Donor advised funds
Encyclopedia
A donor-advised fund is a charitable giving vehicle administered by a public charity and created for the purpose of managing charitable donations on behalf of an organization, family, or individual. A donor-advised fund offers the opportunity to create an easy-to-establish, low cost, flexible vehicle for charitable giving as an alternative to direct giving or creating a private foundation
. Donors enjoy administrative convenience, cost savings, and tax advantages by conducting their grantmaking through the fund.
The New York Community Trust
pioneered the development of donor-advised funds in 1931. Although the second such fund was not created until 1935, in the decades since the field has greatly expanded as commercial sponsors, educational institutions, and independent charities started offering the service. Donor-advised funds are the fastest growing charitable giving vehicle in the United States of America, with more than 152,000 donor-advised accounts established, holding over $25 billion in assets.
Because the fund is housed in a public charity, donors receive the maximum tax deduction available, while avoiding excise taxes and other restrictions imposed on private foundations. Further, donors do not incur the cost of establishing and administering a private foundation, including staffing and legal fees. Since the maximum tax deduction is received by the donor at the time of the gift, the foundation administering the fund gains full control over the contribution, granting the donor advisory status. As such, they are not legally bound to the donor, but make grants to other public charities upon the donor's recommendation. Most foundations that offer donor advised funds will only make grants from these funds to other public charities, and will usually perform due diligence
to verify the grantee's tax-exempt status.
While private foundations in the United States are heavily regulated by the Internal Revenue Service
, including rules on oversight and minimum annual payouts, donor advised funds housed in public charities are not subject to the same tax restrictions. On August 17, 2006, President Bush signed the Pension Protection Act of 2006 (H.R. 4) into law, which includes a number of changes to the regulatory framework for donor-advised funds, and follows both House and Senate passage of H.R. 4. The sections dealing with donor-advised funds include:
’s marketing material for their plan:
Suppose you have 1,000 shares of stock that you purchased 15 years ago (thus, you’re in long term capital gain
s territory). Assume that you purchased the stock for $10 per share and it is now worth $100 per share. Now, let’s compare the cost to the donor of making a contribution of $100,000 to a charity of your choice. We assume a 35% income tax rate and 15% long term capital gains tax rate.
Option 1: Contribute cash from sale of securities
Net cost to donor: $78,500
Option 2: Contribute appreciated securities to donor advised fund
Net cost to donor: $65,000
Thus, you can effectively contribute $100,000 to the public charity of your choice for $13,500 less in actual donor cost by using the donor advised fund. This example does not acknowledge that the same tax advantage would be obtained if one were to donate the appreciated securities directly to a 501(c)(3) charity, whether it was a donor-advised fund or not, as the charity then sells the assets and the capital gains are avoided.
Private foundation
A private foundation is a legal entity set up by an individual, a family or a group of individuals, for a purpose such as philanthropy. The Bill & Melinda Gates Foundation is the largest private foundation in the U.S. with over $38 billion in assets...
. Donors enjoy administrative convenience, cost savings, and tax advantages by conducting their grantmaking through the fund.
The New York Community Trust
New York Community Trust
The New York Community Trust was founded in 1924 to distribute the income from charitable funds established by will to improve the quality of life in New York City. It also offers services to living donors. It is one of the oldest and largest community foundations in the United States, and...
pioneered the development of donor-advised funds in 1931. Although the second such fund was not created until 1935, in the decades since the field has greatly expanded as commercial sponsors, educational institutions, and independent charities started offering the service. Donor-advised funds are the fastest growing charitable giving vehicle in the United States of America, with more than 152,000 donor-advised accounts established, holding over $25 billion in assets.
Because the fund is housed in a public charity, donors receive the maximum tax deduction available, while avoiding excise taxes and other restrictions imposed on private foundations. Further, donors do not incur the cost of establishing and administering a private foundation, including staffing and legal fees. Since the maximum tax deduction is received by the donor at the time of the gift, the foundation administering the fund gains full control over the contribution, granting the donor advisory status. As such, they are not legally bound to the donor, but make grants to other public charities upon the donor's recommendation. Most foundations that offer donor advised funds will only make grants from these funds to other public charities, and will usually perform due diligence
Due diligence
"Due diligence" is a term used for a number of concepts involving either an investigation of a business or person prior to signing a contract, or an act with a certain standard of care. It can be a legal obligation, but the term will more commonly apply to voluntary investigations...
to verify the grantee's tax-exempt status.
