Now Is The Perfect Time (PDF)

Now is the perfect time to consider a Donor Advised Fund if you are a CAT person with a desire to reduce your tax burden and give to charities in the future. This paper highlights the structure and benefits of setting up a Donor Advised Fund. Please consult with your tax advisor as this is not intended to be tax planning advice.

What is a Donor Advised Fund?
A donor advised fund is a charitable giving vehicle wherein an individual or family makes an irrevocable, tax-deductible contribution of personal assets to a charity, and at any time thereafter, can recommend grant distributions to qualified charitable organizations.

What type of asset is best to contribute?
Appreciated securities that have been held for more than one year are ideal. You can avoid the capital gains tax on the securities and can deduct the total value of the contribution from your federal income taxes, up to 30% of adjusted gross income for appreciated securities. Unused deductions can be carried forward for 5 years. Because of these advantages, you are able to give more to the causes you support.

Why contribute to a Donor Advised Fund rather than directly to a charity?
Donor Advised Funds provide a number of benefits that direct donations to a charity may not, including:

  • Ability to accept and process appreciated securities for which the donor does not have to pay capital gains tax.
  • Variety of investment options allowing the contribution to potentially grow over
    time.
  • Capacity for the donor to give one block of securities that can benefit multiple charities.
  • Creation of a legacy versus providing a one-time gift.
  • Separation of tax planning and charitable giving: donor receives tax deduction when contribution is made, but grants to charity can be made later.
  • Simplicity: a single contribution can benefit multiple charities while only requiring one tax substantiation letter.

What is the difference between Donor Advised Funds and Private Foundations?
Starting a private foundation can involve substantial start up costs and administrative expenses, such as the yearly filling of a Form 990-PF. But one of the most important differences is that Donor Advised Funds receive more favorable tax treatment than a private foundation. Donor Advised Funds allow donors to take a federal income tax deduction up to 50% of adjusted gross income (AGI) for cash contributions and up to 30% of adjusted gross income (AGI) for appreciated securities; versus 30% of AGI for cash contributions and 20% of AGI for appreciated securities for a private foundation. Donor Advised Funds also offer the ability to recommend grants anonymously, if desired. It is also possible to convert a foundation over to a donor advised fund to simplify ongoing maintenance and record keeping.

Who should be listed as the donor?
The donor is the person or persons responsible for making the contribution(s) to the Donor Advised Fund. If the contributions are from joint ownership, then multiple donors can be listed. If the donor wants non-contributors to have grant making rights to the account, they should name those individuals as account advisors.

What is an account advisor?
An account advisor is named by the donor to recommend grants from the account. An account advisor is usually a spouse, child or relative.

What is an account successor?

An account successor is the person identified by the donor to take over the account after the donor’s death. Multiple successors can be named to an account and, depending on the donor’s wishes, the account can be split equally among the successors, or they can share the responsibilities. Successors can name future successors to take over the account in the event of their own death, essentially leaving a legacy from one generation to the next and so on.

What is a charitable beneficiary?

A charitable beneficiary is a charitable organization(s) identified by the donor to receive either all of the remaining assets of the account or 5% of the account annually upon the death of all the original donors. This is done as an alternative to naming an account successor(s).

Can an account be named after someone other than the donor?

Yes, donors can choose any name for the account. However, it is recommended the name reflect the donor’s name and/or the main purpose of the account such as “The Jones Family Foundation.” Notably, each grant has the ability to be recognized by either donor name, account name, anonymously or by special acknowledgment (for example, In memory of, In Honor of).

When is a contribution considered a charitable donation?

A contribution is complete when the asset is out of the donor’s control. The time frame varies depending on the type of asset and when it’s transferred to the account.

What is the minimum to establish a Donor Advised Fund?
We manage Donor Advised Funds with over $250,000 for our clients, and our advisory fees are a fixed .30% of the assets in the fund.

If you cannot meet the minimum, please contact us to discuss other options available.

What charities and nonprofits can grants be made to?

Tax laws require that your charitable gifts be irrevocable and unconditional in order for you to receive the associated tax benefits. If you were to retain control over the assets transferred to a Charitable Gift Account, there would be no “gift” for purposes of a charitable deduction. While the Schwab Charitable Fund will allow you to recommend how assets are invested and disbursed, all recommendations are subject to the approval of the Fund.

Grants from the Fund will be made only to U.S. organizations that are tax-exempt public charities (As defined in Internal Revenue Code Section 501(c)(3) and Section 509(a)(1), (2), or (3).), or to U.S., state or local governmental organizations qualified to receive tax-deductible charitable contributions, such as state colleges or universities (As defined in Internal Revenue Code Section 170(c)(1).). The fund cannot approve recommended grants that fulfill a donor’s pre-existing pledge to a charity, or would be used to support or purchase items at any charitable event, such as fundraising dinners, concerts, auctions or other benefit functions where the Donor would receive a quid pro quo. Chances are, the organizations you choose to support to fulfill your philanthropic goals will be acceptable, but you should keep in mind that the Fund has final discretion regarding grant recipients.

How many grants can be made in a year?

There is no limit to the number of grants made out of an account. Most Donor Advised funds have a minimum grant amount that can be as low as $500.

Tax Benefits

Save taxes in four ways

1) Contributions are tax deductible in the year they are made. Because AEF is a public charity, contributions qualify for immediate and maximum tax benefits.

  • Deduction for cash: Up to 50% of adjusted gross income (AGI).
  • Deduction for securities and other appreciated assets: Up to 30% of AGI.
  • Five year carry forward of unused deductions.

2) Avoid capital gains on gifts of appreciated property.

3) Avoid estate taxes.

4) Investments in a Donor Advised Fund can grow tax free.

Other tax considerations

When contributing the following asset types to AEF, donors can deduct the full market value of the asset subject to the AGI limitations mentioned above. If contributed to private foundations, the donor’s deduction would likely be limited to cost basis.

  • Closely held stock (C-corp or S-corp).

Real estate. 


What should I do next?

If you would like more information, please contact Cypress Asset Management, Inc. at (309) 679 9146, or via email at This email address is being protected from spambots. You need JavaScript enabled to view it.

Tax Benefits

Save taxes in four ways

1) Contributions are tax deductible in the year they are made. Because AEF is a public charity, contributions qualify for immediate and maximum tax benefits.

  • Deduction for cash: Up to 50% of adjusted gross income (AGI).
  • Deduction for securities and other appreciated assets: Up to 30% of AGI.
  • Five year carry forward of unused deductions.

2) Avoid capital gains on gifts of appreciated property.

3) Avoid estate taxes.

4) Investments in a Donor Advised Fund can grow tax free.

 

Other tax considerations

When contributing the following asset types to AEF, donors can deduct the full market value of the asset subject to the AGI limitations mentioned above. If contributed to private foundations, the donor’s deduction would likely be limited to cost basis.

  • Closely held stock (C-corp or S-corp)
  •  Real estate.

This information is for educational purposes only. It is not intended to be professional tax or legal advice. Portions of this article provided by DonorAdvisedFunds.com.

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