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Donor Advised Funds: Time to Convert?
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  • 1. R foundation in 2000 to fund education and literacy pro-grams, joining a growing wave ofphilanthropy in the U.S. In thewake of the recent turmoil in fi-nancial markets, he became partof another trend: He closed theRaymond Foundation about ayear ago and rolled the assetsinto a donor-advised fund. MONDAY, NOVEMBER 9, 2009 © 2009 Dow Jones & Company, Inc. All Rights Reserved. Mr. Kurlak opened an accountwith the Schwab CharitableTime to Convert?Fund, an independent, nonprofitorganization founded by CharlesSchwab Corp. Other fundsfounded by big financial-servicesfirms include the Fidelity Chari-table Gift Fund and the Van-guard Charitable EndowmentA number of philanthropists are shutting down private foundations andProgram, and there are many Ross MacDonaldother choices as well. As theturning to donor-advised funds. Here’s why you should—and shouldn’t—do it.names suggest, these funds dis-tribute money to charitablecauses as recommended by theBY JILIAN M of their By Jilian Mincerdonors. One INCER advantagesRis that they relieve philanthro- Raymond P. Kurlak estab- Two Vehicles for Giving aymond P. Kurlak es-pists of some of the costs of run- Some of the key differences between donor-advised funds and private foundations lished a private foundation tablished a privatening a foundation. in 2000 to foundation in 2000 fund education and Donor-Advised Funds Private Foundations Mr. Kurlak estimates that he literacy programs, joining asaves about fund by using to 10% education Start-up costs/time None; can be established Legal fees and other start-up costs can be growing wave of philanthropy inSchwab to and literacy pro- administer his ac- immediately substantial; typically takes several weeks and the U.S. In the wake of the recentcount instead a growing wave ofgrams, joining of paying for his often months to create turmoil in financial markets, heown lawyers, in the U.S. In andphilanthropy accountants the Administrative and manage- 0.85% or less of assets annually, plus Typically 2.5% to 4% of assets annually became part of another trend:office of the recent he did whenwake supplies, as turmoil in fi- ment fees investment management fees He closed the Raymond Founda-nancial markets, he became parthe ran his foundation. Those tion about a year ago closed the and rolledsavings are trend: Heof another particularly impor- Tax-deduction limits for gifts 50% of adjusted gross income 30% of adjusted gross income the assets into a donor-advisedRaymond Foundation about a of cashtant because of the losses his fund.foundation suffered when assetsyear ago and rolled the stock Tax-deduction limits for gifts 30% of adjusted gross income 20% of adjusted gross income Mr. Kurlak opened an accountprices donor-advised fund.into a dropped. Cutting back on of stock or real property with the Schwab Charitable Mr. Kurlak opened an accountcosts makes his depleted assetswith the independent, pleased,” Fund, an Schwab nonprofitgo further. “I’m veryCharitable Required grant distribution None Must expend 5% of net assets annually organization founded by CharlesFund, an independent, nonprofithe says. “It takes much less time Privacy Names of individual donors can be Must file detailed and public tax returns on Schwab Corp. Other fundsand money” to direct theCharlesorganization founded by distri- kept confidential, and grants can be grants, investment fees, trustee names, staffSchwab by big financial-ser- founded Corp. Other fundsbutions from his Schwab account made anonymously salaries, etc. vices firms include the Fidelityfounded by big financial-servicesthan it did to run his foundation. Administrative responsibili- Recommend grants to favorite Manage assets, keep records, select charities,firms include the Fund and the Charitable Gift Fidelity Chari- Vanguard Fund and Endow- Charitable ties of donor charitable causes administer grants, file annual state and fed-table Gift Tax Savings the Van-Privacy and eral tax returns, maintain board minutes, etc. ment Program, and there areguard Charitable Endowment Cost-cutting is one of the fac-Program, and increasewell. As many other choices astors driving an there are many Ross MacDonald in con- Source: National Philanthropic Trust the names suggest, these fundsversions from as well. founda-other choices private As thenames suggest, these charitable distribute money to funds dis-tions to donor-advised fundstribute as recommended by the Privacy and Tax Savings causes money to charitable Making the switch from foun- have expanded staff to assist donors. One of their