Please note the information below is intended to provide generalized information that is appropriate in certain situations. It is not intended or written to be used, and it cannot be used by the receipient, for the purpose of avoiding federal tax penalties that may be imposed on any taxpayer. The contents of the information provided below should not be acted upon without specific professional guidance. Please call us if you have any questions.

When you contribute to a donor advised fund, your heart and assets are in the right place. So what can go wrong?

Plenty. Tax laws regulate the use of donor advised funds by limiting the charitable contributions deduction for contributions to such funds. Inappropriate actions exhibited by anyone associated with the activity of a donor advised fund—the donors, the funds, or the charities maintaining the funds—face penalization.

Before you sign over your legacy or make any commitments, let me help you ensure your contribution not only generates the benefit and impact you desire, but that it also functions within the law to keep you out of trouble.

I can help you learn the importance of "advisory privileges" and how they differ from legal rights or obligations. The distinction is critical. If a donor's control over a fund owned by a charitable organization is limited to giving advice, and the charity is not obligated to follow the donor's advice, then the contribution to the fund is deductible as a charitable contribution if the other requirements for deduction are satisfied. Because of the potential for abuse, however, the fund is subject to the various provisions affecting funds, donors, and charities.

I can also help you discover why a gift may not be deductible for income tax purposes, even if it meets all the requirements of a charitable contribution. A donor of a donor advised fund must satisfy all the generally applicable substantiation rules, which generally depend on the form and amount of the gift. The donor must also obtain a contemporaneous written acknowledgement from the sponsoring organization stating that the sponsoring organization has exclusive legal control over the assets contributed to the donor advised fund. The written acknowledgement must be obtained within a specified time period.

Together we can examine two excise taxes that you may be subject to as the donor of a donor advised fund. The first, a tax on excess benefit transactions, could subject certain disqualified individuals to an excise tax equal to 25% of the excess benefit received from either the donor advised fund or the sponsoring organization, and if the excess benefit transaction is not corrected within a specific time period, an additional tax equal to 200% of the excess benefit may be imposed. Alternatively, the second tax, which penalizes donors and others whose advice to a donor advised fund results in an improper benefit, imposes a tax equal to 125% of the improper benefit.

As you can see, donor advised funds can be tricky.