Using
Donor-Advised Funds as a “Giving Bank”
Who might want to set up a Donor-Advised
Gift Fund?
Someone who has come into an inheritance, and wishes to tithe
this new wealth. Someone faced with disposing of securities
and wishing to avoid capital gains taxes.
Someone wishing to do some estate planning. Someone wanting to impart to children (or grandchildren) his/her
philosophy of charitable giving.
Fundamentals
A Donor-Advised Fund can help you co-ordinate your finances
with your desires to give to St. Stephen (currently or anytime in the
future). Such Gift Funds, generally operated by a mutual fund company, pool
and manage funds contributed by donors
to be available for future gifts (termed “grants”) on their
own individual schedule to charities of their choice.
While the moneys remain invested in the Gift Fund, those investment earnings are tax-free, permitting
even larger future grants. This
is because the Fund is
recognized by the IRS as a public charity in its own right.
When donors make each contribution into the Gift
Fund of their choice (in
the form of cash or securities), it is
recognized by the IRS as a charitable gift in that tax year because
the gift is irrevocable. The
trustees of the fund have the legal title to all the assets,
but the donors are able
to advise the fund on
how and when they wish charitable grants to be made from their own account. Any grant must go to a recognized public charity
not-for-profit organization (charitable, religious, educational, scientific,
etc.) Thus one fund account can be used not only for grants to St. Stephen, but also
to any cause you would like to favor with charitable gifts: social
agency, college, symphony, museum or research organization, among other
avenues.
Mechanics -
Setting up an account
Most Gift Funds offered by mutual fund companies
have a minimum size to open
an account (range for the four largest funds is $5,000 to $25,000).
Additional contributions are permitted in modest amounts after an account
has been opened.
Most Gift Funds will let you choose one or more different sub-funds in which to invest. Choices would depend upon your risk tolerance,
preference for income vs. growth, and your plans for how soon some of
the account balance might be disbursed through your grant requests. Electing a conservative sub-fund for grants
you might make in the near future could be a wise choice, while a sub-fund
that included a greater proportion of stocks would be suitable for growing
your account to make larger or more frequent grants some years in the
future. The Gift
Fund might have a size minimum (perhaps $5,000) applicable to
choices of sub-funds.
You will be asked to designate one or more Advisors, each of whom can make a
grant request individually without the signature of another advisor,
unless you so request. Thus
husband and wife can each serve concurrently as advisors, or you can
grant this authority to a trusted friend.
You can set up Successor Advisors,
such as one or more children, relatives, or friends to continue to manage
the charitable direction of grants from the fund after your death
or in the event of your incapacity if there is no Co-Advisor.
This permits you to impart your gifting philosophy to your heirs who can serve as alternate and/or successor advisors, contribute their own moneys
(in amounts and timing of their own choosing) and even perpetuate the
“Jones Family Charitable Fund” after your death. Particularly if there are multiple heirs involved in continued gifting
and distributing, there is a marvelous opportunity to establish a legacy
of family philanthropy. The
knowledge of having your money make
a difference on an increasing scale is rewarding.
If you do not have an Alternate or Successor
Advisor, after
the death of the donor(s), the trustees of the Fund
will distribute the remaining balance in your account in accordance
with your advance instructions. (Participations by multiple grant recipients
would be on the basis of designated percentages.)
Should you not make any advance decision, the trustees would
distribute the balance of your account to public charities as they (actually
the Gift Fund staff) deemed appropriate.
Mechanics
- Advising (Making requests for grants)
Most
funds have a minimum size individual grant (typically $100 to $500) in order to
keep expenses low. The Gift Fund’s request form will permit
designating which sub-fund(s) the grant is to be drawn from, or may
permit the grant to be drawn proportionately from each investment sub-fund..
Federal law requires that a grant from the
fund not benefit the donor in a financial
way (e.g., flow back to him/her or a family member as compensation,
scholarship, grant from the recipient charity, attendance at an event,
etc.).
The one restriction that most funds impose: a grant cannot be in satisfaction of a prior pledge.
As it relates to St. Stephen, that restriction can be avoided
by not executing a written Estimate of Giving or response to a special
appeal in which you indicate a future gift. Just complete the fund’s request form as required for the desired timing,
and the grant will be accomplished as easily as if written from your
own check book (and nearly as promptly, if you do not wait until the
week before Christmas to do your year-end gifting.)
Donor-Advised Funds are governed by the rules for foundations,
which require that the minimum total amount disbursed by the fund each
year be equal to or larger than 5% of the fair market value of the whole
fund.
Most of the larger, well run funds
meet this test handily with aggregate annual grants of 20% to 40% or
even more of their assets. This
is because the funds are large pools, and many of their
donors are adding to their accounts and making grants with regularity.
So you should be able to confine your annual request for grants
from your account to the amount it has earned, or even skip some years
to have a larger balance available to meet a future special need of
one of the causes you support from the Gift Fund. Nevertheless, if your fellow contributors to the fund do not appear likely to meet the
5% standard in any year, you might
be required to advise
the fund trustees to make one or more grants
that will meet that fund’s
5% test for your aggregate account balance. Some Gift Funds may require at least one grant every so many years,
irrespective of the 5% test.
How Donor-Advised Funds can help you reduce
income taxes
Depositing gifts of securities that
have appreciated over their tax basis cost in a Donor-Advised
Fund avoids the donor paying capital gains taxes. More important, it retains for the Donor the use of and
earnings on 100% of the value of the gift, even though
the title rests with the Fund trustees. The availability of the full proceeds in the
“gift bank” permits the Donor
to direct to alternate uses
cash which would otherwise be applied to charitable gifts. The customary
path of selling the appreciated securities involves taking the permanent
hit of the 15% capital gains tax rate and sacrificing future earnings
on the amount lost to the capital gains tax.
Other tax advantages accrue from keeping the capital gains out of the Donor’s Adjusted Gross Income reportable on Form 1040. That figure is used as a basis for limiting
some deductions on Schedule A; a lower AGI increases the eligible deductions.
..
Gifts of securities are deductible in the year of the
gift up to a limit of 30% of Adjusted Gross Income, as opposed to the
50% of AGI limit which applies to cash gifts..
Any excess over that amount in either case can be carried over
to be deducted in the following year(s).
Charitable distributions from the
Gift Fund upon the advice of the Donor (and attributed to the name of the
Donor’s account title and/or the recommending Advisors in the cover letter to the grant recipient) are not deductible on the Donor’s tax return, of course. That is because the Donor already received a deduction (effective weeks or even
years ago) at 100% when he deposited cash or securities into the Gift Fund.
Choosing
a Donor-Advised Fund
The most important criterion to seek
is a low expense ratio assessed by the Gift Fund for managing the investments and administering the gifting process. Achieving this is significantly aided
by size of the Gift Fund
and of the sponsoring mutual fund family.
Four such Gift Funds are
noted in the profiles below, which give the latest measures upon which
to make judgments. Another
feature to consider: helpful
Gift Fund web-sites with educational
material on managing your gifting process, how to assess additional
charities which might become candidates for your program, and other
useful tips. The listed four
are above average on this count also. Phone numbers and web sites shown
permit your own inquiries.
Comparison of Donor-Advised Gift Funds (in alphabetical
order):
