Benefits of a Donor Advised Fund

Donor Advised Fund

laughterDonor Advised Funds are convenient, flexible tools for individuals, families, businesses, or groups that want to be personally involved in suggesting grant awards made possible by their gifts. Companies looking for an easier, more effective way to give back to the community can establish a Donor Advised Fund and a team of employees can meet regularly to review local needs and recommend grants.

Donor Advised Funds are typically less costly and easier to administer than other forms of philanthropic giving such as family or corporate foundations. The donor or other named advisors can recommend grants to 501(c)(3) nonprofit organizations from the fund’s investment income and/or the corpus of the fund. Grants are made in the fund’s name, and the donor receives quarterly fund activity statements. The donor (if established by individuals) also has the right to name successor advisors to the fund who can recommend grants in the fund’s name after the death of the original donors.

Private Foundation Comparison

A private foundation allows extensive donor control over distributions, board selection and investment management. However, private foundations are highly controlled by the IRS with many special restrictions and regulations, including administrative and reporting burdens, excise taxes and a required minimum payout.

As described in the following chart, establishing a Donor Advised Funds through Bainbridge Community Foundation (BCF) can serve as a cost-effective alternative to a starting up a private foundation or administering one that already exists.

Comparisons Donor Advised Fund Private Foundation
Creating the Foundation Established at BCF by a simple agreement Nonprofit corporation or trust organized as a private foundation with additional legal and tax advice
Tax Exempt Status Shares the public charity tax exempt status as a “component” of BCF Must apply for private foundation tax-exempt status from the IRS
Start-up Costs No cost to donor Similar to a corporate start-up requiring substantial legal, accounting, and operational start-up costs
Recommended Size $10,000 or more Substantial assets required ($5 – 10 million)
Charitable Deductions for Cash Gifts Tax deduction of up to 50% of adjusted gross income (AGI) Tax deduction of up to 30% of adjusted gross income (AGI)
Charitable Deductions for Appreciated Property Tax deduction available for full fair market value of marketable securities and other property Tax deduction may be taken for fair market value of marketable securities up to 20% of AGI. Tax deduction for other property is limited to the lower of cost or fair market value
Donor Control Donor makes advisory grant recommendations; final decision rests with BCF’s board of trustees Donor retains complete control over investments and grant making, subject to IRS requirements
Self-Dealing Rules Private foundation self-dealing rules do not apply Strict regulations prohibit most transactions between a private foundation and its donors (including related persons or organizations)
Payout Requirements Upon donor discretion Must pay out for charitable purposes at least 5% of its asset value annually, regardless of its income
Contact with Potential Grantees BCF provides at donor request Donor must provide
Administrative Concerns (personnel, facility, grant mgmt.) Services provided by BCF Must establish and/or obtain these services
Annual Costs Minimal Administration can be costly
Annual Taxes None Subject to an excise tax of up to 2% of net investment gain, including net capital gains and income
Annual Tax Filings and Returns (990 Report) Not required (reported as part of BCF’s annual reporting) Must be filed by the private foundation with required reporting schedules
Investments Fund assets are professionally invested through BCF’s investment program Must research, secure, and carefully monitor its own investment vehicles
Fiduciary Responsibility BCF fulfills the associated fiduciary responsibilities The private foundation board has fiduciary responsibility
Liability and Risk Insurance Provided by BCF Must be purchased by the private foundation