CheckbookDonor-advised funds, though they may bear the donor’s name, are not separate entities, but are mere 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. You must get a written acknowledgment from the fund’s sponsoring organization that it has exclusive legal control over the assets contributed.

Though the donor can advise the charity, which generally will follow his recommendations, the donor cannot have the power to select distributees or decide the timing or amounts of distributions. The donor’s only input is to advise the charity as to the identity of possible distributees and the possible timing and amounts of distributions. This right must be advisory and not be binding. The charity is not required to follow the donor’s advice but must retain complete discretion regarding the use of the funds.

Donors often use donor-advised funds to control the timing of their charitable contributions or to defer the selection of the ultimate recipient. Donor-advised funds may also serve as a convenient alternative to setting up a private foundation.

It may be advisable to contribute appreciated securities to a charity’s donor-advised fund in order to avoid the capital gain tax that would otherwise be due on the sale of the securities.

A major advantage of this type of gift is that the fund already exists and has been determined to be a tax-exempt organization. Thus, there is no need to apply for tax exemption, and no annual IRS filings are required.

Mutual funds operated by major financial institutions, as well as many community trust organizations, operate such funds. The fund may require a minimum initial contribution and may require that any recommended distributions be in excess of a minimum amount.

David Mize, CPA