So-called "donor-advised" funds have become immensely popular with wealthy charitable donors. But that tax strategy is now under the gun. The IRS is trying to ferret out which funds benefit donors themselves rather than fulfilling charitable intentions.
Advice: If you have such a fund, make sure you take a hands-off approach; give the fund ultimate authority over the money.
Here's the skinny: With a donor-advised fund, a taxpayer donates a lump sum to the fund, which is often managed by an experienced charity. In return, the taxpayer receives a current tax deduction. The donor can then dole out the money to designated charities he or she deems worthwhile. Although the fund legally controls the money, the donor essentially decides who gets what and when.
Typically, such funds require an up-front gift of between $10,000 and $25,000. They also charge fees—usually, about
1 percent of the assets—for administering and investing the money.
Donor-advised funds have operated without much regulation for more than 30 years. They're not required to give away any specified amount of assets or disclose contributions. In effect, such funds are like mini-private foundations.
Changes in the works? Congress is now crafting legislation that would address abuses of those funds. In the end, lawmakers will likely require greater disclosure of fund activities and prohibit using assets to pay personal expenses. Most significantly, funds may be required to donate a certain percentage—perhaps 5 percent—of the assets to charity each year.
Bottom line: To safeguard your donor-advised trust, make sure you hand over ultimate control to the fund. To be legally viable, the fund must have ultimate authority over how the money is invested and distributed.
Avoid any "self-dealing" practices that allow you to line your own pockets while the fund operates. Gifts to a fund that are used to benefit the donors, their families or other related parties are prohibited.
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