MERCY SMILES DONOR ADVISED FUND

What is a Donor Advised Fund?

A Mercy Smiles Donor Advised Fund (DAF) is a gift to Mercy Smiles that allows you and your heirs to determine how and when the gift is used or given to other charities, and how the funds are invested until then.  Assets in your DAF are kept separate from other DAFs and from Mercy Smiles’ other assets.

Why would I want to create a Mercy Smiles Donor Advised Fund?

A DAF gives you the benefit of an immediate income tax deduction and reduces your taxable estate.  The money in your DAF can be given to Mercy Smiles, to churches or other charities, or invested for future gifts as you and your heirs direct.  Invested money grows tax-free. 

A DAF gives you many of the same benefits as a private foundation or endowment, but without the legal expense required to create one:

  1. The DAF can exist for a very long time, blessing Mercy Smiles, churches, and other charities for decades to come.

  2. Unlike an endowment, a DAF need not pre-select the charities to benefit.  You and/or your heirs can select new recipients for donations anytime.

  3. You may prefer that a large donation be spread out over time, rather than given as a one-time windfall.  A DAF lets you control the timing of future gifts.

  4. A DAF is flexible.  In a given year, the DAF can (within limits) give as little or as much as you wish.  Investment strategies are flexible, too. 

  5. A Mercy Smiles DAF can be closed at any time by giving all of its remaining assets to Mercy Smiles, to another charity, or by transferring them to another DAF sponsoring organization, but DAF money cannot be refunded to the donor or heirs.

Can the Donor Advised Fund benefit me or my family?

The only benefits are the spiritual benefit of generosity, an immediate income tax deduction, and a reduction of a taxable estate.  To be tax deductible, a transfer to a DAF must be a completed gift, but you and your heirs may continue to advise on how funds are invested and how and when charity gifts are made.  Later gifts made by a DAF to other charities are not tax-deductible, as technically they are gifts from Mercy Smiles.  Of course, your name can be on the gift.

Mercy Smiles will honor your wishes unless you want the DAF to do something that violates the DAF agreement or IRS regulations.  Example: A DAF cannot do anything self-serving, like awarding a scholarship to a family member or investing in a family business.  As with all DAFs, the IRS requires that Mercy Smiles retain final decision-making power over the use of DAF assets sponsored by Mercy Smiles.

Also, a DAF cannot pay salaries or fees to family members for making giving or investment decisions, or pay travel expenses for them to meet.  A private foundation or endowment can sometimes pay these, but a DAF absolutely cannot.

How is a Mercy Smiles DAF different from those offered by others?

A Mercy Smiles DAF charges no annual fee.  The entire donation goes to charity, with the small exception of transaction fees to buy or sell investments.

What types of gifts can I give to a Mercy Smiles DAF?

A Mercy Smiles DAF can accept gifts of money or publicly traded securities or bonds from a donor, a donor’s IRA, or from another DAF.   

Gifts of real estate, cryptocurrency, interests in partnerships, LLCs, or non-public corporations, or gifts of tangible personal or intellectual property would require approval because of the complexities and costs of selling them.  The DAF would have to pay the sales costs.

Under current law, if you donate appreciated property (land, stocks, bonds, etc.), its full market value is immediately deductible for income tax purposes; you never have to pay tax on the appreciation.

Rules of a Mercy Smiles Donor Advised Fund:

  1. The minimum initial funding for a DAF is $1,000, but the donor or heirs can always add more.  The DAF must be closed or transferred if its balance falls below $100. 

  2. The DAF donor must provide written instructions on who has the authority to make giving and investing decisions, and how such authority can be changed in the future.  This is especially important after the original donor leaves control of the DAF to his/her heirs. 

  3. Unlike most DAFs, a Mercy Smiles DAF charges no annual fee.  The DAF pays only third-party commissions.

  4. A Mercy Smiles DAF must give at least 5% of its assets to Mercy Smiles or other charities each year.  This avoids complex paperwork that the IRS would otherwise require to justify how the fund fulfills its tax-exempt purpose.  In other words, a DAF is supposed to be charitable, not a tax-free way to build wealth. 

  5. The greater of $100 or 10% of annual giving from the DAF must be to Mercy Smiles International Outreach.  This is the only benefit to Mercy Smiles since there is no annual fee.  Gifts from the DAF to Mercy Smiles must be dollars, not other investments.

  6. Gifts may be monthly, quarterly, or annually, depending on the donor’s wishes, but the $50 gift minimum to other charities may dictate less frequent gifts.

