Donor-Advised funds are a tax-advantaged way to make gifts to charities over time. A donor-advised fund is basically an account with a public charity which has a donor-advised program and which qualifies as a “sponsoring organization.” Gifts are made to the fund, which is held in the name of the donor or in the name or names of the donor’s family members. Gifts from donors to the fund qualify as charitable deductions for income tax purposes, and distributions are made from the fund to charitable organizations over time. Distributions from the fund do not count as additional charitable deductions for the donor, since the donor has already gotten a charitable deduction when the original gift was made to the fund.
Donor-advised funds are usually opened during the lifetimes of the donors, and distributions are made to charitable organizations which the donors select. Since the sponsoring organization is responsible for seeing that the tax laws have been complied with, the donors make “recommendations,” and not binding directives, as to the distributions to tax-exempt organizations. Normally those requests are honored unless the requested done does not qualify as a tax-exempt organization. Donor-advised funds may also be created, or increased at death under a will or trust agreement of the donor, often with family members of the donor to make distribution recommendations to the charitable organization after the deaths of the donors.
Donor-advised funds may be used to support a number of public charities. They are sometimes used as alternatives to private foundations.
Private foundations are separate legal entities created by a donor or donors. They require ongoing maintenance and expense. Also, the donors receive smaller tax benefits than they would receive with a similar gift to a donor-advised fund at a public charity. Legally, a private foundation allows the donor or donors to retain more control over the investments, grants, and control of the entity.
Donors often prefer a donor-advised fund instead of a private foundation for convenience, reduced costs, greater tax benefits and ease of gifting, with no worries about minimum distributions or the tax issue of excise tax on net investment income, which would be applicable to a private foundation.
The donors may make a large charitable gift to the donor-advised fund, and have the gift used to make periodic distributions over time, with the donors not having to worry about compliance costs and requirements.
“Bunching” of Charitable Deductions
Under the new tax laws with higher standard deductions, donors who traditionally have made charitable gifts of several thousand dollars a year in deductible contributions now often receive reduced or no tax benefits from making their customary annual distributions.
For example, consider married donors with $120,000 annual income, who traditionally give about $5,000 per year to charitable organizations. On their tax returns, they cannot claim medical deductions of less than 10% in 2019 (formerly 7.5% in 2017 and 2018), so often the
taxpayers would not itemize medical deductions. They cannot deduct more than $10,000 per year in state and local taxes, and there is no longer a deduction for miscellaneous itemized deductions. Unless they have high home mortgage interest, if they donate $5,000 to charitable organizations in 2019, their total deductions may be less than their standard deduction of $24,400 (in 2019), in which case they would receive no income tax benefit for charitable gifts totaling $5,000.
In the alternative, let’s consider “bunching” their contributions by the use of a donor-advised fund. For example, they could give $50,000 to a donor-advised fund in 2019. If their itemized deductions otherwise would be $10,000 in state and local taxes and $5,000 in home mortgage interest, the gift to the donor-advised fund itemized tax deductions would now total $65,000 ($50,000 gift to the donor-advised fund, plus $10,000 in state and local taxes and $5,000 in mortgage interest), as compared to a standard deduction of $24,400. Their income taxes for 2019 would be reduced by over $10,000, assuming they were in a 28% marginal tax bracket.
The donor-advised fund would receive $50,000 in gifts, but it would be possible to distribute from the fund only the donors’ customary $5,000 to charitable organizations, as requested by the donors. The charities would receive their customary gifts in 2019 and the donor-advised fund would retain the remaining $45,000. In future years similar gifts could be made from the donor-advised fund each year, as directed by the donors or their family.
The donors could resume claiming a standard deduction on their subsequent income tax returns, until the fund was depleted. If the donors died or became incapacitated, their families could continue to make charitable contributions from the fund.
The above example illustrates moderate gifting and the effect of “bunching,” but donor-advised funds are often utilized for very large gifts, often at the death of a donor, sometimes in lieu of a private foundation.
Families With Existing Private Foundations
If the donors already have a private foundation which they find expensive and burdensome to maintain, the private foundation could distribute its assets to a donor-advised fund with a sponsoring organization. The sponsoring organization would then be responsible for compliance with federal laws, instead of the donors or their family’s being responsible.
