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Donor Advised Funds as an Alternative for Charitable Donations

Allison J. Shoemaker, CPA Director, Tax Strategies

Many people want to be philanthropic but do not have the time or resources to establish their own private foundation. Donor advised funds offer an alternative.

Donor advised funds are held and managed by a sponsoring charitable organization in an account with the donor’s name.

Here is how they work: Once the donor makes the contribution to the organization, the organization has legal control over the assets. However, many organizations allow the donor to retain advisory rights or appoint a designee to advise how the funds should be invested and distributed to qualified charities. The donor may only make recommendations; the organization is not bound to carry out those recommendations.

One advantage of a donor advised fund is that it allows for an immediate tax deduction for the donated amount, while permitting the money to be distributed to recommended charities in the donor’s name over a number of years. This may assist with both charitable intent and tax planning by allowing charitable deductions in the year when the deduction is most advantageous.

Contributing to a donor advised fund also allows the assets to appreciate and earn income before they are distributed to the final charitable beneficiary without being taxable to the donor.  The contribution of the assets can also reduce the value of the donor’s estate for estate tax purposes.

Donor advised funds have some advantages over a private foundation. They are simpler and less costly to maintain. And unlike a private foundation, there are higher adjusted gross income contribution limits on contributions made to public charities.

There are a few disadvantages of donor advised funds. They require the donor to give control of the assets to a sponsoring organization; with a private foundation, the donor maintains control of the assets. Also, the donor must be careful not to advise the sponsoring organization to distribute funds to a charity from which the donor receives more than an incidental benefit. Improper investing or distributions may involve penalties.

For charitably minded people who are not quite ready, willing, or able to create a private foundation, donor advised funds provide a way to give back to the community.

Allison J. Shoemaker can be reached at Email or 215.441.4600.

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Allison J. Shoemaker, CPA

Allison J. Shoemaker, CPA

Director, Tax Strategies

Investment Industry Specialist, Business Tax Specialist, Individual Tax Specialist

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