Philanthropy, at its core, is the act of promoting the welfare of others, typically through the donation of money, resources, or time. It’s a noble endeavor that allows individuals, corporations, and organizations to make a positive impact on their communities and the world at large. One such tool that has emerged to facilitate philanthropy are donor advised funds.
A donor advised fund is an account maintained and operated by a section 501(c)(3) organization, known as a sponsoring organization. Each account is composed of contributions made by individual donors. Once the donor makes the contribution, the organization has legal control over it. However, the donor, or the donor’s representative, retains advisory privileges with respect to the distribution of funds and the investment of assets in the account.
Donor advised funds are a way to centralize and manage charitable donations, offering a flexible and tax-efficient method of giving.
In Miami County, KS, donor advised funds are becoming an increasingly popular tool for philanthropy. They offer a way for donors to make a lasting impact on their community and support local charities and initiatives in a way that’s both financially beneficial and administratively simple. Nationally, donor advised funds have seen significant growth, with assets held in donor advised funds rising to $159.83 billion in 2020, a 9.9% increase from $145.49 billion in 2019.
In the next section, we will look at the pros and cons of donor advised funds.
Donor advised funds: pros and cons
Just like any financial instrument, donor advised funds come with their own set of advantages and disadvantages. Let’s delve into donor advised funds pros and cons.
Cons of donor advised funds
Irrevocable Donations: Once a contribution is made to a donor advised fund, the donation is irrevocable, meaning the funds cannot be returned to the donor or used for any purpose other than grantmaking to charities.
Final Say: The fine print in the agreements explicitly states that donors cede all legal control of their contributions to the donor advised fund sponsor. Although the sponsors promise that donors will retain control, the fund has the final say in what happens to the money.
Potential for Misuse: There have been instances where donor advised funds have been misused, with funds being seized as collateral or used for purposes not in line with the donor’s intent.
Fees: Donor advised funds often come with a variety of hidden fees, some of them quite high, which leads to the suspicion that they actually benefit the fund more than they do the donor.
Pros of donor advised funds
Despite some of the cons, there are numerous pros of donor advised funds, such as:
- Immediate Tax Deduction: The major benefit of donor advised funds is the ability to take an immediate tax deduction on the amount contributed. Donors contributing cash can take a deduction of up to 60% of adjusted gross income.
- Wide Range of Appreciated Assets: Donors can contribute a wide range of appreciated assets, including stocks, bonds, mutual funds, privately held business interests, restricted stock, and even cryptocurrencies. This allows investors to remove these assets from their taxable portfolios without taking the tax hit associated with the embedded capital gain.
- Control Over Donations: Contributors to a donor advised fund retain full control over when and where to make charitable donations. Account holders can make donations all at once or over time to a single charity or a variety of charitable organizations.
- Investment Control: Donors retain control over how the remaining assets are invested. Investors can typically choose from several preset investment options with different risk levels or build their own portfolios using a longer list of single asset-class options.
Other benefits of donor advised funds include the fact that the funds can be invested for tax-free growth, they simplify recordkeeping, and they also support legacy planning.
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Donor Advised Funds vs. Private Foundation
When it comes to philanthropy, individuals and organizations may find themselves choosing between two popular giving vehicles: donor advised funds and private foundations. But what is a private foundation?
A private foundation is an independent legal entity specifically created for charitable purposes. The concept of a “foundation” often features in the names of many nonprofit organizations, yet not all are private foundations. To understand the unique identity of private foundations, it is crucial to delve into their financial backing and governance.
The backbone of a private foundation is its funding source. Unlike public charities, which rely on public fundraising efforts, a private foundation is typically backed by a single, specific source. This source is often an individual, a family, or a corporation. Notably, donations to the foundation are tax-deductible. This distinct funding model sets private foundations apart from public charities.
Private foundations and donor advised funds each have their unique advantages and considerations, and the choice on which to donate largely depends on the specific needs and preferences of the donor.
