Do you know how a donor advised fund works? Not many people do, though they’ve been around since 1914. And despite their dramatic rise in popularity over the last few years, many would struggle to describe what one actually is.
The Internal Revenue Service describes it this way:
“…a donor advised fund is a separately identified fund or account that is maintained and operated by a section 501(c)(3) organization, which is called 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.”
While this definition is technically clear, it’s still not a lot of help for most people.
A Charitable Bank Account
A metaphor is helpful. A donor advised fund is like a bank account, except it’s a charitable bank account. A donor can donate money to the account, take a tax deduction, and then give to the charities they want to support. They may have given to 20 charities through their account but at year-end will still receive just one tax receipt. It’s simple.
In a donor advised fund the donor gives up control of the funds in favor of “advisory” rights. However, that means the donor receives the maximum income tax deduction—up to 60% of their income and 30% of their income when using capital gain assets.
They’re easy for donors to set up and use, but they’re also versatile. The funds can receive asset-based gifts, such as closely held interest in a business or gifts of real estate.
Donors also often have a say in the investment of the funds in their account, so they can grow the amount available to grant out to charities.
Donor advised funds now exceed 460,000 accounts and hold over $110 billion in assets. From 2016 to 2017, donor advised fund accounts grew by a whopping 60%.
So even if people cannot completely describe what they are, they are growing in favor compared to private foundations, which now number just above 80,000.
Photo by Nick de Partee on Unsplash
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Published August 30, 2019
Topics: Giving Strategies