Regulation
Current U.S. tax law allows the donor of appreciated securities or other assets to get a tax deduction for the market value of the donation and avoid capital gains taxes. This double tax advantage can make donating appreciated assets to a charitable organization more attractive than selling the assets and donating cash. By donating appreciated assets to a donor advised fund and then advising the fund to make donations to several charities, one can reap these tax advantages without the hassle and paperwork of transferring non-cash assets to several organizations. This combination of convenience and full tax advantage is one reason that donor advised funds are used.While private foundations in the United States are heavily regulated by the Internal Revenue Service
Internal Revenue Service
The Internal Revenue Service is the revenue service of the United States federal government. The agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue...
, including rules on oversight and minimum annual payouts, donor advised funds housed in public charities are not subject to the same tax restrictions. On August 17, 2006, President Bush signed the Pension Protection Act of 2006 (H.R. 4) into law, which includes a number of changes to the regulatory framework for donor-advised funds, and follows both House and Senate passage of H.R. 4. The sections dealing with donor-advised funds include:
- Legal definition of a donor-advised fund.
- A list of prohibited payments to donors and advisers to donor-advised fund.
- New rules about what grants can be made from donor-advised funds.
- The documentation required for all contributions to donor-advised funds.
Tax Efficiency Example
The following example is taken from VanguardThe Vanguard Group
The Vanguard Group is an American investment management company based in Malvern, Pennsylvania, that manages approximately $1.6 trillion in assets. It offers mutual funds and other financial products and services to individual and institutional investors in the United States and abroad. Founder...
’s marketing material for their plan:
Suppose you have 1,000 shares of stock that you purchased 15 years ago (thus, you’re in long term capital gain
Capital gain
A capital gain is a profit that results from investments into a capital asset, such as stocks, bonds or real estate, which exceeds the purchase price. It is the difference between a higher selling price and a lower purchase price, resulting in a financial gain for the investor...
s territory). Assume that you purchased the stock for $10 per share and it is now worth $100 per share. Now, let’s compare the cost to the donor of making a contribution of $100,000 to a charity of your choice. We assume a 35% income tax rate and 15% long term capital gains tax rate.
Option 1: Contribute cash from sale of securities
- Immediate cost of donation: $100,000
- Capital gains tax incurred: $13,500 (15% times ($100k minus $10k))
- Income tax saved: ($35,000) (35% times $100k)
Net cost to donor: $78,500
Option 2: Contribute appreciated securities to donor advised fund
- Immediate cost of donation: $100,000
- Capital gains tax incurred: NA (15% times $100k minus $10k)
- Income tax saved: ($35,000) (35% times $100k)
Net cost to donor: $65,000
Thus, you can effectively contribute $100,000 to the public charity of your choice for $13,500 less in actual donor cost by using the donor advised fund. This example does not acknowledge that the same tax advantage would be obtained if one were to donate the appreciated securities directly to a 501(c)(3) charity, whether it was a donor-advised fund or not, as the charity then sells the assets and the capital gains are avoided.
Find a community foundation near you
- http://www.cof.org/whoweserve/community/resources/index.cfm?navItemNumber=15626#locator Community Foundations Locator
List of largest commercial brokerage-run donor advised funds
- Fidelity Charitable Gift Fund (Fidelity InvestmentsFidelity InvestmentsFMR LLC or Fidelity Investments is an American multinational financial services corporation one of the largest mutual fund and financial services groups in the world. It was founded in 1946 and serves North American investors. Fidelity Ventures is its venture capital arm...
) - US$4.7 billion (December 2007) - Schwab Charitable Fund (Charles SchwabCharles SchwabCharles Schwab may refer to:*Charles M. Schwab , American steel magnate*Charles R. Schwab , founder of the eponymous brokerage*Charles Schwab Corp., an American based brokerage firm...
