Use Donor-Advised Funds To Leverage Charitable Gifts

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Donor-advised funds present an exciting opportunity for financial advisors to expand their role in the charitable giving process. As agents of change, advisors can unite the interest of individuals, families, and charitable organizations to achieve mutually beneficial results.

The simplicity and versatility of donor-advised funds give the advisor a tool that is well suited for current and deferred giving arrangements.

With minimal paperwork, the process of opening an account at a donor-advised fund is straightforward. An individual account is established at the fund and named by the donor. The donor has wide latitude in selecting a meaningful name for the account. The account can be named to provide recognition for the donor or to maintain a donors privacy and anonymity. For example a family, in memory of a loved one, could establish the “Jane Doe Foundation.”

Initial and subsequent contributions to a donor-advised fund may be made with relatively small dollar amounts. Minimum required contribution levels are fund specific, but it is not uncommon for donor-advised funds to have a minimum account opening balance as low as $5,000–with additional contribution minimums of $250.

Donor-advised funds accept a wide range of contributed property, typically including cash, mutual funds, and securities. Contributions are not limited to those made by the individual or organization that established the account–accounts may accept contributions from many sources.

For example, the “Jane Doe Foundation” account could be funded by family members with $5,000 and accept additional contributions from individuals and corporations for as little as $250 each.

Grants to qualified charitable organizations are made from the donors account by the trustees of the donor-advised fund based on input and recommendations from the donor, or named donor advisors. The role of donor advisors is significant because it promotes involved philanthropy beyond the lifetime of the donor.

For example, the children of Jane Doe can be named as donor advisors to the “Jane Doe Foundation” and may make grant recommendations regarding the selection of charitable recipients and the dollar amounts of the proposed grants. The use of successor donor advisors allows the continued participation of family members in charitable activities that were important to preceding generations.

The recipients of grants must be qualified charities under IRS rules and regulations. There is a great deal of distribution flexibility with regard to the timing of the grants as well as the number and name of charitable beneficiaries. The assets of donor-advised accounts may be distributed to one or many charities.

Recommendations regarding the selection of grant recipients can change based upon the goals of the donor or donor advisors. The distribution can be made in one lump sum or be made in smaller amounts over a period of time. Minimum distribution amounts vary by donor advised fund but many funds will make grants for amounts as small as $500.

Using the “Jane Doe Foundation” as an example, the family members as donor advisors may select a single charitable recipient this year to receive 5% of the value of the account. Next year, the family members may choose three recipients who will each receive $5,000.

Because donor-advised funds are public charities under IRC 501(c)(3), donors receive the most favorable charitable tax benefits for their generosity. The tax benefits inure to the donor in the year the gift is made to the fund. The timing of the tax benefit can be an important consideration if the donor needs a tax benefit in a year in which the intended charitable beneficiary cannot effectively utilize the gift.

The tax benefits include the avoidance of capital gains taxes, charitable income tax deductions of up to 50% of AGI, and the ability to carry forward unused benefits for a period of five years.

The ability to provide administrative and investment management services to multiple individual accounts on a cost effective basis is a key component to the successful operation of a donor-advised fund. Administrative functions include the acknowledgement of contributions, processing grant requests, due diligence regarding the eligibility of recommended grant recipients, making disbursements, and the preparation of donor statements. Donor-advised funds provide professional management of fund assets and offer a range of investment alternatives.

Certain donor-advised funds encourage the participation of financial advisors. Financial advisors have long been associated with philanthropy, and are frequently the agents of change as both plan designer and motivator when a client’s interests are best served by charitable gifting strategies.

The trusted advisor is uniquely positioned to provide services and solutions that address client concerns. As a tool for the informed advisor, the donor-advised fund is a bridge-building tool between the client, the clients family, and charitable organizations.

Administrative and investment management expenses for donor advised funds that utilize the services of a financial advisor are typically in the range of 2.5% of assets under management. This includes fair and reasonable compensation for fund administration, investment management, and compensation to financial advisors.

For charitable organizations, donor-advised funds represent an opportunity to benefit from an expanded universe of charitable donors.

A fundamental change in personal finance has been the degree of involvement by consumers in the decision making process. Charitable organizations can benefit from this change. Donor-advised funds allow people to become involved philanthropists. Charities that actively support the concept of involved philanthropy will be rewarded with more benefactors both today and in the future. With advice and guidance, giving to a donor-advised fund is easy and rewarding.

Charitable organizations can further expand their reach by working with professional financial advisors to leverage their fund raising activities. Many organizations will find that financial advisors can be their greatest advocates with potential donors.

As a conduit for charitable giving the donor-advised fund is a versatile and valuable tool. Each organization and individual that is involved is fairly rewarded. Ultimately, based on increased participation in the charitable giving process and the extension of family values to future generations, the rewards will exceed their definable economic benefit.

, CLU, ChFC, is senior vice president of American Guarantee & Trust, Newark, Del. He may be reached via e-mail at EDeverell@nationallife.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, December 3, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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