According to National Philanthropic Trust’s 2014 Donor-Advised Fund Report, in 2013 there were approximately 217,367 donor-advised fund (DAF) accounts in the United States valued at more than $53.74 billion. In contrast, in 2007 there were approximately 161,941 DAF accounts valued at more than $31.97 billion, an increase of 34.2% in new DAF accounts and 68.1% in assets.
Donors use DAFs because they are simple to create, highly flexible, and provide superior income tax charitable deductions when compared to private foundations. The benefits of using a DAF include:
- DAFs are easy to create (most DAFs are created by completing a brief application);
- DAFs are flexible;
- Most organizations that sponsor DAF programs accept contributions of not only cash, but also marketable securities and may accept real property and closely-held business interests;
- Many DAF programs offer an array of investment options and support a variety of grantmaking approaches;
- Unlike grants from private foundations, grants from a DAF can be truly anonymous;
- Donors frequently contribute appreciated assets because they are allowed a deduction for the full value of the gift while avoiding recognizing the capital gain when the Sponsor sells the contributed assets; and
- A gift to a DAF is a gift to a public charity, which qualifies for maximum deductibility.
DAFs have been around for nearly a hundred years, but it wasn’t until 2006 that Congress gave them a formal definition. The key elements of that definition are that a DAF is:
- A separately maintained account (however the assets may be commingled with other funds, including non-DAF funds);
- Maintained by a publicly-supported section 501(c)(3) charity (Sponsor) that is not a private foundation or governmental entity;
- An account over which a donor retains or delegates certain advisory rights around grantmaking and investment;
- Not a separate legal entity; and
- Under the exclusive legal control and ownership of the Sponsor at all times.
A properly created DAF is a completed gift to the Sponsor for tax purposes.
A DAF is not a fund created to support only one charity and is not a scholarship fund.
What rights do donors have?
In general, donors can retain the right to recommend that the Sponsor make charitable grants from their DAF to qualifying charitable organizations and they can retain the right to advise the Sponsor regarding the investment of their DAF assets. However, it is important to note than in either case the donor’s right is advisory in nature. Ultimately the Sponsor must approve, deny, or modify the payment of a charitable grant or the implementation of an investment recommendation.
What types of organizations can receive a grant?
In general, a Sponsor may only make grants to publicly-supported section 501(c)(3) organizations. However, a Sponsor may make grants to foreign charities or for charitable events organized and sponsored by groups such as Kiwanis, Rotary, or chambers of commerce, but only if the Sponsor exercises appropriate due diligence over the use of the funds by the recipient. A Sponsor must not make distributions (including payments for charitable purposes or expense reimbursement) to an individual or certain types of charities called “Type III non-functionally integrated supporting organizations.”
What IRS rules apply to the operation of a DAF?
Because DAFs are regulated by the IRS, they are subject to several important rules. First, for a donor to claim a deduction for a contribution to a DAF, the Sponsor must provide a timely written acknowledgment to the donor stating that the Sponsor has “exclusive legal control” over the contribution. Second, a punitive excise tax is imposed on any grant that results in a more than incidental benefit to the donor or a donor advisor. Third, a Sponsor that receives contributions of a closely-held business into one or more DAFs is generally required to sell those contributions within a five-year period if the Sponsor’s holdings, combined with those of the donor and the donor’s family, exceed a 20% threshold. Failure to comply with this divestment requirement will result in the imposition of an excise tax on the DAF.
How does a DAF compare to a private foundation?
DAFs are frequently compared to private foundations. Key differences to these two “endowment giving” vehicles include:
- DAFs do not require the creation of a separate legal entity with associated costs; private foundations do;
- DAFs do not require the donor to create a board of directors with fiduciary responsibility that must adhere to governance best practices and procedures; private foundations do;
- DAFs to not require the maintenance by the donor of separate financial statements and the preparation of a separate Form 990-PF; private foundations do;
- DAFs are not subject to a 2% excise tax on their investment income; private foundations are;
- DAFs are not required to make annual grants; private foundations are;
- DAFs can make grants that are completely anonymous to the grant recipient; private foundations can’t; and
- Contributions to a DAF qualify for maximum deductibility; contributions to a private foundation don’t.
In conclusion, DAFs are suitable for almost any donor. They are simple, flexible, and cost-effective. They permit donors to recommend to the charitable sponsor both grant recipients and investment options. Moreover, they permit donors the opportunity to contribute appreciated property and avoid recognizing the capital gain on sale. Finally, they provide superior anonymity and deductibility compared to private foundations.
Interested to see how Renaissance can support a Donor-Advised Fund for you? Visit our website at www.reninc.com.
Read how Jack & Dee Twain used a donor-advised fund to avoid capital gains while supporting their favorite charities.