The Benefits of a Donor Advised Fund at Berks County Community Foundation
If you are considering establishing a private foundation to carry out your charitable interests, you may want to consider establishing a donor advised fund at Berks County Community Foundation instead. Donor advised funds offer several advantages over private foundations.
How Donor Advised Funds Work
Permanence
Recognition
Tax Benefits
Administrative Costs
Donor advised funds are component funds of Berks County Community Foundation. They are generally permanent endowment funds with a percentage of the fund used each year for charitable purposes. If the donor wishes, the fund can be set up to spend some or all of the principal as well.
Once the fund is established, the donor provides advice to the Community Foundation about where gifts from the fund should be made.
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Donors who create private foundations frequently struggle with long-term governance questions. With a donor advised fund, the donor advises the Community Foundation about the distribution of grants from the fund during his or her lifetime. In addition, donors may designate their children or other trusted individuals to succeed them as donor advisors.
At the end of the donor-advising period, the remaining principal is used to create a fund to benefit an organization or cause of the original donor's choice, or placed in the Community Foundation's undesignated pool to be used to meet the most pressing needs of the county. The guidelines for these funds are agreed upon when the initial gift is made.
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Recognition
Many donors recognize that their leadership will inspire others to give. For these donors, having their gift publicly recognized adds to the value of the contribution. Other donors prefer to remain anonymous. Still others want to honor or memorialize a loved one. Donor advised funds can be created to satisfy any preference.
Donors choose the name of the fund that they establish. Grants made from a donor advised fund are identified to the recipients by the fund's name. For existing private foundations, the change may be as simple as switching the name from "The Jones Family Foundation" to "The Jones Family Fund."
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Community Foundation funds offer significant tax benefits over private foundations. For federal tax purposes, gifts to private foundations of appreciated property (other than publicly traded securities) are deductible only at the donor's cost basis.
Gifts of appreciated property made to the Community Foundation are deductible to the donor at their current fair market value. This difference can result in substantial tax savings to the donor.
In addition, a gift to the Community Foundation will enjoy a higher limit of deductibility as a percentage of the donor's adjusted gross income. Gifts of cash to the Community Foundation may be deducted up to 50 percent of the donor's adjusted gross income (AGI). Generally, gifts of cash to private foundations are limited to a deduction of 30 percent of AGI.
Gifts of appreciated property to the Community Foundation are deductible up to 30 percent of AGI, while gifts to a private foundation are only deductible up to 20 percent of AGI.
Beyond the deductibility of gifts, the Internal Revenue Code assesses an excise tax on the net investment earnings of private foundations. This tax amounts to either one or two percent of net investment earnings, depending on the foundation's distribution pattern. Community Foundation funds are not subject to the excise tax.
Private foundations are required to distribute five percent of their net investment assets each year, while community foundations are not. This means that a donor advisor and the Community Foundation can agree to "grow" a fund by reinvesting earnings in anticipation of making larger gifts.
The Internal Revenue Code also provides strict limits on the amount of stock that can be transferred to a private foundation by board members or donors. The Community Foundation is not subject to these limits. This allows donors who are major shareholders of their companies to make more tax advantageous gifts.
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Beginning and operating a private foundation is an expensive and time-consuming proposition. Initial legal and accounting fees to incorporate and to seek IRS approval can easily reach $3,000. The annual accounting costs and tax filing fees are likely to be at least $1,000 to $2,000. Beyond these fees, charges paid to an investment manager can exceed one percent of the fair market value of the fund annually.
The Community Foundation charges permanently endowed donor advised funds a fixed administrative fee equal to 1.15 percent of the fund's annual fair market value. In addition to the administrative fee, there is an investment management fee charged of .35 percent of the funds annual fair market value.
Some donors establish a pass-through donor advised fund that is designed to spend some or all of the principal. Because the principal of pass-through funds is not held in the Community Foundation's permanent endowment investment pool, income is not reallocated to the fund. Pass-through funds are subject to a 1% up-front management fee on each contribution.
Administrative services include tax filings and all other administrative costs. There is no set up fee. The Community Foundation's fees are deducted from the fund and do not impact the charitable deduction.
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To determine the method, or mix of methods, that make the most sense for structuring a gift through Berks County Community Foundation, this information should be reviewed with a competent financial, tax or estate planner.
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© 2001, 2002 Berks County Community Foundation • info@bccf.org
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