Your ultra-high-net-worth clients may use private foundations to satisfy their charitable objectives without giving up control over the donated assets. But what about clients who simply fall into the high-net-worth category? Donor advised funds can serve as a vehicle to retain control of a client’s assets under management and simultaneously better align their planning and charitable aspirations.
Donor advised funds are an economical alternative to private foundations for wealthy families that do not want to spend five figures or more annually to maintain their assets. Although contributions to organizations such as the United Way may satisfy your client’s desire to use their contributions to benefit a wide range of charities, once the contribution is made, it is out of your client’s hands concerning how it will be used.
Donations to a donor advised funds aren’t limited to cash and securities; real estate, art, or other tangible personal property can be donated, or the fund can be named beneficiary of a 401(k) or IRA account. Property that appreciates inside the fund won’t be taxed, but that appreciation isn’t deductible by the donor. Contributions to a donor advised fund will not be included in the donor’s estate—unless the donor dies within three years of the gift.
When a publicly traded security held for more than one year is contributed to a donor advised fund, the amount of the contribution will be the average of the high and low prices of the security on the date of the contribution.
It is important to note that some contributions to donor advised funds are not deductible for income tax purposes. A contribution to a donor advised fund is not deductible if the qualified organization that sponsors the fund is a war veterans’ organization, a fraternal society, or a nonprofit cemetery company. Also, donors must receive acknowledgment from the sponsoring organization that the organization has exclusive legal control over the contributed assets in order for contributions to be deductible.
There are also restrictions on how donor advised contributions may be used. Donor advised funds cannot make, and advisors to donor advised funds can’t recommend, grants that would benefit, directly or indirectly, the donor, the advisor or a related party unless the benefit is only incidental. And grant funds can’t be used to give grants, compensation, loans, or other payments to a donor, advisor, or related party.
The Advantages of Donor Advised Funds over Foundations
Foundations serve many of the same purposes as donor advised funds, but donor advised funds have a number of significant advantages.