Donor-Advised Funds: Preparing for Closer Scrutiny: More Restrictions May Await This Popular Way to Give
Tarlson, Nick G., Journal of Accountancy
* Donor-advised funds (DAFs), as an alternative to private foundations, have been a popular means of charitable giving, but fund managers, donors and their advisers must reckon with new laws and regulations stemming from the Pension Protection Act of 2006. A DAF allows the donor to advise the organization administering to on its use to support public charities. Congress is continuing to scrutinize issues of possible abuse of DAFs with a study mandated by the PPA.
* Donors benefit from fund managers' expertise in selecting gift recipients and especially from the ability to deduct the fund donation before it is disbursed to the ultimate recipient.
* The possibility of an economic benefit to donors has been among reasons for the scrutiny. Others relate to donor control of investments from the fund and the relationship between the organization sponsoring the fund and the one supported by it.
* Possible new directions in regulation of DAFs could include a minimum required distribution of funds, since such a requirement has been raised as a possibility in both the study and an act that passed the Senate in 2005 but was not enacted into law.
Congress has shown a great deal of interest in donor-advised funds (DAFs) in the last few years. The Pension Protection Act of 2006 introduced several significant restrictions on DAFs and directed the IRS to further study their organization and operation. In complying with that mandate, on Feb. 26 the Service issued Notice 2007-21, which raised some provocative and potentially wide-reaching issues concerning these funds. These issues may affect the ability of DAFs to continue to allow donors to defer some of the decisions relating to charitable contributions while obtaining immediate tax benefits.
This article explores the basic structure and characteristics of DAFs, their historic use and changes imposed by the PPA. It also explores issues raised by Notice 2007-21 and how future reforms may affect the planning opportunities DAFs offer.
ANATOMY OF A DAF
A DAF is an account at a charitable fund or foundation that results from a charitable contribution by a person who has an agreement with the fund or foundation that provides the donor the right to advise the foundation regarding the ultimate disposition of the gift. The gift is considered completed because the foundation is a public charity, and under the terms of the gift, future direction of the gift is limited to similarly situated and qualified charities. But the agreement provides the donor with rights that include recommending that the foundation make gifts to other charities from the DAF.
Although the foundation is not obligated to follow the donor's advice, it is understood and accepted that its failure to do so would be frowned upon by past and future donors. A DAF must also be identified with the donor or donors or a related person, usually by being named after them [IRC section 4966(d)(2)]. It offers tax and practical advantages for many taxpayers over private foundations, which are subject to lower limits on charitable deductions for donors, as well as special regulations concerning their operation and possible excise taxes.
DAF administrators can add significant value by assisting donors in identifying charitable giving opportunities consistent with their objectives. The administrator is obligated to ensure that the ultimate recipient of the funds is a qualified charity and to report to the donor on the earnings and disposition of the funds. DAF administrators benefit from this arrangement by receiving a fee for their services in handling and investing the funds.
Donors benefit from this arrangement by receiving a current tax deduction without having to decide on the ultimate recipient of the contribution. Donors often have the right to designate successor "advisers," such as their children, who can continue to advise the fund after the donor's death. …