Many nonprofit organizations are familiar with donor-advised funds, in part because donors frequently use their donor-advised funds to support the organization. In fact, you and your team are probably familiar with the checks that come from the Winona Community Foundation via donors’ grant recommendations, which in turn trigger the Winona Community Foundation to issue checks to you from these donors’ donor-advised funds.
Donor-advised funds have become increasingly popular and are frequently featured in the media. But donor-advised funds are not new. First deployed as a charitable giving technique in the 1930s, long before their popularity ascended in the 1990s, usage of these vehicles to organize charitable giving has recently reached record highs.
An individual or family often establishes a donor-advised fund at the Winona Community Foundation as a tax-savvy, efficient alternative to a private foundation. A donor-advised fund at the community foundation, for example, can save donors the time and expense of administration and also allow the donors to contribute highly-appreciated assets, such as real estate and closely-held stock, to charitable causes and be eligible for deductibility at the assets’ fair market value. This is not the case with gifts of nonmarketable assets to private foundations, which typically are deductible at the donor’s cost basis.
One of the reasons donor-advised funds have been in the news lately is because proposed legislation aims to change the way contributions to donor-advised funds by private foundations are treated. Under current laws, private foundations can make contributions to donor-advised funds under the same rules that govern contributions to donor-advised funds by individuals, in that the funds are not subject to any particular timing requirements to be distributed to charities. (It is important to note that, despite the lack of a formal pay-out requirement, the 10-year average aggregate pay-out rate from all donor-advised funds is a whopping 22.2%, and the 2021 aggregate pay-out rate was a record 27.3%. Donor-advised fund donors tend to be very active in supporting their favorite organizations!)
By contrast, private foundations are subject to a 5% annual distribution rule. Under proposed legislation (see page 139 of the Treasury’s explanation document), while it would not affect contributions to donor-advised funds by individuals, contributions to donor-advised funds by private foundations would need to be distributed “by the end of the following taxable year,” and documented as such, to qualify for the 5% private foundation distribution requirement.
Time will tell whether these proposed changes make it into law.
Overall, donor-advised funds established at the Winona Community Foundation can help donors organize their giving, making it easier for them to keep track of the support they give to your organization and their other favorite charities. In many cases, donors who establish a donor-advised fund are able to unlock long-term capital gains property and deploy it toward charitable purposes at much greater financial levels and with more administrative efficiency than would have been possible without going through a donor-advised fund.
We encourage you to reach out to the team at the Winona Community Foundation with your questions about donor-advised funds and how your organization can gain a better understanding of how these vehicles help engage donors and grow philanthropy in our community. As always, we are here to help you achieve your mission, now and in the future!