© 2016 Joan E. Emery
A donor advised fund is an account established at a qualified sponsoring organization. A qualified sponsoring organization is a public charity which has satisfied various Internal Revenue Code requirements. The person who establishes the account is referred to as the “donor.” The donor or someone designated by the donor is permitted to make recommendations to the sponsoring organization regarding how, when, whom, and in what amounts distributions to charities will be made from the account by the sponsoring organization. When the donor transfers assets to the donor advised fund, the donor is permitted to take a federal income tax charitable deduction, subject to certain limitations, for the value of each donation. In order for the transfer to the donor advised fund to be deductible, the donor must receive a written acknowledgement at the time of the transfer that sponsoring organization has exclusive control over the transferred assets. There is an exception to the general deductibility rule, discussed in one of my previous blogs, which prohibits a qualified charitable distribution from an individual retirement account to a donor advised fund. A sponsoring organization may administer donor advised funds for hundreds or even thousands of individual donors. The sponsoring organization is required to file reports with the Internal Revenue Service and various state agencies.
A private foundation is an Internal Revenue Code 501(c)(3) (“501(c)(3)”) charitable organization which is not a public charity. Public charities are generally 501(c)(3) charitable organizations which rely on donations from a broad segment of the public or which support such a charitable organization. In contrast, a private foundation usually receives its funding from an individual or a family. Charitable organizations that are exempt from federal income taxes are subject to strict rules under the Internal Revenue Code regarding use of assets, investment limitations, and restrictions or prohibitions regarding certain types of expenditures or activities. If a charitable organization qualifies under the Internal Revenue Code as either a public charity or a private foundation, a person who makes a donation to that organization may take a federal income tax deduction, subject to certain limitations, for that donation. Public charities and private foundations must file reports with the Internal Revenue Service and various state agencies.
For someone who is charitably minded, the simplest way to make a charitable gift is simply to give cash or an appropriate asset directly to the charity. If the amount of the gift is substantial or the donor wishes to continue to be involved in the administration of the gift, an outright gift to the charity may not be a desirable option. In that case, it may be more advantageous for the donor to make a charitable gift to a donor advised fund, a private foundation, or a charitable lead or remainder trust.
In 2014, according to the National Philanthropic Trust website, there were 238,293 donor advised fund accounts with total assets of $70.7 billion and there were 82,045 private foundations with total assets of $695.30 billion. In 2014, although there were many more donor advised fund accounts than there were private foundations, each donor advised fund held an average of $296,694, while each private foundation held an average of $8,474,618.
Next week, I will focus on charitable gifts to donor advised funds as compared to private foundations.
I am an attorney practicing in the Chicago area.