December 9th, 2015
Private Family Foundation Shift to Donor Advised Fund: Donors Gain Cost, Tax Benefits But Sacrifice Some Control; Leaving Paperwork to Us
Frustrated by the upkeep, philanthropists are increasingly unwinding their private foundations into donor-advised funds, which invest assets and make grants to charities based largely on donors’ recommendations.
Martin Morris started his own private foundation in the early 1990s to funnel money to private schools, churches and hospitals. But as the years went on, running it became a hassle. There were annual tax forms, and Mr. Morris, now in his late fifties, often had to chase down letters from charities assuring him they had received his grants. He paid at least $2,000 annually in fees to lawyers and accountants. And he found it increasingly difficult to diversify his foundation’s investments with only about $100,000 in assets. So earlier in 2015, he closed down his foundation and transferred its assets to a Community Foundation into a new donor-advised fund. It allows Mr. Morris to park his money in a variety of diversified investments, recommend where grants should go later and any new assets or gift into the donor-advised fund he can take an immediate tax deduction.
You may know, donor-advised funds (DAF) are increasingly being used by investors to give their money away. Here are some of their pros and cons:
• DAFs offer immediate tax deduction on contributions made to accounts, and cut paperwork and administrative hassles. Privacy advantage is another potential benefit. Foundation tax forms, contain details on grants and other revealing information about a donor, are easy to find on the Web. The public forms filed by community foundation doesn’t list individual accounts. Still, the factor that drives most people to close a foundation is the heavy time commitment.
• Community Foundation has the final say on where your money is donated, and we require minimum contributions to open accounts. We legally retain final discretion on where to donate, though in practice, the donor’s wishes are usually followed.
Your Community Foundation of Tompkins County can make more sense if a client prefers philanthropic education services, such as defined local needs identified to making grants for a specific goal, like affordable housing, food hunger, arts and culture, children and youth, women’s, or employment needs, to deploy your assets wisely.
Transitioning from a foundation to a donor-advised fund can take a few months. While rules for closing foundations and moving their assets vary state by state, doing so usually follows these steps:
1. First, the private foundation must adopt a dissolution plan.
2. The private foundation officials must notify proper authorities, which often includes a state attorney general.
3. The foundation’s remaining assets can often be moved through a final grant to a qualifying charity, including the Community Foundation or establishing a donor-advised fund with us.
4. Finally, the private foundation must file a final tax form to the Internal Revenue Service. State authorities may also require this form.
The Community Foundation of Tompkins County will walk you through the closing of your foundation.
We believe that everyone can be a philanthropist. Your financial advisor position is one we respect. We advise our donors to contact their professional advisors.
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