Cassady SchillerUncategorizedCharitable Donation Planning – Donor Advised Funds and Private Foundations

Charitable Donation Planning – Donor Advised Funds and Private Foundations

Nov

23

November 23 , 2015 | Posted by Gail Waham |

Charitable Donation Planning – Donor Advised Funds and Private Foundations

As 2015 draws to a close, clients with projected significant taxable earnings during 2015 may wish to consider making charitable contributions that allow them to reduce the corresponding tax burden. The following discussion focuses on those individuals who have experienced an income recognition event that may not necessarily reoccur annually. Examples would include the sale of a business or a large holding of low basis securities, a large bonus or commission or the exercise of stock options. Two popular approaches that allow you to realize a current tax deduction and actively manage your charitable giving in future years are private foundations and donor advised funds.

Private foundations and donor advised funds operate in a similar fashion from an income tax standpoint. Both of these entities allow you to donate assets in the current year, receiving a charitable contribution deduction to offset current income, and disburse the funds to charitable organizations in subsequent years. Your ability to deduct donations to either entity is subject to certain limits, based on your adjusted gross income (AGI), depending on the form of the contribution. Donations are often made either in cash or appreciated stock that has been owned for more than one year. Deductions for donations made in cash to donor advised funds are limited to 50% of AGI and 30% for private foundations. Donations made in appreciated stock to donor advised funds are limited to 30% of AGI and 20% for private foundations. Real estate and closely held stock may also be contributed; limits here are 30% of AGI on the fair market value to a donor advised fund and 20% of AGI of the cost basis to a private foundation. Note that with contributions of appreciated property, the appreciation is not subject to the capital gains tax at the individual level, allowing greater support to be provided to the charity. Any contributions that cannot be utilized in the current year due to the above AGI limitations can be carried forward for five years.

Private foundations offer the advantage of significant control as to the ultimate recipients of the donated funds. Grants from the private foundation are determined by the foundation’s Board and can be made to any qualifying charitable organization or private operating foundation (but not to another private foundation). A private foundation is a separate taxable entity that files an annual Form 990-PF. Tax is levied on the private foundation’s net investment income, at a rate up to 2%. Minimum annual distributions of 5% of the assets are required; failure to timely distribute the required minimum results in an excise tax of 30% or more. Tax compliance and corporate governance requirements place a larger administrative burden on a private foundation.

Donor advised funds, available through various organizations such as The Greater Cincinnati Foundation, InterAct for Change, or the Jewish Federation of Cincinnati, among others, are public sector entities that remove the administrative burdens of a private foundation while offering much of the same advantages. All tax filings and corporate governance functions are handled by the donor advised fund without involvement by the individual donor. One main difference from a private foundation is that the donor recommends specific grants to qualified nonprofit groups, which are then ultimately approved by the governing board of the donor advised fund. There are also donor advised funds administered by the larger brokerage and mutual fund companies such as Fidelity, Schwab, Vanguard and Morgan Stanley, that can be coordinated through your CSA Financial advisor.