Posted on November 11, 2014 by David Laidlaw

Many people give generously to their preferred charities during the holiday season. Managing these gifts through Donor Advised Funds provides a number of benefits compared to direct giving.

A Donor Advised Fund is a pooled vehicle that receives philanthropic gifts. These funds then distribute gifts to charities chosen by the donor. Aside from the psychic benefits, donors receive tax deductions when gifts are made to the charitable fund, not when the gifts are ultimately distributed to the charities.

Securities in taxable accounts which have appreciated from the costs at which they were purchased represent ideal gifts to Donor Advised Funds. This strategy makes sense since the donor receives a tax deduction for the value of the security as long as it does not exceed 30% of the donor’s adjusted gross income. The donor is also able to avoid paying capital gains taxes on the gifted securities at combined state and federal rates that can exceed 30% for those in the highest tax brackets.

Donor Advised Funds are also able to accept closely held companies or interests in limited partnerships that are not publicly traded. This flexibility allows the gifting of illiquid securities and does not require the donor to sell the securities at an inopportune time.

Donor Advised Funds also streamline the administration of the gifting process since many individuals make gifts to numerous charities. If a Donor Advised Fund or private foundation is not used, the donor must obtain transfer instructions and arrange the distribution of securities to each charity. These gifts must then be documented on a tax return. On the other hand, an individual can give to multiple charities through one transfer to a Donor Advised Fund. The Donor Advised Fund is then able to convert gifted securities to cash and distribute the cash to the underlying charities. This process is much simpler than transferring securities directly to each charity.

Private foundations offer similar benefits to charitable individuals. However, private foundations require the individual to establish and maintain the foundation from a legal and tax perspective on an ongoing basis. Foundations allow the most flexibility in giving, but can be expensive to administer. Tax deductions for both cash and appreciated securities are also less generous for private foundations than Donor Advised Funds.  

Donor Advised Funds are generally run by financial institutions and charities themselves. These entities charge tiered fees to cover the administration of the assets which generally decrease as balances increase. Any investment vehicles embedded within the funds also charge management fees for overseeing the assets held in the fund. Donor Advised Funds also typically require minimum contributions of about $5,000.

Please contact us if you would like to learn more or are interested in establishing a fund.