University of Rochester Donor-Advised Funds: Questions and Answers
What is a donor-advised fund?
A donor-advised fund is, in many ways, comparable to a private foundation created by a donor and administered by the University of Rochester. It allows the donor the ability to create a fund and to generally retain the privilege of suggesting grants to particular qualified charitable organizations. However, the donor does not bear the administrative burden of a foundation and is not subject to the excise taxes or limitations on investments imposed on private foundations. The ability to only advise, and not direct, grants is the key difference between an advised fund and a private foundation. Donor-advised funds are named for their donors, for their purposes, or as memorials. One special advantage of a donor-advised fund is the ability to respond quickly, effectively, and flexibly to both the donor's and various charities' interests, now and in the future. An additional attraction is the maximum tax advantage afforded to its donors.
How do donor-advised funds work?
Establishing a donor-advised fund can satisfy a number of financial, philanthropic, and estate-planning concerns. It can be established at any point during the donor's lifetime, providing enjoyment as good intentions turn into financial support for favored charitable organizations. Once a fund has been created, additional contributions may be made to it at any time. Initial and subsequent contributions to a donor-advised fund during the donor's lifetime qualify for immediate charitable income-tax deductions in the year of the gift. Testamentary transfers can yield significant income- and estate-tax savings. Of course, donors should always consult their own tax advisors to fully evaluate these tax savings.
Why do people give through donor-advised funds?
Generally, donors prefer giving through donor-advised funds to making charitable contributions directly, because donor-advised funds allow more flexibility in giving and provide many of the long-term benefits of a private foundation without the cost or administrative drawbacks of a foundation. Also, donors feel that donor-advised funds give them a way to ensure the fulfillment of their charitable intentions, even after the charitable gift is made.
How large are contributions required to be to establish a named fund?
A donor-advised fund at the University of Rochester can be started with a charitable donation of $25,000 or more in cash and/or publicly traded securities.
Is creating a donor-advised fund difficult to do?
Creation of a donor-advised fund is quite simple. The entire process can be accomplished quickly and with only a few short forms to complete. As is true with any important financial or legal steps, the donor should confer with his or her lawyer, accountant, or financial advisor before proceeding. During this process, we will be pleased to provide copies of donor-advised fund documents to the donor or advisors, explain how the fund will operate, and provide guidance on the appropriate type of fund and the timing of charitable gifts to it.
Are there investment choices?
Donors may express preference for either a money market fund or the University's general endowment.
How does the University provide information to the donor about the investment performance and gifting activity balance of a donor-advised fund?
The donor receives quarterly investment and gift reports from our agent, Northern Trust Company.
Can the donor involve other family members in a donor-advised fund?
Yes, the donor may name a spouse, children, grandchildren, or others to advise grants from the fund established. Thus, a donor-advised fund can help instill a charitable giving ethic within a family.
How does the University of Rochester allocate grants?
An advised fund, by matter of law, is wholly owned and controlled by the University of Rochester, and each fund is segregated for accounting purposes. While final discretion on grants rests within the discretion of the University, the donor, or other fund advisor, is permitted to make grant recommendations for the consideration of the University. This is, of course, the essence of the word "advised" in the account title. For funds valued at $25,000 to $249,999, the University requires that at least 50% of the advised fund dollars be distributed to the University of Rochester or programs operated by the University. For funds valued at $250,000 to $999,999, only 25% must go to the University, and, for funds of $1 million or more, there is no required percentage of fund distributions that must go to the University.
The donor may always choose to make a general unrestricted contribution to the University of Rochester, to be used by the University, along with other such gifts, in the manner deemed most effective by the University of Rochester Board of Trustees. More commonly, a University gift is restricted, which limits the use of the gift to certain purposes, such as endowment, scholarship, or other purpose.
Why shouldn't donors make gifts directly to their other preferred non-profit organizations?
Of course, donors may always make gifts directly to charitable organizations of their choosing. By donating to a University of Rochester Advised Fund, however, they have the option of making a current gift and taking a current income-tax deduction but delaying decisions on specific recommended grantees until a later time. Making that recommendation at a later time allows time to carefully consider the changing needs of the community or specific organizations. This delay also allows time for the assets in the donor-advised fund to possibly appreciate in value, thereby increasing the amount available for grants. In addition, the University of Rochester must, in carrying out its responsibility, research recommended non-profit organizations to determine whether they are operating in accordance with their stated charitable purposes and whether they are operating in a financially sound manner. This due diligence by the University of Rochester can save the donor time which would otherwise be spent investigating each potential grantee.
How can assets other than cash be donated?
Either cash or marketable securities may be used to fund a donor-advised fund. In fact, donors who contribute long-term appreciated securities get a double federal-tax benefit. Gifts of appreciated securities are deductible at their full market value if held for longer than 12 months prior to the gift. If the stock is sold and the gift is made from the proceeds, the donor owes capital-gain tax on the stock appreciation (the difference between the property's cost basis and its present fair-market value). By donating the stock to the University of Rochester, the capital-gain tax on the stock's appreciation is completely avoided. So, through this type of gift, the donor escapes capital-gain tax and is also entitled to a charitable income-tax deduction for the full market value of the contributed securities.
What guarantee does the donor have that the University of Rochester will make grants from the advised fund to the recommended charities?
The University of Rochester has complete ownership of the advised fund from the time it is created and a gift is made to it. The Trustees of the University of Rochester (or staff operating under the direction of the Trustees) therefore must perform due diligence to ensure that the organizations that the donor recommends are qualifying charitable organizations and are operating in a responsible and sound manner. If the recommended charity meets those criteria, the University generally will make the grant recommended by the donor or other fund advisor. If, for any reason, the University determines that a recommended charity is not a qualified grantee, all reasonable attempts will be made to contact the donor or other fund advisor to allow for an alternative recommendation.
Does the University charge any fees or commissions to the donor or to grant recipients?
No. The University of Rochester assumes all administrative costs involved in managing its donor-advised funds, therefore leaving all contributed assets available for charitable grants.
Can the grants from a donor-advised fund remain anonymous?
Yes. The donor can instruct the University not to provide the donor's name to the non-profits who receive grants from the fund.
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