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By Rebecca Rothey Community Foundation for the National Capital Region Baltimore, Maryland
Many fortunate individuals express a desire to “give back” through charitable giving. Clients may be overwhelmed when evaluating the multiple options that allow them to maximize tax benefits while also making the greatest possible community impact through their charitable giving. This article reviews the benefits of the various options, with special emphasis on gifts made through community foundations to donor-advised funds, designated funds, or field of interest funds.
A donor-advised fund is a fund or account owned and controlled by a sponsoring organization that is separately identified by reference to contributions of a donor or donors and over which that donor, or a person designated by that donor has, or reasonably expects to have, “advisory privileges” regarding the distribution or investment of funds contributed.
While many practitioners think of donor-advised funds as a relatively new vehicle for charitable giving, the first donor-advised fund was established in 1931 by the New York Community Trust, one of the nation's oldest community foundations. The decision in Nat’l Found., Inc. v. United States , wherein the court ruled that, if donors relinquish all control of a gift to the sponsoring organization, then donors qualify for a tax deduction under §501(c)(3), solidified the viability of donor-advised funds as a vehicle for charitable giving. Four years later, in 1991, the first commercial donor-advised fund was established by Fidelity. Since that time, donor-advised funds have flourished.
Why are donor-advised funds so popular? Sponsoring organizations that offer donor-advised funds are public charities whose purpose is to administer charitable funds that benefit other tax-exempt organizations, families, or individuals (such as scholarship recipients). Therefore, they allow an individual to make a gift to establish a donor-advised fund that receives the same income tax deduction they would receive for any gift to a public charity. As with all charitable gifts, the gift is irrevocable and the donor gives up all control of the asset. However, by agreement with the sponsoring organization, the donor retains the right to recommend where gifts from the fund will be made.
Sponsoring organizations include commercially based sponsors, such as Fidelity, Vanguard, and Charles Schwab, community foundations and other geographical, religious, and education-affiliated sponsors. While all sponsoring organizations provide experienced staff to manage the administration of the fund and facilitate discussions on philanthropic priorities, community foundations are uniquely situated to navigate the local charitable community. Community foundations were initially created by trust banks for the purpose of redirecting orphan trusts. Their boards were community leaders dedicated to harnessing resources to address challenging local issues. Over the years, community foundations have evolved into hubs for giving and social change in the regions they serve, offering expert knowledge of regional nonprofits and community needs.
All sponsoring organizations charge a fee for administering the funds; however, typically, fees charged by community foundations are 50 to 100 basis points higher than those offered by commercial funds. Why would someone choose to open a more costly fund? Often, the decision to open a donor-advised fund is prompted by a significant financial or life event. These can include the sale or transfer of a business or real property, an inheritance, realization of deferred or other disposable income, or, most commonly, retirement or estate planning that includes a desire to give back during the donor's lifetime or to create a charitable legacy. Motivations also include a desire to involve family in philanthropy, the wish to remember or honor a loved one, or a decision to become more intentional or purposeful about charitable giving. These events often prompt the decision to seek expert guidance. Community foundations offer locally based resources with expert staff whose role is to offer just such guidance.
Donor-advised funds offer a viable alternative to private foundations. When a donor sets up a fund, he or she names the fund — many include “foundation” in the name — and the donor is able to name current or successor advisors. Fund advisors are empowered to recommend grants from the fund, just as trustees would be when doing grant-making through a private foundation. However, donors establishing a donor-advised fund are relieved of the administrative requirements of private foundations. The following chart sets forth key differences between donor-advised funds established at community foundations and private foundations:
|Community Foundation Donor-Advised Fund||Private Foundation|
|ESTABLISHING A FUND|
|Ease of establishment||Fund can often be opened in less than 24 hours with one standard agreement with the community foundation.||Must form a nonprofit corporation or trust organized as a private foundation; file for incorporation and tax-exempt status, create by-laws, select trustees. Can take several months.|
|Tax-exempt status||Receives 501(c)(3) public charity status as component fund of the Community Foundation. No paperwork required.||Must establish separate tax-exempt status as private foundation.|
|Start-up costs||None.||Requires legal, accounting, and operating costs.|
|Minimum size||$10,000||No minimum; however $3-5 million often recommended to justify the operating costs and time.|
|CHARITABLE INCOME TAX DEDUCTIONS|
|Cash gifts||Up to 50% of AGI.||Up to 30% of AGI.|
|Publicly traded securities||Fair market value up to 30% of AGI.||Fair market value up to 20% of AGI.|
|Real estate, closely held securities, and other special categories||Fair market value up to 30% of AGI.||Cost basis up to 20% of AGI.|
|Minimum payout||None required.||5% annual payout required.|
|Grant-making||Donor recommends grants. Typically, three- to five-day process for IRS-required due diligence on prospective grantees.||Donor retains control over grant-making; limited by IRS requirements.|
|Liability||Community foundation assumes all liability and risk.||Responsible for all liability and risk; must maintain insurance.|
|Privacy||Donors and their grant-making may remain anonymous.||IRS requires annual 990-PF to list all grants and officers/directors/trustees.|
|Professional staffing||Staff offers customized services to all fund holders.||Must employ staff or retain consulting services.|
|Investments||Short and longer-term investment pool options available. Option to recommend outside money manager to manage fund assets.||Manages own investment vehicles.|
|Annual taxes and reporting||None required; reported as part of overall Community Foundation reporting.||Annual tax returns required; annual IRS 990-PF. Excise taxes of up to 2% of net investments, including capital gains.|
|Operating costs||Admin fee of 1.1% of annual fund balance with a minimum fee of $500. Funds over $500K receive reduced fees.||Private foundations under $1M average costs are 4.8% of assets. Foundations $1M to $10M average 3% of assets.|
|Fiduciary responsibility||Community foundation fulfills fiduciary responsibilities.||Board has fiduciary responsibility.|
To many first time donors, especially when there is an opportunity to give more than in years past, it can be surprisingly difficult to decide where to give. Other donors, however, have a clear charitable vision and wish to narrow their giving either to specific organizations or to an area of interest. In addition to donor-advised funds, community foundations offer two other types of funds that can meet these purposes: (1) designated funds and (2) field of interest funds.
Helping clients determine the best possible option to meet their objectives in “giving back” will give them the most rewarding philanthropic experience possible. For clients looking to give within their local communities without taking on the administrative commitments associated with a private foundation, donor-advised funds, designated funds, or field of interest funds at a community foundation may be a good fit.
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