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Donor-Advised Funds Gain In Recession

Though a private foundation can be a great, hands-on way to fulfill your philanthropic intentions, it can also be expensive and time-consuming, and the recession has left many foundations with diminished portfolios and burdensome costs. Moreover, if your business is struggling, you may have fewer hours to devote to running foundation operations. Under the pressure of today’s financial realities, another charitable giving vehicle—the donor-advised fund—could be an appealing alternative.

With a donor-advised fund, you contribute cash or property to a special account managed by a sponsoring charitable organization or an investment company. Then you make recommendations about how and when to distribute the funds in your account. Although you can’t legally require distributions to be made to the charities you designate, the money will normally go to your suggested recipients unless there’s a legal reason it can’t.

A donor-advised fund may require a minimum contribution to set up an account, and you’ll likely pay an annual administrative fee based on a percentage of the assets in your account. Still, compared with a private foundation, a donor-advised fund may deliver more of your charitable dollars to your intended recipients at a lower cost. And whereas private foundations must publicly disclose some information about the foundation and its grant recipients, gifts through a donor-advised can be made anonymously.

There may also be tax advantages. You get an immediate write-off for contributing to a donor-advised fund, even if your money is distributed to charitable recipients in later tax years, and the maximum deductible donation may be higher with a donor-advised fund than if it were made through a foundation. Contributed real estate is deductible at its fair market value through a donor-advised fund, whereas you can deduct only the property’s cost basis if you donate it through your foundation. Finally, there are no mandatory distributions with a donor-advised fund. A foundation must distribute at least 5% of its net assets every year.

            If you already have a private foundation, you could convert it to a donor-advised fund. There are strict IRS rules you must follow if you’re dismantling a private foundation, however, and you’ll also need to comply with state laws. If you’re establishing your donor-advised fund through a charity or a financial company, that entity may be able to provide guidance for making the transition. But you’ll also need to consult an experienced attorney. We can work with you and your other advisors to oversee the change, file the necessary paperwork, and handle other issues.

This article was written by a professional financial journalist for Legend Financial Advisors, Inc. and is not intended as legal or investment advice.

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