Donor Advised Funds: Beauty & The Beast
March 26, 2020 Maui, Hawai‘i 1
History of Donor Advised Funds • 1931 – 1st DAF established NY Community Trust • 1969 ‐ Tax Reform Act
Private foundation vs. public charity distinction
• 1987 ‐ National Foundation, Inc. vs. U.S.
Court held organization that raised and distributed funds to other charities and administered charitable projects, mostly recommended by donors, qualified for 501(c)(3) exemption
• 1990s – Commercial Gift Funds
For profit investment management firms established affiliated nonprofit organizations to maintain donor advised fund accounts. 2
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The Impact of DAF giving is growing Total Charitable Giving in 2018
Total Giving from DAFs in 2018
$427.71 Billion
$23.42 Billion
4.3% growth from previous year
18.9% growth from previous year
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What is a Donor Advised Fund? A fund or account: 1. which is separately identified by reference to contributions of a donor or donors, 2. which is owned and controlled by a sponsoring organization, and 3. with respect to which a donor (or any person appointed or designated by such donor) has, or reasonably expects to have, advisory privileges with respect to the distribution or investment of amounts held in such fund or account by reason of the donor’s status as a donor. IRC Section 4966(d)(2) 5
How Does it Work?
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The “Beauty” of a Donor Advised Fund More favorable tax benefits FMV of long‐term capital gain assets (real estate, marketable securities, closely held stock), up to 30% of AGI Cash gifts up to 60% of AGI
No minimum payout (for now…) 100% of grants = “public support” to grantee (for now…) No excise tax on investment return Option for donor anonymity 7
Drawbacks of Donor Advised Funds Donor recommendation Grants to qualified charities No reimbursement for fundraising expenses Cannot employ or make grants to individuals
Expenditure responsibility required for grants to non‐charities Subject to excess business holding rules Not currently eligible to receive IRA charitable rollovers
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What Does the Future Hold for DAFs? • IRS Notice 2017‐73: DAF Grants and Public Support Proposed “look through” to donor and apply 2% public support limitation, and Treat all DAF grants from anonymous donors as made by one person • Minimum Payout Requirement? 9
DAFs “Beastly” Criticism
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Endowment: Cutting to the Heart of the Debate • The Zombie Charity article begins: “Philanthropy is for the Living. Philanthropy has received significant criticism of late — some warranted, some not. One fair critique is the often long gap between when donors receive their tax deduction and when the money is actually employed for its philanthropic ends.” • This is a recurring criticism of DAFs, but it is really a philosophical critique of endowment generally.
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Why Target Donor Advised Funds?
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Put a Stake in the Myth that DAFs Warehouse Charitable Dollars for the Ultra Rich The Reality: • Donors that establish DAFs are actively recommending grants to their favorite charities. • Annual DAF payout rate is well above the 5% required of private foundations. • According to a report by National Philanthropic Trust (NPT), median payout rate by DAFs is above 20%. • DAF grants increase during economic downturns. (Compared to giving from individuals and private foundations which decrease when services are most needed). • If DAFs were eliminated, endowment giving would be confined to the very rich. http://acreform.org/blog/data‐contradicts‐common‐myths‐donor‐advised‐funds/ https://www.nptrust.org/reports/daf‐report/
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Happily Ever After: Advanced Uses •Pre‐fund Charitable Giving (Bunching): Timing itemized charitable deduction to exceed standard deduction in a particular year • Accept Complex assets – Avoid
Capital Gains 14
Happily Ever After: Continued •Private Foundations Meet 5% requirement
•Convert IRA Assets to a Philanthropic Inheritance
Make anonymous gifts Termination
•Testamentary DAF Philanthropic inheritance
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Bottom Line for Your Clients DAFs remain a cost effective, administratively efficient option Enhanced tax benefits compared to private foundations Immediate tax deduction (at time of wealth event or “bunching” charitable contributions to match anticipated taxable income) If DAFs were no longer available as a giving option, less money would be distributed to charity
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Questions?
Mahalo
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Disclaimer Neither the Hawai`i Community Foundation nor its representatives engage in the practice of law. The purpose of this presentation is for educational purposes only in regards to the subject matter covered. It is being provided with the understanding that the authors are not engaged in rendering legal, accounting or any other professional services. Due to the rapidly changing nature of the law, information contained in this presentation may become outdated. Thus, this presentation should not be utilized as a substitute for your own research and analysis to update the information and ensure accuracy. If legal advice or other expert assistance is required, the services of a professional should be sought. The authors specifically disclaim any liability, loss or risk incurred as a result of the use and application, either directly or indirectly, of any advice and information contained in this presentation, whether or not negligently provided. All examples, illustrations, tips and recommendations are suggestions only, and changes must be made depending on the specific circumstances in each case. Any federal tax advice contained in this communication (including any attachments or enclosures) is not intended and cannot be used for purposes of avoiding penalties imposed by the IRS or to promote, market, or recommend to another party any tax related matter(s) addressed herein. © 2018 Hawaii Community Foundation
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