The IRS has put donor-advised funds under the microscope after a new legal crackdown. A donor-advised fund, a type of charitable-giving vehicle, allows you to give money, stock and other assets to special accounts maintained by a public charity. Many financial services companies offer donor-advised programs, including:
- Fidelity: www.charitablegift.org
- Vanguard: www.vanguardcharitable.org
- Charles Schwab: www.schwabcharitable.org
Strategy: If your donor-advised fund operates legitimately, you have nothing to fear. Under the scope: abusive arrangements where donors use the funds for personal expenses like college costs or vacations.
Here’s the skinny: With a donor-advised fund, you donate a lump sum to the fund, which an experienced charity often manages. In return, you receive a current tax deduction.
Then you dole out the money to designated charities you deem worthwhile.
Although the fund legally controls the money, you essentially decide who gets what and when.
Typically, the fund requires an upfront gift of $10,000 to $25,000. It also charges a fee—usually, about 1 percent of the assets—for administering and investing the money.
The IRS does not require the funds to give away specified amounts or to disclose contributions. In effect, they act like mini private foundations.
New law change: The Pension Protection Act of 2006 imposes stiff fines and penalties if donors use designated funds to benefit themselves or their families. The new law also directs the IRS to study donor-advised funds to determine if the agency should require even tougher measures.
If you haven’t done so already, hand over ultimate control of the assets to the fund. The fund must have final authority over how to invest and distribute the money.
Tip: The law strictly prohibits gifts to a fund that benefits a donor, his or her family or a related party. That prohibition extends to 35 percent-owned entities.