advantagescauses as recommended by the is that they of their advantages relieve philanthro- Cost-cutting is one of the dation to fund isn’t for everyone. donors with the process.donors. One Two Vehicles for Giving Some individuals may founda- was fielding so many inqui- pists they relieve philanthro- factors driving an increase inis thatof some of the costs of the cachet of running a prefer The Schwab Charitable Fund runningsome of the costs of run- conversions fromdifferences between donor-advised funds and private foundationspists of a foundation. Some of the key private foun- tion, or the opportunity it gives ries about converting that itning a Kurlak estimates that he dations to donor-advised funds. them to teach family members recently devoted additional staff Mr. foundation. saves about 10% by using Schwab But there are others that aren’t Mr. Kurlak estimates that he Donor-Advised Funds Private Foundations to administer 10% by using Start-up costs/time of about philanthropy. Perhaps and conversions costs developed asaves abouthis account instead so closely tied to the directionNone; can be established Legal fees to other start-up and can beSchwab tofor his own lawyers, of paying administer his ac- stock prices. Funds also relieve most important, foundations questionnaire several weeks and immediately substantial; typically takes to help individuals give donors total control over decide whether to make thecount instead of office supplies, philanthropists of many of the their contributions, which can accountants and paying for his often months to create move, says Kim Wright-Violich,own lawyers, accountantsfoun- hassles of running a foundation, or less of assets annually, plus Typically 2.5% to 4% of assets annually as he did when he ran his and Administrative and manage- 0.85% dation.supplies, as he are partic- like filing paperwork, checking be crucial for those who support the fund’s president.office Those savings did when investment management fees of the main- ment fees causes that are outhe ranimportant because Those out potential recipients or, for ularly his foundation. of the More to Give losses are particularly impor- Tax-deduction limits for gifts 50% stream.savingshis foundation suffered larger foundations, managing a of adjusted gross income 30% of adjusted gross income when stock of the losses his staff. cash Kurlak says he spends prices dropped. of Mr. Still, the number of accounts at “As assets have gotten beatentant becausefoundation suffered when stock about two weeks a year on his of adjusted gross income climbed 11% up, gross income Cutting back on costs makes his Tax-deduction limits for gifts 30% donor-advised funds 20% of adjusted people have gotten really depleted assets go further. “I’m account’s or real propertyprices dropped. Cutting back on of stock business now, down last year, to 148,588, following a frustrated about not being ablecosts pleased,” he says. “Itassets from two months a year on his 13% increase the previous year, to do the same level of gifting,” very makes his depleted takes Required grant distribution None Must expend 5% of net assets annuallygo further. time and money” to foundation in the past. And according to the National Phil- says Ms. Wright-Violich. More much less “I’m very pleased,” direct the distributions less time thePrivacy offer tax advantages anthropic donors can behe says. “It takes much from his funds Names of individual Trust, a charity in detailed and public tax returns on she Must file philanthropists are realizing, kept Jenkintown, Pa. Conversion isn’t says, that the money that donor-and money” to direct the distri- and greater privacy for donors, confidential, and grants can be grants, investment fees, trustee names, staff Schwab account than it did to run his from his Schwab account among other advantages.butions foundation. funds advised funds can save them in difficult, and many of the salaries, etc. made anonymouslythan it did to run his foundation. Administrative responsibili- Recommend grants to favorite Manage assets, keep records, select charities, ties of donor charitable causes administer grants, file annual state and fed- (over p lease)Privacy and Tax Savings eral tax returns, maintain board minutes, etc. Cost-cuttingsis one of the ePrinT DOes nOT COnsTiTuTe Or imPly any enDOrsemenT Or sPOnsOrshiP Of any PrODuCT, serviCe, COmPany Or OrganizaTiOn. The Publisher ’ s ale Of This r fac-tors Custom Reprints (609)520-4331 P.O. Box 300 Princeton, N.J. 08543-0300. DO NOT EDIT OR ALTER REPRINT•/REPRODUCTIONS NOT PERMITTED #41560 driving an increase in con- Source: National Philanthropic Trust •versions from private founda-tions to donor-advised funds !
