DAF’s are a fast growing element of the charitable giving world. While donor-advised funds have been in existence in some form since the 1930s, during the 1990s, for-profit financial investment firms (such as Fidelity and Vanguard) began to establish affiliated nonprofit organizations to maintain donor-advised fund accounts. Typically, these “commercial” DAFs hire the affiliated for-profit investment firm to manage the investment of the assets in the accounts for a fee that varies based on the balance in the account and the number of annual transactions.
DAF’s are the fastest growing charitable giving vehicle in the US, with an estimated 125,000 donor-advised accounts established, holding over $27 billion in assets. Because the DAF fund itself is charitable organization, Donors receive the maximum tax deduction available, while avoiding excise taxes and other restrictions imposed on private foundations. Since the maximum tax deduction is received by the Donor at the time of the gift, the sponsoring entity administering the DAF gains full control over the contribution, but grants the Donor advisory status. Accordingly, the DAF is not legally bound to the Donor, but make grants to other public charities upon the Donor’s recommendation.
In general, contributions to a DAF are treated as contributions to a public charity, thus providing donors some advantages over private foundations. For example, donors may claim a higher charitable contribution deduction (up to 50% of adjusted gross income (AGI) to a public charity vs. 30% to a private foundation), and donor-advised funds are not subject to restrictions that apply to private foundations, such as self-dealing rules and annual payout requirements.
Donor Advised Funds Defined
Before the adoption of the Pension Protection Act of 2006 (PPA), there was no statutory definition of a DAF. DAF’s are now defined in Section 1231 of the PPA. The 3 primary defining elements of a DAF as set forth in Internal Revenue Code Section 4966 (d) (2) (A) and the regulations thereunder
1. The DAF must be owned and controlled by the sponsoring organization. This is the charitable organization administering and controlling the DAF.
2. The DAF’s funds must be separated from the sponsoring organization’s general fund and each individual DAF must be identified as to the particular funds donor and or donor advisor; and
3. The donor or donor advisor who will be acting on behalf of the DAF must have a reasonable expectation to have a real advisory role with respect to the direction of grant requests to selected charitable and or educational agencies.
Operation of a Donor Advised Fund.
Simply stated DAF’s are segregated funds maintained by a donee charitable organization which is also often referred to as the sponsoring organization. There are exceptions such as Fidelity and Vanguard which can hardly be considered charitable organizations, but that are sponsoring organizations for multiple DAF’s. The role of the sponsor is to administer the participating DAF’s, including investment management. Under most circumstances a Donor may not select how the funds contributed are invested. There are exceptions. Some sponsors provide a selection of investment pools that maybe attractive to some Donors. Many sponsors place limits on the type of property that may be placed in a DAF under their control. A typical restriction might be prohibiting a Donor from donating a parcel of real property that has a mortgage with no offsetting income to cover the expenses of holding the real estate asset.
The gift to the DAF is established by the Donor making an irrevocable contribution of property (i.e. an asset) to the fund. Since the DAF is considered a public charity the Donor receives an income tax deduction upon the transfer of ownership of the property to the fund. The Donor has the ability i.e. the expectation to make recommendations as to grants or distributions from the DAF, subject to the approval of the sponsor. The sponsor makes the final determination as to acceptance or rejection of the recommendation of the Donor advisor of a DAF for a grant or distribution from any DAF under its control. Donors must clearly understand that their expectation of making recommendations for grants and or distributions from the DAF to which they have made a gift is just that a recommendation, the sponsoring organization must and does have the right of final approval over any Donor recommendation for a grant or distribution.
A donor may not satisfy an existing obligation with a grant from a DAF, such as a pledge or prior commitment to make a payment for services rendered or to be rendered from a public charity. A Donor may not derive any direct financial benefit from a grant made from a DAF under his/her control or administration. A donor may not make a grant or distribution to a private foundation.
Contact A.O. “Bud” Headman at email@example.com for more information.
- On November 21, 2012