Financial - Private philanthropy: A sensible alternative for making gifts to charity

Would a family legacy be better than paying estate and income taxes?

While you are alive, the government allows you to use your assets in any way you see fit. But this may have given you a false sense of security, because if your estate exceeds $2 million (through 2008), a substantial percentage of its value may belong to the government. Even if you’ve had the foresight to purchase life insurance to cover this possible liability or have made other arrangements to keep your estate intact, you’ll still have to pay the government what it considers to be its own. However, if you’re one of the many Americans who care about (and provide for) charitable institutions, you do have another option. Setting up a private charitable fund – an increasingly popular solution – may be one way to accomplish your charitable objectives and reduce your estate taxes. And the best part: it’s easier than you might think.

The concept we are discussing is called a “Donor Advised Fund.” Donor Advised Funds are considered public charities and are generally established under the auspices of an “umbrella” organization that makes sure all the relevant rules are followed. The IRS allows you to make tax-deductible charitable donations of cash, mutual funds, marketable securities, and/or other property to your Donor Advised Fund. The Donor Advised Fund can then, over as few or as many years as you desire, direct cash “grants” to the public charities of your choice. This permits you to maintain significant control over how much is distributed, and when. The Donor Advised Fund maintains and invests these assets; you “advise” on how the assets will be distributed. And although your “advice” is not technically binding on the umbrella organization, as long as you stay within the confines of the law and the guidelines of that organization, you can expect your advice to be followed. You may also designate other family members who will continue to advise after your death.

One option for controlling how the government’s “share” of your assets will be used is to establish your own Donor Advised Fund. Using a turnkey design program, you can establish your own fund and name it anything you’d like. Maybe you’d like to honor your parents (e.g. “The Al and Sandy Jones Foundation”). Or maybe you’d like your company’s name on the fund (e.g. The Bicycle Shop Fund”). Whichever way you set it up, a Donor Advised Fund usually will be significantly less expensive than setting up (and operating) a private foundation, and you’ll generally receive a greater tax-deduction in the process.

There is also the privacy issue – another powerful advantage. With a Donor Advised Fund, you’re the only one who sees the balances of the accounts held within the fund. The records are not public. As the Fund grows tax-free, you can direct grants at any time. The independent board of directors of your Fund will make certain that the charity receiving the money is a qualifying organization and that no “self dealing” issues are apparent. In other words, you cannot benefit directly from the grant, and it cannot be used to fulfill a personal pledge or obligation.

Does a Donor Advised Fund sound right for you? Here are some creative ways you can use one:

1. Change the beneficiary on your IRA by directing that a portion of your IRA assets go to your own Donor Advised Fund after your death. This potentially will let your heirs avoid the income and estate taxes that plague IRA accounts.

2. Start a family tradition of giving by establishing a Fund, and then providing a true legacy that will survive long after your death. Note in your (or a loved one’s) obituary that tax-deductible donations are welcomed in lieu of flowers or other memorials.

3. If you’ve already established a charitable remainder trust that permits it, consider changing the remainder beneficiary designation on a portion of the assets to be sent to your own Donor Advised Fund.

4. During your lifetime, donate an asset that has appreciated in value. You’ll avoid the capital gains tax and receive a tax-deduction for the asset’s market value.

5. Any assets that you bequeath to your Donor Advised Fund through your will or living trust will avoid all estate and income taxes. You may wish to establish an irrevocable life insurance trust to replace those assets on a tax-free basis. Your designated heirs will control the direction of your donor Advised Fund in perpetuity.

A second cousin of the Donor Advised Fund is the pooled income fund. This charitable account provides a method by which you can make charitable gifts and have a structure to potentially receive a lifetime income for both you and a spouse. The income is generally fairly competitive and the ultimate beneficiary of the account could be your Donor Advised Fund.

Sharing your wealth with – or giving something back to – the community that helped you generate it is a great feeling. That you can reap tax rewards for doing so is a wonderful side benefit. If you’d like to reduce your income and estate tax liability, donate to a favorite charity or organization and direct how and when your donated assets are used, a Donor Advised Fund may be just right for you.

TC38329(1107)

*This information is not intended as tax or legal advice. Please consult with your Attorney or Accountant prior to acting upon any of the information contained in this correspondence.

Stephen Jenkins is a Registered Representative and Investment Adviser Representative of Equity Services, Inc. Securities and Investment Advisory Services are offered solely by Equity Services, Inc. Member FINRA/SIPC. 28 Corporate Drive, Suite 100, Clifton Park, NY 12065. Sterling Manor Financial, LLC is independent of Equity Services, Inc.