There are several gifting vehicles that provide donors and their families with the opportunity to participate in their philanthropy on an ongoing basis. Frequently, families will consider creating and funding a private family foundation or, in special circumstances, an organization that supports one or more public charities. A cost-efficient option for many families is to coordinate their charitable giving through a donor advised fund (DAF) sponsored by a reputable public charity.
To create such a fund, a donor simply enters into a gift agreement with a public charity such as a community foundation, or a national or local religious foundation like the Presbyterian Church Foundation or a United Jewish Appeal Federation. Such a gift agreement typically provides for:
- Establishing a fund to accept irrevocable, tax deductible contributions of assets identified by name with the donor or donor family.
- Naming a fund advisor and successors to make recommendations regarding distributions from the DAF for charitable purposes.
In some instances, a DAF agreement may also permit fund advisors to recommend investments from a menu of preapproved investment options.
Establishing a DAF has many potential benefits. A DAF generally has lower administrative burdens than a separate foundation. Also, most DAF programs have flexible grant making options while providing an advisory role to the donor and/or the donor’s family in the grant making process. Moreover, a DAF typically has lower operating costs than a separate foundation, comparable investment flexibility and, unlike a separate foundation, a DAF is not subject to statutory minimum payout requirements (although some sponsoring organizations affirmatively require that a DAF remain active and not just accumulate or hold assets indefinitely). Also similar to a separate foundation, contributions made to a DAF are eligible for current charitable contribution deductions, even though distributions from the DAF need not be made in that same calendar year. This provides the donor with the benefit of a current deduction while also allowing donated amounts to appreciate before distribution (permitting a larger amount to be used for charitable purposes if the DAF generates gains from investments). Finally, a DAF can be named for a donor or donor family, thereby creating the same type of family legacy as a separate named foundation.
Initially, some donors are cautious about DAFs because the sponsoring public charity owns and legally controls the assets in the DAF. This can lead to a fear that the DAF will impose undue restrictions on the family’s flexibility. However, unless a donor’s recommendation would result in the imposition of a penalty tax (or is otherwise inadvisable), a sponsoring public charity will more likely follow a recommendation or provide helpful guidance to improve a donor’s initial recommendations. In short, a DAF can effectively function, from the donor’s perspective, much like a separate foundation.
For the last ten 10 years there have been a number of technical limitations that also apply to this vehicle. They include the following:
- Taxable distribution rules. An excise tax is imposed on the sponsoring public charity if a DAF makes a distribution to a natural person, or to an organization not described in Internal Revenue Code Section 170(b)(1)(A) (other than certain supporting organizations) that does not use the distribution for charitable purposes or the sponsoring public charity does not exercise “expenditure responsibility” with respect to the distribution.
- More than incidental benefit rules. An excise tax is imposed if the donor or a fund advisor recommends a grant from a DAF that results in such person or a related person receiving a “more than incidental benefit.”
- Excess business holdings rules. The private foundation excess business holdings rules apply to a DAF, which limit the ownership of the voting stock in a corporation or equivalent ownership in a partnership, proprietorship or similar “business enterprise.”
- Excess benefit transaction rules. The excess benefit transaction limitations apply to a DAF, which apply when an economic benefit is provided to a “disqualified person” in excess of the value of the consideration (including the performance of services) received for providing such benefit, and, in the case of a DAF, this includes “any grant, loan, compensation, or other similar payment.”
BakerHostetler attorneys are available to assist anyone interested in designing an optimum gifting vehicle, including a DAF.