Donor Advised Funds

By January 19, 2007Financial Planning
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Over the past decade, a vehicle called a donor advised fund has made it increasingly possible for individuals and families of more modest means to plan and manage their charitable giving much like that of much larger charitable foundations. Since these funds are relatively new, we would like to take the opportunity to tell our clients and friends about them here.

Charitable donor advised funds operate much like a private foundation. Individuals can contribute cash or appreciated long term capital gain property such as mutual fund shares or stocks to the fund and receive a deduction for the fair market value of the security on the date of the transfer. Once an investment is received by the donor advised fund, it is liquidated and placed into one or more pooled investment accounts selected by the donor. The donor can then use these funds to make cash gifts to one or more charitable organizations. The gifts can be made all in one year or over several years. When a donor wants to make a donation to a charity, he or she simply sends information regarding the gift to the sponsoring organization who, after verifying the charity’s tax exempt status, sends a check directly to the charity indicating that it is from the donor’s account.

An example may help clarify the use of these donor advised accounts:

Mrs. Smith owns $40,000 of the Oakmark Select fund with a basis of $10,000. She normally gives $4,000 per year to 5 charities. Her accountant has informed her that she should accelerate her 2007 charitable contributions into this year because she will be in a 40% combined federal and state income tax bracket in 2006, and only the 28% combined tax bracket in 2007. Mrs. Smith thinks this is a good idea and would like to use her Oakmark Select position to fund the contributions, but is concerned about the administrative hassle of transferring securities to five charities. She is also concerned about making all of the contributions in one year and would like the flexibility to change the amount of money each charity receives, because every once in a while she finds new charities she would like to support.

In May of 2006, Mrs. Smith sets up a donor advised account with Schwab’s Fund for Charitable Giving (“SFFCG”) and transfers her $40,000 Oakmark Select position to the account. She will re-ceive a $40,000 tax deduction on her 2006 income tax return. No capital gain is realized on the transfer of these shares to the donor advised fund. SFFCG liquidates the Oakmark Select position and invests the proceeds in one of the Fund’s pooled investment accounts. In July of 2006, Mrs. Smith requests a $4,000 transfer to each of her five favorite charities. The SFFCG verifies the tax-exempt status of these charities and then sends checks to the charities in Mrs. Smith’s donor ad-vised fund’s name. The next year, Mrs. Smith finds five additional charities that she wants to support and in June of 2007, she directs that 10 charities receive $2,000 each. The SFFCG again verifies the tax-exempt status of these charities and then sends checks to the charities in Mrs. Smith’s name. In July of 2007, Mrs. Smith has a small balance left in her donor advised account representing the earnings on her original donation. She can now direct this final amount to a qualified charity, leave the account open or donate cash or additional securities into the account.

Which Organizations Offer Donor Advised Funds?

The following is a chart summarizing key information regarding some donor advised funds that are available to individual clients:

How do charitable gifts help us to better manage your investments?

In the case of taxable accounts, we are always trying to maximize after tax returns. Many investors hold several mutual fund positions with large built-in gains that we hesitate to sell because of the tax cost. In these cases, there may be other mutual funds we prefer to hold rather than the existing positions, but the preference is not strong enough to justify triggering the tax liability. To the extent that a client donates some of these low basis shares to a charity, and then adds cash to the account to replace the asset, it helps us to rebalance the account to our target positions with-out recognizing any taxable gains.

How will you know whether these strategies work for you?

If you believe that a Donor Advised Fund may be appropriate for you, we would analyze your situation and consult with your tax professional before making a specific recommendation.

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