'Tis the Season for Charitable Giving Through Donor Advised Funds

Have you considered establishing a donor advised fund as part of your year end giving?

A donor advised fund is a type of charitable giving vehicle that allows you to make an irrevocable contribution to a charitable organization (the “sponsoring organization”) and establish a donor advised fund in your name.  This enables you to make grant recommendations from the fund to public charities over time. Sponsoring organizations include certain charitable organizations established by financial services corporations, community foundations, or other public charities. The donor advised fund is a separately identifiable sub-account within the sponsoring organization.

A key aspect of donor advised funds is that you irrevocably relinquish formal control over the assets once they are donated. You have no rights or obligations over donated funds except as an advisor.  This lack of control makes your contribution to a donor advised fund a tax-deductible gift in the year the contribution is made even if the funds are not yet distributed to the ultimate charitable organizations. Your advisory privileges enable you to work with the sponsoring organization to make recommendations on investment policy and grants. Your recommendations are generally followed if the recipient is a qualified tax exempt organization, however, the sponsoring organization is not required to accept your advice.

As noted above, contributions to donor advised funds are tax-deductible for income tax purposes. The tax deduction is immediately available and is taken the year your contribution is made to the sponsoring organization. Thus, for the year 2023, contributions to a donor advised fund must be received by the supporting organization by December 31, 2023, to be eligible for a tax deduction for the 2023 tax year.

Depending on the sponsoring organization, you can donate cash as well as other financial assets, including stocks, mutual funds, and private business interests. Currently, contributions of cash are deductible for income-tax purposes up to 60% of your adjusted gross income. Contributions of long-term appreciated financial assets are deductible for income-tax purposes up to 30% of your adjusted gross income, and you will not have to pay any capital gains taxes on the donated appreciated assets.

Some donors implement a tax planning strategy that involves “bunching” your charitable contributions in a particular tax year in order to take advantage of itemized deductions in that tax year (i.e. by contributing to your donor advised fund an amount that puts your deductions in excess of the standard deduction).  Then in the following year, the standard deduction would be taken and  the donor advised fund would be used for charitable gifts in that year, foregoing any additional related deductions since the donor had already benefitted from a higher deduction in the prior tax year. However, it is important to note that this strategy should be carefully considered and planned with the assistance of a tax professional.

In addition to being aware of the advisory privilege rules and income tax deductions, there are several other considerations that should be weighed before establishing and contributing to a donor advised fund. Distributions from a donor advised fund must go to public charities, or the donor advised fund will be subject to tax penalties. Generally, the public charities must be domestic charities, however, a sponsoring organization may allow for international distributions (but the fees will generally be higher). It's also important to note that a grant from a donor advised fund cannot be used to satisfy a pledge made to a charity.

Donor advised funds can be more administratively convenient for the donor since the sponsoring organization oversees the investment of the funds and the distribution of the funds. Moreover, the donor does not have to pay a capital gains tax on the market increase of the assets in a donor advised fund. Lastly, a donor advised fund provides the donor flexibility in the timing of grants from the donor advised fund and in choosing which public charities to benefit.

So, if you have always had a charitable inclination, or are motivated to donate to many good causes at this time of year, consider a donor advised fund as a method to make your donations for this year and next year.

If you would like to discuss your charitable giving plan and the use of donor advised funds, please contact a member of our Trusts & Estates Department.