Donor-advised funds offer an effective means of providing contributions to charitable organizations while still allowing for the contributors to maintain most of the decision-making power. As is the case with all tax-deductible allowances, there are restrictions to be aware of, but companies and individuals in a position to provide such offerings can take advantage of the terms that allow for recommendations to be made during the sponsorship of a given organization or charity.
By definition, a donor-advised fund is separately identified and maintained by a sponsoring organization, with each account typically comprised of a range of individual contributions. According to the IRS, these funds are also characterized by the organization’s legal control over them, which includes the retention of advisory privileges regarding fund distribution and asset investment.
In other words, if you are the contributor – or part of the contributing organization – you maintain the ultimate say in the recommendations for grants to qualified nonprofit groups or other charities after you have made an irrevocable contribution. That contribution then leads to an immediate tax deduction allowing you, the donor, to determine the manner and timing by which funds are ultimately distributed from the charity.
Deduction terms and other distinctions
Donors are permitted to take a deduction of up to 50 percent of their adjusted gross income (AGI) for cash contributions, and 30 percent of their AGI in the event their contributions are made in the form of appreciated assets. Therefore, capital gains taxes are limited or even eliminated for gifts of long-term appreciated securities.
Furthermore, donor-advised funds also allow for successors to be named in the interest of a continued family involvement, usually for the sake of future grant distribution advice. Anonymity may be retained along with the autonomy that makes this form of contribution appealing to many. Essentially, it offers a method of professional investment management that incorporates an element of personal or familial passion along with control of the decision-making process. That last part is important to many donors when it comes to a project or cause in which they are particularly invested.
An important distinction is in the recommendation of grants – as opposed to actually making them – by the donors. Understanding and abiding by these terms is essential to retaining eligibility, as the organization must be an IRS-qualified charity and there are other restrictions pertaining the specific policies for sponsoring different organizations.
Ultimately, though, a donor-advised fund provides an attractively flexible avenue for making contributions in a less restrictive, mutually beneficial manner.