Post a Comment On: CPA at Law

For the charitably-motivated individual, the easiest way to support a nonprofit and qualify for a tax deduction is to simply make a donation to an eligible charity (the IRS maintains an on-line list of most such organizations at their EO Select Check page). However some individuals wish to retain some degree of control over exactly how their funds are utilized to support charitable endeavors. The strategies for doing this are innumerable, but one popular alternative that is almost as easy as an outright contribution is a contribution to a donor-advised fund.

A donor-advised fund is a separately-identified fund or account owned and controlled by a public charity over which a donor retains nonbinding advisory privileges. Any public charity can establish a donor-advised fund, and can even do so inadvertently if the charity operates one of its accounts "as if contributions of a donor... are separately identified" and the donor expects to have an advisory role over how the contribution is used.

Donor-advised funds have been around for decades, but were not mentioned in the Internal Revenue Code until the Pension Protection Act of 2006. Congress's objective in addressing the issue was to curtail perceived abuses whereby such funds were established "for the purpose of generating questionable charitable deductions, and providing impermissible economic benefits to donors and their families..." The response was an excise tax on any consideration paid by a donor-advised fund to a disqualified person, without regard to any consideration received in exchange, which is how standard excise taxes under Code Section 4958 function.

Fortunately, these rules are easy to follow because a public charity owns the donor-advised fund and will vet an individual's recommended distributions. The donor receives an immediate tax deduction, subject to the least restrictive AGI limitations, for contributions made to their donor-advised fund, and the donor can make additional contributions and recommendations indefinitely. Donor-advised funds are free to set up, cheap to maintain, and the fund investments are professionally managed. A donor-advised fund is a simple yet meaningful approach to charitable giving.