Credit: Shutterstock photo"It is every man's obligation," said Albert Einstein , "to put back into the world at least the equivalent of what he takes out of it." If you agree and wonder about starting a private foundation to control spending of your charitable donations, you might have a better tool: a donor advised fund.
Starting a private foundation can involve substantial start-up and administrative expenses - such as annually filing of the Internal Revenue Service Form 990-PF , a Return of Private Foundation - not to mention the major time commitment.
A donor advised fund (DAF), on the other hand, is a charitable giving vehicle where an individual, family or corporation makes an irrevocable, tax-deductible contribution of personal assets to a charity. The donor can any time thereafter also recommend grant distributions to other qualified charities .
In plain English, you give money to this account to support your favorite charities now and in the future.
You can take a deduction on your tax return in the year the charity received the money. The account can also take your donations of marketable securities such as stocks and bonds, and even donations of hard-to-sell real estate. If your asset appreciated in value above its original cost, you also avoid the capital gains tax.
According to the "2014 Donor Advised Fund Report" from the National Philanthropic Trust , 217,367 DAFs existed in 2013 with $53.7 billion in assets, nearly a 20% spike over the previous year's total.
Obviously growing in popularity, DAFs bring numerous benefits. First, you do not need to be Bill Gates to create a DAF but instead can start with as little as $10,000. DAFs also often have a minimum additional contribution (such as $500); suggested grants also frequently carry a smaller minimum.
These funds also allow you to take a tax deduction in one year and then decide later on the best choice of charities. You can make a single contribution to the fund and still benefit multiple charities while only requiring one substantiation letter documenting the deduction. Your accountant will thank you.
Another benefit: creation of a legacy versus providing a one-time gift. You can create a family foundation, allowing your children and grandchildren to get involved evaluating charities - potentially fostering charitable spirit at an early age. Your family can also name successor advisors to your account.
You can choose between many DAFs . We prefer independent fund sponsors such as the American Endowment Foundation (AEF) due to low annual fees and what seem to us sensible distribution policies. AEF also accepts donations of all different assets, especially helpful if you have appreciated real estate or art to donate.
With AEF, you the donor can recommend the investment strategy for your contributions (you might also want to work with a financial advisor). This helps eliminate concern about how charities manage or mismanage investments.
People establish DAFs for a number of different goals - some financial, some philanthropic, most centered on family. AEF shares a recent conversation with Mary, the widowed matriarch of her family with four children and 10 grandchildren. She created a DAF:
"My husband and I started our fund primarily for the tax advantages and the flexibility in giving to multiple charities," she said, "but I think that my biggest reason … is [for] keeping my family together once I am gone. Though my children and grandchildren live in different places, it gives me peace of mind in knowing that the fund will keep my family connected in a meaningful way."
So if you're charitably inclined wish to get a tax benefit this year and a voice in which charities benefit in the future, a DAF may be your best option to fulfill a very important obligation.
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Dan Crimminsis the co-founder of Crimmins Wealth Management LLC in Woodcliff Lake, N.J. His blog is Roots of Wealth.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
