How Do Children’s Giving Funds Work?

Children’s giving funds offer a structured approach to introduce younger generations to the principles of philanthropy. These funds provide a mechanism for families to engage children in charitable activities, teaching them about financial stewardship and the impact of giving back to communities. By setting aside resources specifically for charitable purposes, families can foster a deeper understanding of societal needs and the role individuals can play in addressing them.

Understanding Children’s Giving Funds

A children’s giving fund is a financial tool designed to facilitate charitable contributions and educate younger family members in philanthropy. Several common structures exist that families can adapt to create such a fund, each offering distinct operational and involvement opportunities.

Donor-Advised Funds (DAFs) are a mechanism established at a public charity, where the donor contributes assets and receives an immediate tax deduction. While the sponsoring organization legally controls the funds, the donor retains advisory privileges for grant distributions and asset investments. Children can be involved by being named as successor advisors, allowing them to recommend grants from the family’s DAF account. Alternatively, parents can involve children in researching charities and making recommendations from an existing DAF, providing a hands-on learning experience.

Custodial accounts, such as Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) accounts, can also be utilized for charitable giving. An adult holds and manages assets for a minor until the child reaches a certain age. While funds in these accounts are irrevocably gifted to the child, they can be directed towards charitable purposes as the child matures, often with parental guidance. This structure provides a framework for children to learn about financial responsibility before gaining full control of the assets.

Families can also establish informal family giving accounts or budgets, which involve setting aside a specific amount of money for charitable donations chosen by the children. This less formal approach provides flexibility and can be as simple as a dedicated savings account or a designated portion of a family budget. It allows for direct discussions about charitable causes and the impact of donations without the complexities of formal financial vehicles.

Establishing a Children’s Giving Fund

Setting up a children’s giving fund involves careful consideration of the fund type and gathering necessary information. The initial decision often revolves around the level of formality desired, the degree of control over the assets, and the associated tax implications for the donor.

Establishing a Donor-Advised Fund typically begins with selecting a sponsoring organization, such as a financial institution or community foundation, which may have minimum contribution requirements. Once a sponsoring organization is chosen, the donor will need to provide personal identification details, including their name, address, Social Security Number, and contact information. If other individuals, such as the children, are to be designated as successor advisors, their contact information and year of birth will also be required.

For the initial contribution, donors typically need to specify the asset type, whether it’s cash, publicly traded securities, or other assets, and the amount they intend to contribute. The process generally involves completing an application form provided by the sponsoring organization. These forms will require the detailed information gathered previously, including the designated charitable organization for initial setup, if applicable. For contributions of non-cash assets like securities, additional forms or transfer instructions may be necessary. Once the application and initial contribution are processed, the fund is formally established, and the donor receives a tax receipt for their contribution.

Operating and Engaging with the Fund

Once a children’s giving fund is established, ongoing operations involve making contributions, recommending grants, and actively engaging the children in the process. Families can add funds to the established giving vehicle at any time, typically through electronic transfers, checks, or contributions of appreciated securities. Many sponsoring organizations provide online portals to streamline this process.

The grant recommendation process is a central aspect of operating these funds. For Donor-Advised Funds, grant recommendations are typically submitted through the sponsoring organization’s online portal or via specific forms. The sponsoring organization then conducts due diligence to ensure the recipient charity is a qualified public charity before disbursing the funds. In the case of informal family giving accounts, the family collaboratively decides which charities to support, and direct donations are made.

Active involvement of children is key to the educational purpose of these funds. Families can engage children by encouraging them to research different charitable organizations and their missions, and then present their findings and reasons for recommending specific causes. This fosters a deeper understanding of community needs and the impact of their giving. Reviewing fund statements or tracking the impact of past grants can also be part of the ongoing management, providing tangible feedback on their philanthropic efforts.

Tax Implications and Reporting

Contributions made to a children’s giving fund, particularly to a Donor-Advised Fund, generally qualify for an immediate income tax deduction for the donor in the year the contribution is made. This deduction is subject to Internal Revenue Service (IRS) limitations, including adjusted gross income (AGI) limits and carry-forward provisions.

Assets held within a Donor-Advised Fund are invested and have the potential to grow tax-free. Any dividends, interest, or capital gains generated are not subject to taxation, allowing charitable dollars to compound over time and increase the amount available for future grant-making.

It is important to note that while the initial contribution to the fund provides a tax deduction, grants made from the fund to qualified charities are not further tax-deductible for the donor. The tax benefit was realized when the assets were initially contributed to the Donor-Advised Fund. Donors typically receive a contribution acknowledgment letter from the sponsoring organization for tax reporting purposes.