Charitable Deductions This Year, Advisory for Future Years

Perhaps you are interested in giving a substantial donation to charity this year. However, you would like to advise the charity in future years as to the possible use of the donated funds… while still preserving your charitable deduction this year when the funds are paid to the charity.

You may have heard some tax-exempt organizations say this is possible through “donor-advised funds” or “advise and consult funds.”

What Are Donor-Advised Funds

Donor-advised funds—though they may bear the donor’s name—are not separate entities. These funds are bookkeeping entries only. They are components of a qualified charitable organization.

A contribution to a charity’s donor-advised fund may be deductible in the year it is made if it isn’t considered earmarked for a particular distributee. The charity must fully own the funds and have ultimate control over their distribution. You must get a written acknowledgement from the fund’s sponsoring organization that it has exclusive legal control over the assets contributed.

Advisory, Not Binding

Though the donor can advise the charity, which generally will follow his or her recommendations, the donor can’t have power to select distributees or decide the timing or amounts of distributions. The donor’s only input is to advise the charity of possible distributees, timing and amounts of distributions.

This right must be advisory and not binding. The charity is not required to follow the donor’s advice, but must retain complete discretion regarding the use of the funds.

Uses and Advantages of Donor-Advised Funds

  • Gain control of the timing of charitable contributions or defer the selection of the ultimate recipient.
  • Enable a convenient alternative to setting up a private foundation.
  • Avoid the capital gain tax on the sale of appreciated securities by giving these securities to a charity’s donor-advised fund.

A major advantage of this type of gift is that the fund already exists. Since it is with an established tax-exempt organization, there is no need to apply for tax exemption. Additionally, no annual IRS filings are required.

Mutual funds operated by major financial institutions, as well as many community trust organizations, operate donor-advised funds. The fund may require a minimum initial contribution and may require that any recommended distributions be in excess of a minimum amount.

If you need our help in arranging a contribution to a donor-advised fund, or if you would like to discuss any aspect of your contribution planning, please give us a call.

For more information on charitable contributions or financial advice, contact us at 314-961-1600 or online.

About Smith Patrick CPA

Smith Patrick CPA is a St. Louis-based, family-owned CPA firm dedicated to providing personal guidance on taxes, investment advising and financial services to small businesses and financially active individuals. For over 30 years, our firm has focused on providing excellent service to businesses, non-profits, individuals and government agencies in St. Louis and the surrounding areas. Investment Advisory Services are offered through Wealth Management, LLC, a Registered Investment Advisor.