Now let’s compare the key differences between donor advised funds vs private foundations:
- Popularity and ease of setup: In the past decade, donor advised funds have surged in popularity due to their straightforward setup process. Compared to private foundations, which are often expensive and complex to establish, donor advised funds offer an easy-to-manage option for first-time philanthropists and those seeking less administrative burden.
- Control and flexibility: A significant distinction between donor advised funds and private foundations lies in the control and flexibility they provide. In a donor advised fund, you contribute to a fund that manages your donations, which are then made to charities upon your recommendation. However, this structure leaves less flexibility for investment control. Conversely, a private foundation is essentially a charity you create, giving you significant control over grant distribution and investment decisions. This control means you can fund a variety of organizations and causes that align with your philanthropic objectives.
- Privacy: When it comes to privacy, donor advised funds provide the option for anonymous donations, which may be desirable for those who prefer a low-profile approach to giving. On the other hand, donations made by private foundations are generally more transparent, with details being reported and publicly available in the foundation’s annual report.
- Tax deductions: Tax incentives are another crucial aspect to consider. With a donor advised fund, cash donations can be deducted up to 60% of your adjusted gross income, and you can deduct the full market value of illiquid assets, such as real estate, up to 30% of your adjusted gross income. However, private foundations offer less generous tax deductions, capped at 30% for cash contributions and 20% for other contributed assets.
- Minimum annual distribution: Private Foundations are required to donate 5% of their assets annually, creating a continual flow of funding to the nonprofit sector. donor advised funds, on the other hand, do not carry such a requirement, allowing you to make contributions as per your convenience.
- Asset types: Typically, donor advised funds are funded with cash or highly appreciated stocks. If you possess non-traditional assets such as an art collection or antique car collection, a private foundation may be a more suitable choice as it can accept a broader range of asset types.
When you consider donor advised funds’ pros and cons then one positive is that, donor advised funds offer a simpler and more streamlined approach to philanthropy.
Interestingly, some private foundations are exploring the use of donor advised funds to meet their donation requirements. They can contribute the requisite 5% of their assets to a donor advised fund in years when they lack a specific charitable cause to support, allowing them to fulfill their obligation while gaining time to identify worthy beneficiaries.
Establishing Donor Advised Funds With Miami County Community Foundation
Creating a donor advised fund with the Miami County Community Foundation is a straightforward process that not only allows you to make a lasting impact on your community but also provides immediate tax benefits. Here is a simple step-by-step guide on how to set up your donor advised fund:
- Gift your personal assets: The process begins by making an irrevocable gift using your personal assets. This decision is final, but it’s a meaningful step toward creating a lasting legacy.
- Claim your IRS tax deduction: As soon as you make your gift, you can claim the maximum IRS tax deduction. This immediate tax advantage makes donor advised funds an attractive option for philanthropic giving.
- Name your fund: You have the freedom to choose a unique name for your Donor Advised Fund account. This name can reflect your values, your loved ones, or your philanthropic goals.
- Select advisors and beneficiaries: As part of setting up your donor advised fund, you’ll select your current and successor advisors. You also have the power to choose the charitable beneficiary or beneficiaries who will ultimately benefit from your fund.
- Invest your contribution: Your gift is then placed into your uniquely identifiable Donor Advised Fund account with the Miami County Community Foundation. Here, your contribution will be invested and can grow tax-free, providing ongoing benefits for your chosen causes.
- Recommend charitable grants: You or your designated advisors can recommend grants from your donor advised fund to any qualified charity at any time. This flexibility allows your fund to have an impact when and where it’s most needed.
While the Miami County Community Foundation holds legal control over the contributions made, you or your representative maintain advisory privileges. This means you continue to have a say in the investment decisions of the fund and the choice of charities to receive grants.
Thus, establishing a donor advised fund with the Miami County Community Foundation not only creates a meaningful, long-lasting contribution to Miami County, KS, but also ensures you have ongoing involvement in directing your philanthropy.
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