Donor Advised Funds: An Overview

Donor advised funds are the fastest growing philanthropic vehicle in America. Much like a private foundation, but without any administration to worry about, donor advised funds are often referred to as “charitable checking accounts”.

My name is Sean Stannard-Stockton. I am the director of tactical philanthropy at Ensemble Capital Management. I wrote this explanation of donor advised funds to answer your questions. If you have more questions when you finish reading this, or want help setting up a donor advised fund, you can email us at info@ensemblecapital.com or call us at 800-708-8445.

Overview

Donor advised funds are the same kind of account offered by community foundations. These funds are held within an existing nonprofit, such as a community foundation or a national donor advised fund. You receive an income tax deduction when you put assets into the account and then instruct the nonprofit holding the funds to distribute them to the charities of your choice over time.

Donor advised funds can be started with as little as $5,000 (although our firm’s minimum is $250,000). If you are considering putting $250,000 or more into a donor advised fund, you should examine whether a private foundation might make sense instead. While it used to be true that private foundations only made sense if you put $5 or $10 million into them, today administrative costs have fallen so that the choice between a foundation and a donor advised fund should be determined by your goals and objectives rather than the amount of money you plan to give.

Tax Benefits

When making a gift of cash to a donor advised fund, you can take an income tax deduction in the year of the gift. The amount of the deduction claimed can be as much as 50% of your adjusted gross income (donations in excess of this limit can be carried forward for five years). If you donate appreciated assets such as stock or real estate that you have owned for at least one year, the income tax deduction will be equal to the fair market value of the assets. The amount of the deduction claimed for a gift of appreciated assets can be as much as 30% of your adjusted gross income (with the same provision to carry forward excess deductions for five years). In addition to the income tax deduction for a gift of appreciated assets, you also avoid paying capital gains tax on any appreciation. Since gifts of appreciated assets other than common stock are only deductible at their cost basis when contributed to a private foundation, donor advised funds are generally a better tool if your most highly appreciated assets are real estate, privately held business interests or any asset other than common stock.

Expenses

Donor advised funds are very similar to brokerage accounts with a check writing feature. There are no upfront costs to start one. Once you fund the account, the sponsoring nonprofit will charge an administration fee. This fee can vary widely and is a bundle of two separate services; administration and grantmaking consultation. If you open your donor advised fund at a national fund complex sponsored by a brokerage firm or mutual fund company, the administration fee will general be less than 1% of assets per year (sometimes as little as 0.3% to 0.5%). The only service that is offered is account maintenance and check writing. If you open your fund at a community foundation, the fee is generally a full 1%. However, along with the above mentioned administration, community foundations also offer donors advice on where to give. If you have an interest in a specific community and would like assistance in determining which nonprofit to support, a community foundation might be a good choice for you.

Distributions

Donor advised funds are currently not required to make annual distributions. There has been some discussion in congress about setting a minimum annual requirement (private foundations already have a 5% annual requirement). When working with a national donor advised fund, donors may send grant checks to any domestic nonprofit. A few donor advised funds specialize in international giving. When working with a community foundation, it is important to note whether they place any geographic or cause related restrictions on their donors. In addition, you should be aware that when you send a check, the letter accompanying it will list you as well as the sponsoring charity as the donor.

Family Involvement

Various organizations may have different policies regarding the number of people who can be listed on the donor advised fund account. If you wish to involve your family in your giving, you can either list them as “donor advisors” or simply meet as a family to discuss your giving and then have whoever is listed on the account documents execute the family’s decision. If you want a more official role for your family, you might want to consider a private foundation, which can create an official board of directors.

How We Can Help

Ensemble Capital provides charitable planning and investment management services to philanthropic families. We handle account setup, ongoing administration, tax filings and investment management so that our clients can focus on giving. We provide investment management services to both philanthropic entities and private individuals. This dual competency allows us to advise our clients in a holistic way that recognizes the importance of their philanthropic goals within their personal financial plan.

At Ensemble, we never charge a fee for helping people explore their charitable options. We are only paid for managing the investment assets in accounts that we help set up. Because we offer all five of the philanthropic vehicles that donors can launch, we can objectively explain the pros and cons of your various options. If you’d like to discuss your situation with us, please call 800-708-8445 or email us at info@ensemblecapital.com. There is no obligation and no cost to contacting us.