Donor-Advised Funds: Changing the World, One Dollar at a Time

With the recent Independence Day holiday weekend, social media has been buzzing about reasons to be proud to be an American. Obvious reasons include our rich culture (hello, melting pot of the world) and freedoms that citizens of other countries can only dream about. Where else in the world can you practice any religion you please, marry whoever you want, and criticize the president in public, all without fear of death or being thrown in jail? Here’s one more delightful reason we can add to that list: generosity.
The Charity Aid Foundation puts out a study each year that ranks countries based on three giving categories: donating money, volunteering time, and helping a stranger in need. The United States has held the #1 spot on the World Giving Index in 2011, 2013, and 2014. We tied in 2014 with Myanmar, but we were also the only country to be in the top 10 for all three categories.

What does all of this mean? Not only do we as Americans offer more time serving on nonprofit boards, volunteering at community and school events, and feeding the homeless man down the street, but we are also generous with our hard-earned money. This is the American Dream at its finest! So, how can you optimize your charitable contributions and get the most bang for your buck? One option that many taxpayers are unaware of is giving through the use of a donor-advised fund.

What is a donor-advised fund?

I’m glad you asked. A donor-advised fund is a tool that can be used by high net worth individuals to make sizeable charitable contributions, similar to private foundations, without all of the hassle and paperwork. Some of the benefits of a donor-advised fund:

• No annual tax reporting requirement
• Low fees
• Contributions into the fund are deductible immediately (as opposed to waiting until they are paid out to a charity)
• You can name your donor-advised fund whatever you want – after yourself, in memory of a loved one, or (for the humble among us) even keep it anonymous. (Many choose to use “foundation” in the name, such as “The Matsko Family Foundation,” even though it is not really a foundation).

A donor-advised fund can be easily opened at any major brokerage firm – Vanguard, Charles Schwab, and Fidelity are popular choices or through such organizations at the Cleveland Foundation, the Akron Foundation and the Jewish Foundation, to name a few. Generally, the minimum initial contribution ranges from as low as $10,000 and can go up to $50,000; subsequent contributions into the fund can be as low as $500, depending on the broker. The contribution grows tax free until it is distributed to the charity or charities of your choice. Keep in mind that, like any brokerage account, because the money is being invested, there is some risk that the funds could also decrease in value. This doesn’t affect how much is tax deductible, only what is ultimately available to provide support to the charities.

Donor-advised funds are on the rise. According to the 2014 Donor Advised Report sponsored by the National Philanthropic Trust, there were 217,367 funds in 2013, disbursing $9.66 billion into different charities!

Related: Zinner & Co. Estate, Gift and Trust services to help you develop a donor-advised fund

Why would I want to open a donor-advised fund?

There are many tax advantages linked with donor-advised funds.

• Contributions are deductible right away, even if they are not disbursed. This is particularly appealing when you want to offset large gains without committing to an organization; this way, there is more time to research and make an educated decision on where your money can have the most impact.
• Donor-advised funds are also considered tax-qualified public charities; thus, contributions are treated with the more advantageous 50% and 30% Adjusted Gross Income (AGI) limits, as opposed to the private foundation 30% and 20% limits. This can add up to significant tax savings.
• Non-tax benefits are also significant. As already stated, there are none of the stringent reporting requirements that are typically associated with setting up a private foundation, and the cost of maintaining it is significantly lower.
• Donor-advised funds give you more control over where the contributions are distributed and how they are invested. As the donor, you have the right to make recommendations as to which charity should receive contributions, as well as how much and when they should receive them. Legally, the fund can reject your recommendation, but this typically only happens if the charity is not a 501(c)(3) eligible charity – so, although giving money to a family whose house burned down is a noble cause, you can’t use donor-advised funds to do this; you’ll just have to reach into your pocket for that one.

Practical application

Here’s one real world (no, not the TV show) example: Presume you live out the American Dream and start your own motorcycle business. After 10 years of hard work, motorcycles become the only form of transportation due to a population increase and overcrowding; business is booming and you decide to retire and spend more time with your family. You sell your business at a substantial profit, and because you are generous, you want to set aside $5 million dollars to continue to provide for various charities.

You want to be able to take the full $5 million contribution as a deduction in the current year to offset some of the gain associated with the sale. There are a number of routes you can take.

• First, you could donate the $5 million outright to charity; however, this ignores the necessity of any future support and cash flow needs. If, on the other hand, you only donate a portion of the funds and set the rest aside for future years, you won’t be able to use the full $5 million to counteract the current year gain.
• A second option would be to establish a private foundation, but this would require significant time, money, and effort on the various reporting requirements. No fun.
• A donor advised fund is a justifiable alternative to a private foundation. The contributed funds would be invested, both income and principal would be used to provide both current and future support, and the full amount (subject to AGI limits) would be available for the charitable contribution deduction. Problem solved.  And, even if the amount of the contribution is more than can be deducted in the current year, the excess amount can be carried forward into future tax years.

For assistance in determining whether a donor-advised fund is right for you, please contact us at 216.831.0733 or info@zinnerco.com.  We're ready to review your situation, plan effective strategies and position you for financial success.