One of the most popular and effective method of leaving a legacy for your community is to make use of Donor advised Funds. This is a fund for charitable purposes established through the Community Foundation. It’s a viable alternative to an Family Foundation for those who don’t want to assume the burden of administration, risk of responsibility, records keeping and the lack of privacy. Because Donor Advised Funds have been established and managed by Community Foundations, a good base for this post is a definition and discussion on Community Foundations. Section 18A Tax Certificate
What is a Community Foundation?
A Community Foundation is a public charity that was established under the Internal Revenue Code. They generally are established to provide services to a particular geographical region. Community Foundations offer grants to diverse charities within their service area. Instead of focusing solely on one charity, the Community Foundation dedicates itself to catering to the many demands of its communities and donors.
Community Foundations are established as endowments. The grants they grant are exclusively from the earnings from these endowments. A lot of Community Foundations limit their number of grants that they annually to a specified amount of their principal. So the endowment is steady even in the midst of market volatility.
In establishing an Donor Advised Fund, you will be able to donate funds or assets towards the Community Foundation as a permanently endowed fund. Every year, the earnings from your fund will be donated to charitable causes or organizations within the community. You and your family members are permitted to decide or direct on how grants will be distributed every year.
A Comparison to Foundations of the Family Foundations.
- Donor Control. Each of Family Foundations and Donor Advised Funds give the donor different levels of control when it comes to the selection of the recipients of grants. When you establish the Donor Advised Fund, you and your familymembers, as the donor, are able to offer advice for the Community Foundation who has the ultimate authority to choose the beneficiaries.
You can have total control over choosing the recipients of grants (subject obviously, to IRS guidelines) If you set up an Family Foundation. Founders can establish their own boards, enjoy an array of investment options and have complete discretion over the who they choose to grant. Family Foundations offer you the complete range of choice and control.
- Set Up Costs. Donor-Advised Funds are more affordable to set up in comparison to Family Foundations. The Family Foundations must be established through the establishment of an organization, which could be an organization that is a nonprofit or a trust, along with the legal fees required and filing fees. Donor Advised Fund Donor Advised Fund is created within the Community Foundation and, in most cases, it is established with a straightforward agreement.
- Record Keeping and Administration. Management, record-keeping and reporting on tax for the Donor Advised Fund is provided by the Community Foundation usually at a small annual fee (1 percent less than the balance of the fund). The board of the Family Foundation has the responsibility of managing its Family Foundation, although it is able to retain management from outside.
- Charitable Tax Deductions. If you have the Donor Advised Fund, cash contributions are tax deductible at full-time rates (up up to 50 percent of donor’s total adjusted income “AGI”). Contributions to Donor-Advised Funds that are marketable and other real estate such as estate are eligible for tax benefits for charitable causes in full market value. For Family Foundations, the deduction for securities that are marketable is based on the market value. For other property that is appreciated, such as real estate the deduction is restricted to the cost basis of the donor for the property.
- Excise Taxes. Family Foundations must pay an annual excise tax on their net investment earnings. Donor Advised Funds aren’t affected by this tax.
For those with smaller estates, or who do not need control over grant making A Donor Advised Fund is an attractive option.
Donor Advised Funds can provide more security. Because of the necessity to file tax returns and report to the Family Foundation, it is simpler for people to discover what donors’ identities are as well as how much they give. A person’s contribution amount to the Donor Advised Fund is not accessible to the public.