Tax Deductions With Control & Simplicity

Santa Barbara has long been a community that supports philanthropy and with the increased number of “donor advised funds” available in the market today, patrons now have more choices when it comes to control over their tax deductions and the distribution timing of their gifts.

What is a donor advised fund? Quite simply, it is an investment account typically offered by community foundations or through charities set up by national financial institutions. Some programs allow for contributions as small as $5,000 but most national firms set their minimums between $10,000 and $25,000. At the Santa Barbara Foundation, “two types of donor advised funds are offered, one with a five-thousand-dollar minimum and the other is fifty thousand dollars,” according to Chuck Slosser, the foundation’s president and CEO. Contributions for most donor funds are generally in the form of cash and stock but some organizations will allow for real estate and alternative assets. These structures generally allow for the following benefits:

• Donors receive an immediate tax deduction for gifts they make to the fund.

• Donors can postpone their decisions on which charities should receive the money (though typically 5% should be distributed each year).

• The donor controls distributions from the fund and the distributions can be sprinkled out over many years or delayed (versus standard donations, which are fully contributed to the charity in that year).

• Donors may have a wide array of choices in how the funds are invested. Investments options typically consist of a selection of mutual funds or short-term instruments and choices that continue to expand.

• The fund typically handles check distributions, tax reporting and overall administration on behalf of the donor. “With IRS rules requiring that every gift over two hundred fifty dollars to a charity be accompanied by a receipt for tracking purposes, many people have discovered that a donor advised fund is much simpler for consolidating, administering, tracking and reporting of their gift plans,” Slosser says. “A donor advised fund is like having a charity bank account.”

• The structure is easy to set up and work with and in some cases, may be a cost-effective alternative to the creation of private foundations. “Since the national or local donor advised fund administrator files the tax return and generally does not impose set-up fees,” says Slosser, “these can be fantastic alternatives.”

While many aspects of donor advised funds have greatly simplified the process and administration of giving, they do not come without some drawbacks. As competition increases to attract contributions, so does the complexity of choices, fee structures, service options, assistance and so forth. Additionally, lawmakers have been cracking down on past abuses and structures that do not follow the rules.

What should potential contributors need to know before they give to a donor advised fund?

• Local versus national fund: Per Mr. Slosser, “if a donor is going to focus on supporting their community charities, it may behoove them to use a local donor advised fund where the staff can help with guidance and suggestions regarding the best managed organizations in their area.”

• Contribution type limitations: Though some funds are taking on non-traditional investments, many focus on cash, appreciated stock and traditional investments. According to Jim Tombor, a CPA for Bartlett, Pringle & Wolf, LLP, “donors need to be aware of the rules regarding non-cash property, which are different than standard investments.”

• New tax law limitations: Mr. Tombor says “donors should be aware of exclusion in the new pension law as it pertains to those over seventy and a half and the new one-hundred-thousand-dollar IRA gift exemption for 2006 and 2007. It is specifically excluded and is not allowed to be used for donor advised funds.”

It is clear that donor advised funds are increasing in exposure and becoming more popular in their use (visit www.fidelitycharitableservices.com to learn more). In the right situations they can be powerful tools to control taxes and charitable giving wishes. No doubt more options and choices will be coming in this area.