Could I Lose Control Over my Donor Advised Fund?
What is a Donor Advised Fund?
A donor advised fund is an account established by a donor at a “host” charity, usually a financial institution’s charity or community foundation, to be used for charitable giving. By moving money into a donor advised fund, a donor can receive a current income tax charitable deduction. During the life of the donor, the money sits in that account until the donor “advises” the institution or foundation to make a charitable donation to a particular charity.
Easy but Risky?
The donor advised fund has replaced the private foundation for most families with charitable intent. Donor advised funds are comparably easier than private foundations. Easier to set-up. Easier for advisors to “sell”. Easier to administer. Donor advised funds are the fast food of the American charitable diet.
While easy, the fact of the matter is that the fine print of the donor advised fund contract requires that your family not control the dollars. The dollars are actually owned and controlled by the host charity.
Donor advised funds are viewed as a “no-brainer” for families who want to earmark charitable funds for later distribution to charities while saving current income (and future estate) taxes.
And, donor advised funds are administered efficiently for far less dollars than a private foundation. It is this key attribute, the ease of set-up and administration that lures many families to go the donor advised fund route instead of setting up a private foundation. But, at what ultimate cost?
For modest dollars to charity that will be distributed during the life of the donor, a donor advised fund often makes the most sense. A donor can get a charitable deduction today for dollars distributed to charities of a donor’s choice in future years.
After the life of a donor, the fate of the donor advised fund depends on the policies and procedures of the institution hosting the fund, the manner in which the application is filled out, and the attitudes and availability of the successor advisors.
The Case for a Private Foundation Instead
For families with a larger charitable legacy that want control over the who what when and where for their charitable dollars, indefinitely, the donor advised fund carries certain risks of loss of advisory control and management after the death of the donor, making the private foundation a better long-term vehicle.
Reading the Fine Print of a Donor Advised Fund Contract
While most donor advised funds can continue beyond the life of the donor, read the terms of the application carefully to understand what exactly happens to your charitable dollars after your death.
Here are a couple examples of donor advised funds that provide a contrast in how the funds are administered at your death, and how control over the funds may be lost to the host charity.
- At one large national charitable fund, a successor advisor may be named. If the successor advisor is not reachable within 90 days, the fund is at risk of being forfeited to the host’s general charitable fund. If more than one successor is named, the fund will actually be split into different shares equally for each successor at the donor’s death.
- At one local community foundation, a successor advisor may be named, however the successor may generally only be your spouse or your children. Beyond that the funds are at risk of being forfeited to the foundation’s endowed general fund.
Using a Private Foundation for Generational Giving
For families that are less knee-jerk and more thoughtful about charitable giving, a private foundation provides a long-term platform for charitable giving around shared family goals and initiatives and a framework entirely within your family’s control. If collective engagement by your family over a pooled fund with multiple donors is important to you, a private foundation could very well be a better fit for your family than a donor advised fund.
Fund a Private Foundation First?
A private foundation can always be terminated into a donor advised fund if the administration becomes too cumbersome. But, a donor advised fund may not be terminated into a private foundation. It often makes sense to start with the private foundation for assets in excess of $500,000.
Inquiring Minds
If your donor advised fund was established in a hurry as they often are, and you don’t know what happens to the fund after your death, make the call to the host charity.
Alert Your Successor Fund Advisors
If you have selected a successor(s) to advise the host charity on charitable distributions, make sure he/she/they know that. If the host charity can’t find them, the successor advisor appointments may fail.
Select Charities
Create a blueprint for your successor by leaving them with a roadmap of charities that are important to you. Check your donor advised fund application to see if you named a default charity (instead of the host charity) in the event of a termination of your donor advised fund.
Conclusion
There are a myriad of tax and nontax differences between a donor advised fund and a private foundation. Looking solely at the issue of long-term control over assets, a donor advised fund gives me more pause than a private foundation. If communication is an issue in your family, take steps to ensure that your donor advised fund is easily and immediately discoverable at your death.
The lack of formality required and “five minutes to open an account” access to establish a donor advised fund is a stark comparison to the thought process around establishing a private family foundation. Most donors “set-it-and-forget-it” with a donor advised fund, avoiding or neglecting family discussions about charitable goals.
For serious planned charitable giving with leaving a family legacy across multiple generations in mind, a private foundation should be first considered. Don’t let the two page application lure you into opening a donor advised fund when your post-death charitable goals are important.