Another possible benefit would be to bring one’s children into the gifting process during the donors’ lifetimes. After the donors’ deaths, the children would continue to make recommendations for charitable gifts from the donor-advised fund.
Most sponsoring organizations allow grantors or designated family members as advisors for charitable gifts for at least one generation, and some allow two generations.
Most community foundations have donor-advised fund programs and sometimes other organizations such as colleges and universities maintain similar funds, where a certain percentage of contributions must go to the sponsoring organization itself, such as 50%, and the remainder can go to other charitable organizations.
A donor who wishes to establish an ongoing philanthropic program – for themselves and/or their families – should consider establishing a donor-advised foundation as part of their ongoing gifting, and possibly establishing the habit of ongoing gifting to charities for their families.
In Winston-Salem, the Winston-Salem Foundation, Suite 200, 751 West Fourth Street, Winston-Salem, NC 27102, (336) 725-2381, can be contacted about the establishment of a donor-advised fund. See https://www.wsfoundation.org/contact.
Several larger cities and counties in North Carolina have large community foundations, similar to The Winston-Salem Foundation. The North Carolina Community Foundation is a single statewide community foundation with a network of affiliate foundations across the state, which serve many rural and less-populated counties, and which can serve as a sponsoring organization for donor-advised funds in their communities. A list of affiliated community foundations funds can be found at nccommunityfoundation.org/communities.
It is very easy to set up a donor-advised fund with a sponsoring organization. Just contact the organization and see whether it is a sponsoring organization for donor-advised funds. If so, they will meet with you and draft a letter whereby the organization agrees to be the sponsoring organization for your donor-advised fund, which describes the purposes for your fund, etc. They will make it easy for you.
Many employers offer benefits to their workers as part of their total compensation package. These employee benefits can take the form of disability insurance and retirement plans, including 401(k) plans and pensions. These benefits are often governed by ERISA, the Employee Retirement Income Security Act of 1974.
ERISA is intended to protect the interest of employees who are enrolled in employee benefit plans to make sure they receive the benefits they were promised. If you are an employee and have been denied benefits from an employer-sponsored plan, you may have a claim. It is important that you get timely legal advice about how to assert and preserve your claim to receive these benefits. If you file a hasty or incomplete appeal, you can lose your rights. Many pitfalls can trap the unsuspecting claimant and lead to the denial of legitimate benefits.
In most cases, if an ERISA claim is denied, an employee must follow the procedure for administrative appeals set out by the insurer or plan sponsor. Only those issues raised during administrative appeal are typically preserved. For example, if you are appealing the denial of disability benefits, you should submit your medical records that show you are disabled and opinions from your doctors that support your claim. You must also raise all issues underlying your claim for benefits. If you do not resolve your claim with the company, a court will consider only the issues you raised in the administrative process and the records contained in the administrative appeals. Getting advice early can help preserve important rights.
ERISA is a specialized area of law that not all lawyers practice. If you have an ERISA claim, you should find an attorney with experience in this field. We would be happy to meet with you to help you to better understand your options and to pursue your claim.
ERISA claims are typically filed in Federal Court. A judge will hold a bench trial or hearing based on the paperwork you presented in the administrative record. There is no jury trial. ERISA claimants cannot recover claims for emotional distress or punitive damages. In some cases, however, a court may award attorney’s’ fees to the claimant. The court can award only past benefits that have accrued, and cannot award benefits for future expenses.
In 2019, 6,619 ERISA cases were filed, down from a peak of 8,938 in 2010, according to a report that analyzed court filings uploaded to the federal Public Access to Court Electronic Records, or PACER, database. Last year, 3,797 workers sued over benefit claim denials, according to the report. In 2010, 3,118 people filed these suits. The overall amount of damages awarded in ERISA suits has also remained relatively consistent, though the number of cases in which damages are awarded has fallen. Last year, 740 cases resulted in damages awards (roughly 20 percent of claims), resulting in a total of $280 million being awarded. In 2017, $343 million went to claimants in 806 cases, and in 2016, $232 million went to 843.