It is every man’s obligation to put back into the world at least the equivalent of what he takes out of it
If this is your belief and you have contemplated starting a private foundation to be able to control how the money is spent, then this post will hopefully expose you to a potentially better way to fulfill your “obligation”. Starting a private foundation can involve substantial start up costs and administrative expenses, such as the yearly filling of a Form 990-PF as well as a major time commitment. We believe that there may be a better way to accomplish this charitable desire than a private foundation.
That way is a Donor Advised Fund (DAF): The Formal definition: A donor advised fund is a charitable giving vehicle wherein an individual, family or corporation makes an irrevocable, tax-deductible contribution of personal assets to a charity and at any time thereafter can recommend grant distributions to qualified charitable organizations.
In English, you can give money to this account which will be used to support your favorite charities now and into the future. The money once donated can not be recovered from the charity and thus, you can take a deduction on your tax return in the year the money was given.
The account can also take donations in marketable securities (think stocks and bonds) and even hard to sell real estate properties. If the asset has appreciated in value above it’s cost, then you are able to avoid paying the capital gains tax.
Their are numerous benefits to this arrangement. The first being that you do not need to be Bill Gates to create a Donor Advised Fund. You can start with as little as a $10,000. It allows the donor to be able to make a tax deduction in one year and then later decide on the best choice of charities. You can make a single contribution to the fund and still benefit multiple charities while only requiring one tax substantiation letter. Your CPA will thank you.
Another important benefit is it allows the creation of a legacy versus providing a one time gift. You can create a family foundation where the children and grandchildren get involved in evaluating charities and help foster the charitable spirit at an early age. Then, your family can continue involvement in grantmaking and investments by naming successor advisors to your account.
There are 4 types of funds, but we prefer the ‘Independent Sponsors’ such American Endowment Foundation (AEF) due to their low annual fees and how they distribute checks to donors on behalf of the donor. In addition, they allow for the acceptance of all different assets which is helpful especially for clients who have appreciated real estate or art that they would like to donate. With AEF, the donor along with their financial advisor can recommend the investment strategy for their contributions to your Donor Advised Fund. This eliminates the concern about how charities manage or mismanage investments.
AEF shared a recent conversation with Mary who is the widowed matriarch of her family with 4 children and 10 grandchildren who created a DAF; for while men and women establish donor advised funds to accomplish a number of different goals – some financial, some philanthropic, most center on family. Mary stated,
“My husband and I started our Fund primarily for the tax advantages and the flexibility in giving to multiple charities, but I think that my biggest reason for establishing a Donor Advised Fund is keeping my family together once I am gone. Though my children and grandchildren live in different places, it gives me peace of mind in knowing that the Donor Advised Fund will keep my family connected in a meaningful way.”
So if you are charitably inclined as this year is coming to an end, and you wish to get the tax benefit this year and be able to decide on which charities will benefit in the future, the Donor Advised Fund may be the best option for you. Happy Giving!
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