  7. Mercy Smiles will provide the DAF donor or designees quarterly statements of DAF balances, investment performance, and giving.

  8. If Mercy Smiles has no communication from DAF advisors in a year, we will attempt to contact them for a period of 90 days.  If there is no reply, the DAF will be closed and its assets treated as an unrestricted gift to Mercy Smiles.

  9. Mercy Smiles reserves the right to discontinue our role as a DAF-sponsoring organization.  All Mercy Smiles DAFs would have one year to give the entire DAF balance to charity, or a DAF sponsored by another organization.

Specific Rules on DAF Gifts to Other Charities:

  1. All gifts must be fully tax-deductible, with no tangible benefit to the donor.

  2. Gifts may be in the DAF’s name or may be anonymous.  A DAF name may be a family name or a memorial.  Examples:  “The Peterson Family Charitable Fund” or “Grandmother Elsie’s Memorial Fund”.

  3. Gifts are limited to 10 organizations per month; with a minimum gift being $50. (This limit of 10 is negotiable, depending on the size of the DAF.)

  4. All gifts must be to Christian churches or to publicly supported 501(c)(3) organizations that are compatible with Christian values but need not be Christian. 
    Examples: A gift to a homeless shelter would be acceptable, but not to the “Freedom From Religion Foundation” or a racist or anti-Semitic organization.  

  5. The ability to give to a local church is a major advantage Mercy Smiles DAF provides over some commercial DAFs, which allow gifts only to 501(c)(3) organizations.  Most local churches do not have 501(c)(3) status, as a church generally does not require it.

  6. A DAF cannot make political donations.

  7. A DAF cannot grant scholarships to individuals but can give to scholarship funds that the IRS already recognizes as charitable.  Gifts for scholarships awarded by Mercy Smiles as part of its ministry are gifts to Mercy Smiles and are allowed.

  8. DAF funds cannot be used to pay for donor or family travel for volunteer work, even for ministry trips sponsored by Mercy Smiles.  Donors can still deduct these costs as charitable contributions, but a Mercy Smiles DAF cannot pay them.

Specific Rules on DAF Investments:

  1. A DAF must maintain a sufficient cash balance to support current giving.  Investments will be sold to satisfy each quarter’s giving requirements unless the DAF has specifically requested annual gifts.

  2. A DAF donor need not provide investment advice.  If not, Mercy Smiles will direct DAF funds toward prudent investments that are appropriate for the expected life of the DAF, based on the portion that the donor directs to give each year. 
    Examples:  If a donor plans to donate all DAF assets over 3 years, then the DAF should only be invested in Certificates of Deposit to preserve capital.  But, if the donor plans to make the minimum annual 5% donations, then the DAF will exist for a long time, so it would be prudent to diversify investments to preserve liquidity required in the near term, yet seek long-term growth.

  3. A DAF may elect to store DAF funds as bank accounts.  If so, Mercy Smiles will purchase a Certificate of Deposit (CD) from Sage Capital Bank of Texas, or State Bank of India, Chicago Branch.  Mercy Smiles already has accounts with these banks; all accounts are fully FDIC-protected.  State Bank of India has excellent CD rates.
    If a CD purchased by a Mercy Smiles DAF would cause the total of all Mercy Smiles accounts at a bank to exceed the FDIC insurance limit of $250,000, Mercy Smiles will work with the donor to select other bank(s) to keep all funds fully insured

  4. Mercy Smiles has an E*Trade account to receive and sell publicly traded securities and manage investment purchases. 
    A DAF can invest in any non-speculative mutual fund available from E-Trade.

    https://www.etrade.wallst.com/v1/common/pdf.asp?docKey=792, For example, except not the “Alternative” and “Other” funds at the bottom of the list.  Other well-recognized mutual funds are generally acceptable.  (Mercy Smiles selected E*Trade because its minimum balance for nonprofits is reasonable.)

  5. The donor or designee may wish to direct investments in publicly traded stocks, bonds, or mutual funds:   

    • Investments must be reasonably prudent, with a buy-and-hold philosophy.  A DAF may not “play the market” by rapidly shifting between investments.

    • Stocks must be traded on the New York Stock Exchange or NASDAQ.  A DAF can only invest in foreign securities via ADRs. 

    • A DAF may not trade in commodities, foreign currencies, or cryptocurrency. 

    • A DAF may not trade in penny stocks, highly volatile stocks, or stocks of thinly capitalized companies.

    • A DAF may not purchase stock via a new Initial Public Offering (IPO).   

    • The only permitted stock option trading is the writing and closing of covered calls.