Donor-advised funds

Hurricanes Katrina and Rita have demonstrated, once again, the power and importance of charitable giving in meeting human needs in America. Entering the last quarter of 2005, when you may be considering your year-end charitable giving, consider a donor-advised fund to provide flexibility in meeting your financial and charitable goals.

What is a donor-advised fund?
A donor-advised fund is established by gifts to a separate account at a public charity, which acts similarly to a charitable checking account. However, unlike a checking account, the donor-advised fund is an asset of the charity, and the donor has the right to name the fund, recommend grants from the fund, and, in some cases, suggest how the fund is invested.

How do I start a donor-advised fund?
Donor-advised funds are offered by community foundations, larger charities and many investment firms. You may take a tax deduction each time you make a gift to a donor-advised fund. Investment returns on the fund increase the balance from which the donor may recommend grants in the future.

Who can be advisers for a donor-advised fund?
Often, the donor and his or her spouse are the initial donor advisers who recommend grants from the fund. Most charities allow the appointment of successor donor advisers.

Why must the charity have the authority to approve or deny recommended grants?
A donor to a public charity must relinquish control over the gift before it qualifies for a charitable tax deduction. Typically, a charity’s governing board only denies grants suggested to organizations that do not qualify for public tax-exempt status, or where the donor will receive personal benefits from the grant.

What are tax-wise ways to use a donor-advised fund?

  • Unusually high taxable income in 2005 can be offset by the charitable tax deduction from a gift to a donor-advised fund, perhaps equal to several years of anticipated charitable gifts. In future years, you can recommend grants from the donor-advised fund to make the charitable gifts.
  • Recurring annual gifts can be accumulated in a donor-advised fund to make a substantial grant in the future – for example, to establish a scholarship fund or endowment.
  • A donor-advised fund can be the recipient of annual distributions from a charitable lead trust, a future distribution from a terminating charitable remainder trust or the designated beneficiary of an IRA, providing a charitable legacy for future family giving.
  • Donors can involve grandchildren in their charitable giving by making contributions to a donor-advised fund, from which grandchildren research and propose grants. During a family gathering, grandchildren present their choice of charities to receive grants from the family’s donor-advised fund.
  • Smaller private foundations, which incur sizeable costs to administer and file tax returns, can be terminated by transferring the assets to a donor-advised fund. The fund provides the same family identity and generations of donor advisers for making charitable gifts, with considerably less cost.

Michael D. Barnes, Esq. is president of the Johnson Charitable Gift Fund, a public charity providing donor-advised funds, and vice president of Johnson Trust Co., a division of Johnson Investment Counsel Inc., which manages over $3.2 billion in assets. Reach Barnes at (513) 661-3100.