An extremely popular and efficient means of creating a legacy to your community is through the use of Donor Advised Funds.
This is a charitable fund set up through a Community Foundation.
It is an alternative to a Family Foundation for those who do not want to take on the responsibility of administration, potential liability, record keeping and lack of privacy.
Since Donor Advised Funds are set up and administered through Community Foundations, a good starting place for this post would be a definition and discussion of Community Foundations.
What is a Community Foundation? A Community Foundation is a public charity organized under the Internal Revenue Code.
They are generally set up to serve a specific geographical area.
Community Foundations provide grants to a number of different charities in its service area.
Instead of concentrating on one charitable cause, a Community Foundation dedicates itself to serving the wide variety of needs of its community and donors.
Community Foundations are set up as endowments and the grants given by it come solely from the income of those endowments.
Many Community Foundations limit the amount of grants they can give each year to a specific percentage of the endowment principal.
In this way, the endowment remains stable during times of market volatility.
In setting up a Donor Advised Fund, you would donate a sum of money or property to the Community Foundation as a permanently endowed fund.
Each year the income from your fund would be available to contribute to charitable organizations or causes in the community.
You and your family are allowed to direct or advise how the grants are to be distributed each year.
Comparison with Family Foundations.
1.
Donor Control.
Both Family Foundations and Donor Advised Funds provide the donor with various levels of control in selecting grant recipients.
With a Donor Advised Fund, you and your family, as the donor, can make advisory recommendations to the Community Foundation who has the ultimate authority to select the recipients.
You have complete control in selecting grant recipients (subject, of course, to IRS requirements) if you create a Family Foundation.
Founders can create their own board, have a wide choice of investments and absolute discretion in recipients.
Family Foundations allow you the full range of flexibility and control.
2.
Set Up Costs.
Donor Advised Funds are much less expensive to create than Family Foundations.
Family Foundations require the formation of an entity, either a nonprofit corporation or a trust, with all of the appropriate legal fees and filing costs.
The Donor Advised Fund is created within the Community Foundation and, in most cases, can be set up with a simple agreement.
3.
Record Keeping and Administration.
Management, record keeping and tax reporting for a Donor Advised Fund is provided by the Community Foundation usually at a low annual fee (1% of less of the fund balance).
The board of a Family Foundation has the responsibility of administering the Family Foundation, although it can retain outside management services.
4.
Charitable Tax Deductions.
With a Donor Advised Fund, cash contributions are deductible at the full rate (up to 50% of the donor adjusted gross income "AGI").
Family Foundations' tax deductions are limited to up to 30% of the AGI.
Contributions to Donor Advised Funds of marketable securities and other property such as real estate receive a charitable tax deduction for the full market value.
With Family Foundations, the deduction for marketable securities is based on the full market value.
However, for other appreciated property, like real estate, the deduction is limited to the donor's cost basis in the property.
5.
Excise Taxes.
Family Foundations are required to pay a 2% annual excise tax on its net investment income.
Donor Advised Funds are not subject to this tax.
For persons with smaller estates or those that do not require the control over the grant making process, a Donor Advised Fund is an attractive alternative.
Donor Advised Funds provide much more privacy.
Because of the need for tax filings and reporting with the Family Foundation, it is easier for people to find out the identity of donors and how much money they contribute.
An individual's contribution amount to a Donor Advised Fund is not publicly available.