Charitable Giving Through Donor-Advised Funds

Posted by Lee Reams Sr. on

Contribution to a donor advised fund is a way to warehouse funds in a year in which the donor has an unusually high income (and can benefit from a large charitable deduction) to satisfy the donor's social obligations to make charitable contributions in future years, without incurring the expense of setting up a private foundation and satisfying annual filing and other private foundation requirements.

Donor-advised funds, though they may bear the donor's name, are not separate entities, but are merely bookkeeping entries. 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. To document the contribution, and in addition to the usual charitable contribution substantiation rules, the taxpayer must get a contemporaneously written acknowledgement from the fund's sponsoring organization (1) that it has exclusive legal control over the assets contributed (Code Sec. 170(f)(18)(A)). Though the donor can advise the charity, which generally will follow the donor’s recommendations, the donor cannot have power to select distributees or decide the timing or amounts of distributions. The charity must also ensure that all distributions from the fund are arm’s-length and do not directly or indirectly benefit the donor. 

 (1) The sponsoring organization cannot be listed in Code Sec. 170(f)(18)(A) (e.g., a war veteran's organization or domestic fraternal lodge).