) - US$3.07 billion (December 2010). - Vanguard Charitable Endowment Program (The Vanguard GroupThe Vanguard GroupThe Vanguard Group is an American investment management company based in Malvern, Pennsylvania, that manages approximately $1.6 trillion in assets. It offers mutual funds and other financial products and services to individual and institutional investors in the United States and abroad. Founder...
) - US$1.70 billion (December 2007) - The National Christian Foundation US$1.1 billion (December 2008).
- Eaton Vance's Charitable Giving Program (Eaton VanceEaton VanceEaton Vance Corp. is one of the oldest investment management firms in the United States, with a history dating back to 1924. Eaton Vance and its affiliates offer individuals and institutions investment products and wealth management services....
) - US$349 million (March 2010) - The T. Rowe Price Program for Charitable Giving (T. Rowe PriceT. Rowe PriceT. Rowe Price is a publicly owned Investment firm, headquartered in Baltimore, Maryland. It was founded in 1937 by Thomas Rowe Price, Jr.. The company offers mutual funds, subadvisory services, and separate account management for individuals, institutions, retirement plans, and financial...
) - US$95 million (December 2010)
List of Donor Advised Giving Programs
- American Endowment Foundation A national independent Donor Advised Giving Program
- Barnabas Foundation
- California Community Foundation in Los Angeles.
- Combined Jewish Philanthropies of Greater Boston, with over 500 Donor Advised Funds with assets of $213 million under management as of April 2010, offers low minimum investment and management fees.
- Dechomai Foundation A national donor-advised fund that accepts and liquidates donations of non-cash assets (real estate, limited partnerships, closely held stock, restricted stock, S-Corp stock, life insurance, notes and other unusual assets subject to Board approval) then grants net proceeds to charities that donors advise.
- Emporia State University's Donor Advised Funds Program (Emporia State UniversityEmporia State UniversityEmporia State University is a university in the city of Emporia in Lyon County, Kansas, just east of the Flint Hills.- History :...
) - FJC A Foundation of Philanthropic Funds A national foundation of donor advised funds and other programs
- Jewish Communal Fund
- Jewish Community Foundation of Southern Arizona
- The National Christian Foundation
- National Philanthropic Trust accepts the widest range of assets, allows donors to recommend grants to charities throughout the U.S. and around the world, provides best-in-class investment options for charitable gifts, and the opportunity for donors to establish a philanthropic legacy for generations.
- The Renaissance Charitable Gift Fund An independent Donor Advised Fund
- RSF Social Finance is a nonprofit, public charity
- Tides Foundation's core philanthropic services are Donor Advised Funds.
- The U.S. Charitable Gift Trust is a public charity that offers simple and structured planned giving vehicles through its Donor Advised and Pooled Income Funds. The tax exempt status allows us to provide the same tax benefits as a conventional charity while also providing Donors with lifelong income and/or the ability to support their favorite charities on their own time frame.
- United Way Worldwide's International Donor Advised Giving Program (United Way Worldwide)
See also
- Charitable organisation
- Donor Managed Investment AccountDonor Managed Investment AccountA Donor Managed Investment Account is a charitable giving mechanism that provides donors with a full tax deduction at the time the account is funded, while permitting them to exercise ongoing investment management over the account funds for a period of time.By offering a high level of investment...
- Foundation (charity)Foundation (charity)A foundation is a legal categorization of nonprofit organizations that will typically either donate funds and support to other organizations, or provide the source of funding for its own charitable purposes....
- Endowment taxEndowment taxEndowment tax is taxation of endowments. The city of Cambridge, Massachusetts, has proposed taxing MIT and other major universities on these previously exempt, non-profit earnings. A financial endowment is a transfer of money or property donated to an institution, with the stipulation that it be...
External links
- National Philanthropic Trust, Donor Advised Fund Report
- Elfreena Foord, Philanthropy 101: Donor-Advised Funds
- Analysis of S. 2020 The Tax Relief Act of 2005
- Pension Protection Act of 2006 (H.R. 4)