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Rich Families: Look at Donor-Advised Funds

BERKELEY HEIGHTS, N.J. ( TheStreet) -- Donor-advised funds are a great funding vehicle for charitably inclined wealthy families.

Using such a vehicle can lead to a more thoughtful and disciplined approach to giving. The donor gets an immediate tax deduction while their contribution is invested allowing it to grow, with the current year tax deduction subject to the percent of adjusted gross income limits. Since DAFs are considered public charities, the limitation is 50% of AGI for cash donations. (Lower limits apply to noncash contributions.)

For example, an person with an AGI of $1 million could contribute $500,000 in cash into a DAF and take an immediate tax deduction. Even though the donor has made an irrevocable contribution, he or she still gets to select from the DAF's available investment options and decide when and how much to grant to eligible charities.

So how does a DAF stack up against running a private foundation? From a tax perspective, DAFs allow for a potentially higher upfront tax deduction based on AGI limitation rules. DAFs also require significantly less time and administration.

A private foundation does offer more control, particularly around investment and grant making, but the price for the extra control is the initial set-up cost plus ongoing expenses such as legal and accounting fees. A private foundation requires a separate legal entity be created, and the entity will need to apply for tax-exempt status with the IRS. Ongoing rules require minimum annual charitable giving levels, and there are percent limitations on annual administrative expenses. Private foundations are also required to file an annual informational tax return known as a 990 with the IRS.

>>Donate Smartly With Donor Advised Funds

The Council on Foundations has an excellent FAQ on starting a foundation and the various considerations involved. Based on the COF examples it takes $10 million before a private foundation has enough funds to have a paid staff of a part-time CEO and part-time administrative assistant, while the ongoing expense of a DAF will typically include an administration fee plus the expense associated with underlying investments.

Fidelity's DAF, the Charitable Giving Account for individuals, has a blended administrative fee of roughly 0.45% on the first $1 million. The underlying investment expense for the balanced portfolio offered is 0.69%, and it allows grants to any IRS-qualified public charity.

Wealthy families considering setting up a private foundation should see if contributing to a DAF makes more sense from a time and cost perspective. The family could still hold informal meetings and discuss how much and to which charities they wanted to donate -- providing the same benefits as a private family foundation without all the administrative costs and strict rules.

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Michael Maye is the founder and president of MJM Financial Advisors (, a registered investment advisory firm in Berkeley Heights, N.J. He is a member of the National Association of Personal Financial Advisors (NAPFA) and has been a speaker covering tax topics at NAPFA's national and regional conferences. Maye has also been a frequent contributor to the Star Ledger of New Jersey's "Biz Brain" and "Get With the Plan" articles. In addition to NAPFA, he is a member of Financial Planning Association, American Institute of Certified Public Accountants, New Jersey State Society of CPAs and the Estate Planning Council of Northern New Jersey.

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