A Simple Tool for Family Philanthropy
A Case Study (part 2 of 2)
By Terry Green, CFP ®, AIF ® and Phil Tobin
How Does a Donor Advised Fund Work?
A Donor Advised Fund is a family foundation. One can be established and operated without the set-up fees, minimum payout requirements, excise taxes, and administrative hassles of a private foundation. Donor Advised Funds are not new; they have been part of the community foundation landscape for years. In addition, many mutual fund companies, brokerage firms, and independent charitable organizations now sponsor these programs. Because of their simplicity and flexibility, and because people of even modest means can participate, Donor Advised Funds are becoming one of the fastest-growing forms of philanthropy in America today.
Not all Donor Advised Funds programs are alike; some are more flexible and “user-friendly” than others. Here is how they typically work:
- Individuals can create a Donor Advised Fund with a minimum contribution of $10,000.
- Set-up is simple and it can be done quickly.
- All Donor Advised Fund programs accept cash and marketable securities. Some will accept other assets as well, such as life insurance policies, real estate, and closely-held securities.
- Donors can contribute to their Fund and use it for regular charitable giving during their lifetime and /or arrange for it to receive a testamentary gift such as a bequest, as the remainder interest of a Charitable Remainder Trust, as beneficiary of a qualified retirement program, or as beneficiary of a life insurance policy.
- Donors may stay involved in their Fund in a variety of ways including selecting investment strategies, recommending grants, and determining who will succeed them as donor advisors at time of death.
- Some programs offer a wide range of investment options and some allow the client’s financial advisor to continue to stay involved in the management of the Fund’s investments.
The sponsoring charity does everything else, leaving donors and their families free to concentrate on the emotional and enjoyable side of family philanthropy.
The donor’s role is that of an advisor (hence the name Donor Advised Fund). The donor cannot direct that specific action be taken, only recommend an action. This concept of advice is key to the Donor Advised Fund’s superior tax treatment by the IRS.
Why Establish a Donor Advised Fund?
Because of their simplicity and ability to integrate well with other planning strategies, Donor Advised Funds work especially well as a strategy for family philanthropy when the donor wants to:
- stay involved in their charitable dollars
- achieve immediate tax benefits (best available), but decide when to recommend grants on their own timetable
- create a family foundation without the expense, taxes, reporting requirements of a private foundation
- establish a flexible charitable giving strategy that does not conflict with other estate planning strategies
- develop the capability to teach children and grandchildren about philanthropy and pass family values over successive generations
- memorialize a loved one
- support charitable organizations anonymously
- hold charities accountable for carrying through on their commitments by influencing the grant recommendation process
Thanks to Donor Advised Funds, individuals now have a simple, flexible and cost-effective tool with which to practice family philanthropy.
Terry Green, CFP ®, AIF ® is an independent, fee-only financial planner with Blue Water Capital Management. He can be contacted at (858) 552-1488 or firstname.lastname@example.org. Philip T. Tobin is the President of American Endowment Foundation (AEF). Their website is www.aefonline.org.