By: Guest Author, J. Bradley Britton, J.D., LL.M., Director of Planned Giving and General Counsel, The Columbus Foundation
Does the following sound like you? You are a generous donor to charity, and each year, your accountant or financial planner tells you what you can afford to give away, and how much of a charitable income tax deduction you can take that year. So, every year, your challenge is to find just the right charities and give away the amount that you are looking to deduct. And you must make your decisions, and get the money off to the charities, by December 31, or else you won’t get the deduction for that year. In other words, the tax “tail” is wagging the giving “dog”: your tax calendar is driving when and how much you are giving to charity, and not your understanding of how much a charity needs, and when.
Does that make sense? No! But there’s good news. There is a simple, efficient vehicle for charitable giving, called a “donor advised fund” that solves this problem. You can create a donor advised fund at a charity known as a community foundation, such as The Columbus Foundation. (Full disclosure: that’s where I work, and get paid! But I’d say all of this stuff regardless, honest.) You can make a gift into your donor advised fund in the year when you want to obtain a charitable income tax deduction. Then, when you have had time to determine what charities you’d like to support and when they need that support, you may request grants out of your donor advised fund to those charities. Now the timing of your “giving in” decision, and your decision about the amount you will give in a year, can be driven by your financial condition and tax needs for that year, unconnected to when you think it’s appropriate to provide support to the charities you wish to help. Dog and tail are no longer at odds.
That’s not the only advantage of a donor advised fund. Many donors find that a donor advised fund can make their giving more efficient too. Here’s an illustration of what I mean. Let’s say that you bought a stock years ago, and since then, it has appreciated in value many times over the purchase price. Were you to sell that stock, you’d incur a tax on the capital gain. So, your accountant or financial planner advises you to use that stock for your charitable giving; by giving the stock itself to charity, you not only get an income tax deduction for its value, but you also avoid ever paying tax on the capital gain. That’s smart. But we’re not done. Let’s say you’ve got 10 different charities that you’d like to support, using this technique. To provide this support with your stock, you’d have to divide it into 10 different sets of shares, and (if you own it in a brokerage account), get each of the 10 charities to provide you with instructions for an electronic transfer. That’s 10 sets of transfer instructions to track down and give to your broker to follow (and this assumes that each of the charities even has a brokerage account, which is not always the case for smaller charities). Not to mention 10 different tax receipts to obtain–one from each charity–to back up your tax deduction in the way the IRS requires.
This sort of drudgery is certainly not why you got into charitable giving. But once again, enter the donor advised fund to save the day. Instead of facing the hassles described above, you can make a single, larger gift of the appreciated stock to the community foundation for your donor advised fund. Then you only need one set of transfer instructions to give to your broker, and only one tax receipt to give to your accountant, in order to secure your deduction for the gift. And then you can request grants of the proceeds generated by the community foundation’s tax-free sale of the stock. Once again, a donor advised fund makes giving easier.
And that’s still not all. One other service that many larger community foundations offer, including The Columbus Foundation, is assistance in determining what charities are doing the best work in your area of charitable interest. For instance, let’s say that you’d like to support organizations that serve the homeless. Do you have time to determine which of the many organizations doing this work are the most effective? This determination, if done well, involves a detailed review of each organization’s governance, finances and the relative effectiveness of its programs. Well, maybe you don’t have the time and inclination to do this sort of research and analysis, but your local community foundation often has already done it—or could do it. In essence, the community foundation’s grantmaking staff can be your own research staff!
These are just a few of the advantages offered by a donor advised fund at a community foundation. To learn more about creating a donor advised fund at The Columbus Foundation, visit www.columbusfoundation.org, or call The Columbus Foundation’s Donor Services and Development Department at (614) 251-4000.