IRS approves donor-managed investment account technique.

• Author: Nam, Elizabeth E.

In Letter Ruling 200445023, the IRS approved the donor-managed investment account (DMIA), a new charitable giving technique that generates an immediate income tax deduction in the year of contribution and allows donors to manage contributed assets actively, without the administrative cost and complications of operating a private foundation.

Types of Charitable Giving

Charitable giving has long been an attractive component of financial planning for high-net-worth individuals with philanthropic objectives. Under the income and gift tax charitable deductions of Sees. 170 and 2522, taxpayers can benefit their favorite charities and also reduce taxable income. Until recently, aside from using charitable remainder trusts and other split-interest techniques, there have generally been three ways to make charitable contributions:

1. Making direct gifts to the charitable organization;

2. Contributing to a donor-advised fund; and

3. Establishing a private foundation.

For the first two alternatives, the donor retains little or no control over the management of contributed assets. Donor-advised funds (e.g., commercial products offered at various brokerage firms and funds within a community foundation) are hybrids between outright gifts and private foundations. Although immensely popular, they limit a donor's investment options to publicly traded stocks and bonds and, in the case of commercial products, to a small selection of mutual funds. Also, a donor has only advisory, nonbinding control over the ultimate disposition of his or her contributions.

In donating to a private foundation, the donor has maximum control over contributed assets, but is subject to certain start-up costs and reduced percentage limits on deductions (i.e., 30% of adjusted gross income for cash contributions, rather than the 50% limit applicable to gifts to public charities and donor-advised funds), as well as the administrative burdens of tax compliance and grantmaking.

How DMIAs Work

A DMIA caters to charitably inclined individuals who want to make a substantial charitable gift of at least $200,000, but have more confidence in their own (or their financial adviser's) money management skills than in the skills of foundation managers. Just as donor-advised funds provide a middle ground between outright gifts to a public charity and use of private foundations, DMIAs provide an alternative to donor-advised funds and private foundations.

So-called "venture philanthropists" who have...