Is A Donor Advised Fund Right For You?

Published:

Authors:
Howard Essner, JD, General Counsel, Family Wealth & Retirement Plan Advisor


Charitable giving is a major focus for many of our clients. We work closely with clients to ensure that charitable contributions are made in the most tax efficient manner possible. Tax strategies include using appreciated securities to make gifts and using IRA dollars for direct contributions when the donor is older than age 70 ½ and is subject to required minimum distributions. In this article, we will address another strategy that has worked well for many of our clients: using a Donor Advised Fund as a vehicle to fund future charitable contributions.

What is a Donor Advised Fund?
A Donor Advised Fund is a charitable account that the donor can use as a flexible and efficient way to manage charitable giving. A Donor Advised Fund is established by making an irrevocable donation to a public charity that sponsors and administers Donor Advised Funds as separate accounts. At any time, the donor can make a recommendation to the sponsoring organization to have funds from the Donor Advised Fund distributed to another qualified charity of the donor’s choice. Additional contributions can be made to the Donor Advised Fund at any time. The contribution to the Donor Advisor Fund is considered a qualified gift to a charity, so the contribution to the Donor Advised Fund provides the donor with a full and immediate charitable tax deduction to the maximum degree allowed by the IRS. In many ways, a Donor Advised Fund is like a private foundation, but without the administrative burdens and public disclosure requirements associated with foundations.

Why Use a Donor Advised Fund?
A Donor Advised Fund is a great way to maximize the tax savings from charitable contributions. On the one hand the contribution to the Donor Advised Fund is immediately deductible (subject to IRS limits). On the other hand, the assets in the Fund can be used to fund grants to other charities in the future. Thus, a Donor Advised Fund maximizes tax savings by having the charitable deduction utilized in a high tax year even while using the ultimate charitable grant from the Fund may come in a future lower tax year, when the tax savings from a direct gift to a charity would be lower. For example, we have helped clients who have sold businesses and are facing large tax liabilities establish and fund the Donor Advised Fund in the year of the sale. The gift reduces the tax cost of the sale, while providing a vehicle to make future grants in years when the clients’ tax rate is lower. Likewise, clients who are approaching retirement will often fund a Donor Advised Fund in their final working years, knowing that the ultimate charitable grants will be made during retirement when tax rates might be lower.

There are other reasons to consider a Donor Advised Fund. When such a Fund is established, it is often possible to name other family members (such as children and even grown grandchildren) as advisors to the Fund. The Donor Advised Fund then becomes a wonderful vehicle to use for family charitable giving and for the education of younger generations about the benefits of philanthropic activity. It is also possible to have the Donor Advised Fund continue after the death of the original donor(s), giving children the opportunity to continue the philanthropic legacy of their parents.

Many of the charitable organizations that sponsor Donor Advised Funds (see below) maintain staff dedicated to educating and assisting donors to help with evaluating charities, establish programmatic giving plans, and meeting philanthropic goals. Also, a Donor Advised Fund can be used to make gifts with complete anonymity or full recognition, as determined by the donor.

Is there any Downside to using a Donor Advised Fund?
It is important to know that the gift to fund a Donor Advised Fund is irrevocable and that the assets contributed technically belong to the sponsoring organization. The recommendation to make charitable gifts from the fund is just that, a recommendation, and in theory could be denied by the sponsoring charity. However, we are not aware of any sponsoring organization who has denied a request by a donor to make a grant to a U.S.-based charity that is recognized by the IRS as a charitable contribution under IRC Section 501(c)(3).

Almost all sponsoring organizations charge a fee to administer a Donor Advised Fund, either in the form of a flat or asset-based fee, and either directly or through a commingled investment fund.

How to Establish a Donor Advised Fund
Many public charities sponsor Donor Advised Funds, including community foundations, religious-based charities, the charitable arms of major financial institutions, and independent charities specializing in administration of Donor Advised Funds. The process to start a Donor Advised Fund involves completing the account opening paperwork, which names current advisors, sets a name of the Fund, and establishes how the fund will be administered after the death of the donor. The account is then funded with a contribution (using appreciated securities if possible), and the donor is provided with instructions on how to make grants. The sponsoring organization also provides the required documentation to substantiate the charitable gift.

We are happy to work with clients who are interested in exploring whether a Donor Advised Fund could be beneficial. In many cases, it is also possible for a client to have our portfolio management team manage the investment of the Donor Advised Fund through arrangements we have with several sponsoring organizations.

To learn more about Donor Advised Funds please contact your Ancora-Inverness Advisor.


Howard Essner, JD, is the General Counsel, managing director, family wealth advisor at Ancora Holdings Inc


The mention of specific securities, types of securities and/or investment strategies in this newsletter should not be considered as an offer to sell or a solicitation to purchase any specific securities or to implement an investment strategy. Please consult with an Ancora Investment Professional on how the purchase or sale of specific securities can be implemented to meet your particular investment objectives, goals, and risk tolerances. Past performance of these types of investments is not indicative of future results and does not guarantee dividends/interest will be paid or paid at the same rate in the future. The data presented has been obtained from sources that are believed to be accurate and credible. Ancora Advisors makes no guarantee to the complete accuracy of this information. The indexes discussed are market performance indices and are not available for purchase. If you were to purchase the securities that make up these indices, your returns would be lower once fees and/or commissions are deducted. Past performance of these indices is not indicative of future results of the securities contained in these indices.

Ancora Advisors LLC is a registered investment adviser with the Securities and Exchange Commission of the United States. A more detailed description of the company, its management, and practices are contained in its “Firm Brochure” Form ADV, Part 2a. A copy of this form may be received by contacting the company at: 6060 Parkland Blvd, Suite 200, Cleveland, Ohio 44124, Phone: 216-825-4000, or by visiting our website www.ancora.net/adv

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