  • 2. administrative and other costs can a foundation’s investment gains, be made anonymously, a strong Gunderson, president and chiefgo toward the causes they support. which are subject to a small excise incentive for many donors to executive of the Council on Foun-In some cases, she says, such tax. convert, says Sarah C. Libbey, dations, a nonprofit association offunds can cut donors’ costs by as The funds also handle all the president of the Fidelity Chari- about 2,000 grant-making founda-much as 50%. paperwork and due diligence table Gift Fund. tions and corporations, based in Besides cutting administrative involved in making donations and James Barnes, chief relation- Arlington, Va.costs, funds can reduce donors’ investments. That may be particu- ship officer for the Vanguard Char- That may not be an issue forinvestment fees. Small founda- larly reassuring to some givers in itable Endowment Program, says most philanthropists, because it’stions, because of their limited the wake of the Madoff scandal, another reason some foundations rare for a fund to refuse to make aassets, often pay relatively high which heightened concerns about are converting is that the founder donation as desired by an accountfees to the firms that handle their investment scams. has died and family members holder. But Mr. Barnes at theinvestments. But donor funds, disagree on the direction the foun- Vanguard Charitable Endowmentworking with a much bigger pool Flexibility and Privacy dation should take. Some people Program notes that the fundsof money from all the accounts Donor-advised funds also offer in that situation are splitting up a can only write checks to chari-they administer, often pay much account holders some additional foundation’s assets among several ties. That means they don’t allowlower fees to invest donors’ flexibility and help protect their accounts at donor-advised funds, donors to provide direct supportmoney. privacy. and those accounts can then be for individuals or for groups that Donor-advised funds also have There is no requirement for used for different purposes. don’t qualify as charitable orga-certain tax advantages over foun- annual distributions from an Families also often decide to nizations.dations. Donors get an immediate account at a fund, while founda- convert simply because they’ve Another possible drawback istax deduction when they make tions are required to distribute at grown tired of the time and cost of that contributions to the funds area contribution to a fund, as they least 5% of their assets each year. meeting and of managing a foun- irrevocable. So while a fund allowswould with donations to their That can be especially impor- dation. The economic turmoil of for more flexibility in the timingown foundation. But the deduc- tant when financial markets are the past couple of years may have of donations because it doesn’ttions are more generous: Donors tumbling, because many philan- helped fuel conversions because require distributions of at leastcan deduct cash contributions to thropists may want to hold on to philanthropists are having to 5% annually, it limits flexibility ina fund totaling up to half of their more of their money so that they spend more time tending to their a different way by not allowing aadjusted gross income each year; have a bigger asset base to rebuild businesses, leaving less time to donor to react to circumstances bythe limit for donations to a private from when the markets rebound. devote to foundation work. putting the money to other use.foundation is 30%. Donors can also The privacy issue is one that For those who choose to makededuct up to 30% of their adjusted catches some philanthropists Giving Up Total Control the switch, the first step is togross income for donations to a by surprise. Many are unaware Of course, there are some poten- contact the state authoritiesfund of securities that have appre- when they set up a foundation tial drawbacks to consider before that regulate charities, says Ms.ciated in value since the donor that its tax forms will be made switching from a foundation to a Wright-Violich of Schwab. Eachbought them; for a private founda- public, exposing details of the donor-advised fund. state has different requirementstion, the limit for such donations foundation’s operations and even One of the biggest is that for terminating a foundation. Theis 20%. some personal information. No with a fund, “you no longer foundation must also file a final In addition, investment gains such information is available for have the independence and the federal tax form. More detailedin an account at a donor-advised accounts at donor-advised funds. total control” that you have with guidance is available from donor-fund generally are tax-free, unlike And all donations to a fund can your own foundation, says Steve advised funds. Article copyright 2009 by the Dow Jones and Company. Reprinted from the November 9, 2009 issue with permission from The Wall Street Journal. The statements and opinions expressed in this article are those of the author. Neither the Trustees of the Fidelity Investments® Charitable Gift Fund nor Fidelity Investments® can guarantee the accuracy or completeness of any statements or data. This reprint is supplied by Fidelity Charitable Services®, which provides administrative services to the Fidelity® Charitable Gift Fund. The Fidelity® Charitable Gift Fund (“Gift Fund”) is an independent public charity with a donor-advised fund program. Various Fidelity companies provide investment management and administrative services to the Gift Fund. Fidelity and Fidelity Investments are registered service marks of FMR LLC, used by the Gift Fund under license. Fidelity Charitable Services®, Fidelity Investments and the pyramid design are registered service marks of FMR LLC. Clearing, custody or other brokerage services may be provided by National Financial Services, LLC, or Fidelity Brokerage Services, LLC, Members NYSE SIPC. 537259.1.0 1.904840.100