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Donor-Advised Funds

R.C. Thornton & Associates

Donor-advised funds: get the deduction and say where the money goes!

R.C. Thornton & Associates, LLC, is a Phoenix, AZ – based CPA firm. Chuck Thornton is the firm’s President.


Want to control how your money is used by a charity?

Isn’t that the problem…you donate money to charity and, don’t how it was used? Sure, the deduction was nice, but what about the use of the money?


Traditional Ways of Influencing Donations are Costly and Time-Consuming

You could sit on the board of your favorite charity to suggest how the funds be used.  Or, you could go out and form your own private foundation.

Both are time consuming, and the latter is expensive!

A popular alternative to making outright gifts at one extreme and private foundations at the other has been the “donor-advised charitable fund.” To make these funds work, however, the donor must protect his or her right to an immediate charitable deduction.


Donor-advised funds make it easier to direct your donation

Donor-advised funds are similar to private foundations in many ways and can allow you a certain degree of control over how your contributions are invested and distributed, all without the expenses associated with setting up and running a private foundation.

Upon a contribution to a charity, the charity opens up an account in the donor’s name in a special fund. The donor can recommend where the funds are invested, how and when the income is distributed, and to what charities. However, the charity managing the fund need not follow the donor’s recommendation and it has ultimate say as to the disposition. Many donor-advised funds require an initial contribution of $100,000, although as they have grown in popularity, some funds offer a minimum contribution of $5,000 or less. In addition to being offered on the Internet, many donor-advised funds are offered by banks and brokerage houses.

Some donor advised funds will accept property as well as cash contributions. You could even avoid tax on the appreciation of the asset!


Beware of certain pitfalls

Contributing to a donor-advised fund in which your wishes are respected, although perhaps not legally enforceable,may provide you with the extra degree of tangible participation that can make your charitable contributions more meaningful to you.

Such charitable giving, however, does require some research to make sure that the IRS recognizes your initial contribution as a charitable deduction. Before making a substantial initial contribution, you also should investigate other ways to give, from designated gifts to setting up your own private foundation.

And keep in mind that your contribution is treated as equity of the charity.  That means this money is subject to creditors of the foundation. I’m aware of at least one donor advised fund that declared bankruptcy.  Luckily, that did not influence the validity of the deduction, but it did mitigate the donor’s ability to influence the contributions.


Wrap Up and Take Away

Donor-advised funds are an excellent way to keep influence over where your money goes!  The control achieved through a donor-advised fund is second perhaps only to starting your own foundation, or sitting on the board of an organization you contribute to.  However, note that working with a donor-advised fund is not a 100% guarantee that your wishes will be respected.  Consider a donor-advised fund as a narrower component of your overall philanthropic endeavors if you seek to be more actively involved in the charity of your choice.

Pursuant to Circular 230, as promulgated by the US Department of the Treasury, any U.S. federal tax advice that is contained in this article is not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.
The writer is not responsible for providing such advice to the reader unless specifically retained by the reader. Readers of this article are advised to seek professional assistance of a qualified practitioner before implementing any ideas expressed in this article.

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