Think of a donor-advised fund (DAF) as a savings account for philanthropy. In many ways, they work the same as a 401k (a savings account for retirement), or a 529 account (a savings account for funding higher education costs). Like any of these savings accounts, they are designed to accumulate in value for the benefit of a future expenditure.

Donor advised funds are simple to open, provide a charitable tax deduction whenever money goes in to the account, and are easy to grant/gift money to a favorite cause when the donor is ready to do so.

There are different flavors of DAFs and they’ve been around actually for more than 30 years. They got their start at local community foundations where they were established to support geographically local causes. Quite a few DAFs are associated with financial institutions — their differentiated offer often provides a variety of investment options while donors are deciding who to gift to. And DAFs are popping up at colleges/universities and many other charities across the country with programs for their most loyal supporters.

Situationally, a donor-advised fund might be the best option for managing the charitable aspects of a large financial or life event, such as a bequest, a business merger or IPO, or the gift in-kind of a large asset that a philanthropist is not inclined to gift to a single non-profit, such as real estate.

The details of DAF programs are readily available from every DAF for the asking. Financial advisors will know about DAFs and can help with increasing awareness, and no doubt you know some friends and colleagues that have a DAF and can give you their insight into how they work.

A great deal of information has been written about DAFs, so learning more about this popular charitable giving tool is pretty simple too.

• No. The Pension Protection Act of 2006 specifically carved out tax free distributions from an IRA to a CGA. A donor may still use a distribution from an IRA to fund a CGA, but the funds must be received by the donor (ie. constructive receipt and liable for income taxes) and then sent to a charity by the donor to fund a CGA. With the normal tax deductible benefits afforded to a donor by a CGA gift, the tax liability of the IRA distribution may be partially offset.
• Technically, “The exclusion from income applies only if a contribution deduction for the entire distribution otherwise would be allowable (under present law), determined without regard to the generally applicable percentage limitations.”* Thus, split interest gifts of any type do not qualify since their funding has deduction percentage rules.

* From the PPA 2006 languageYou can ask, but no, you can’t place any kind of restriction or control on how the DAF manages their assets. The fact is, when you received your tax deduction for your charitable gift to the DAF you gave up ownership and control. The asset is no longer yours – it is owned by the charity. The DAF may well be advised to listen to your counsel in order not to devalue your gift, but they still must have the decision-making responsibility. If you have concerns about the valuation of an asset if it were to be sold too quickly, discuss that with the charity. My guess is that they’d want to find a way to maximize its value as much as you do.

• No (and yes). This nuanced topic of granting from a donor-advised fund is often referred to as the “bifurcation” of a grant or gift and flags any “personal benefit” that may be received by the donor as problematic. While currently under review by the IRS, grants from DAFs that result in more than an incidental benefit – such as this bifurcated tax situation – are generally not allowed. Grants from DAFs to a charity must be 100% fully deductible under the current language and regulations of the IRS.
• For instance, if a donor buys a table at a gala (or a tee-box at a golf event etc) and receives something of consequence in return – like the ability to seat 8 friends around the table for a free meal, or a free entry to the golf event – that return back to the donor is viewed as a personal benefit which is not tax exempt. The gift of a table at a gala in this case goes to cover some event expenses – the tax-deductible portion of the gift – and a non-deductible portion that provides a personal benefit. (“Bifurcate” – to break into two parts).
• Example – assume a gala event table of 10 seats is $1000 – and the charity has determined that the gift is 75% tax deductible ($75 of each seat goes to offset costs for the event, and each participant is receiving a $25 meal for free).
• The recent IRS Notice 2017-73 provides some interim guidance and directional thinking as the IRS works towards new regulations on this and a few other DAF matters. Under consideration is the possibility for a DAF to fund the tax deductible portion of the event ($750 in the example above), and the donor separately to fund the portion that they would have received as a personal benefit ($250) if they had paid for the full event/table cost
• (and yes); grants may be made to offset event expenses in full in which there is no split of the tax deductibility of the gift. If there is no personal benefit, maybe the donor has no intent to attend the gala nor take advantage of any benefit offered, the gift is likely to be approved by the DAF.
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Let’s start by being clear on two terms that can be confusing: Donor-advised funds (DAFs) are a type of giving vehicle hosted by charitable organizations; these organizations hold a collection of donor-advised accounts (DAAs). You and I can open a donor-advised account at a charity that operates a donor advised fund, but actually “opening a DAF” is for organizations only and requires certification under the regulations for a public charity.

DAFs today offer donors a variety of succession or advisor end-of-life options for their accounts, which are almost always defined in the hosting organization’s terms and policies (that fine print we agreed to when we signed on to open a DAA). Unlike private foundations, DAF accounts are not designed to last in perpetuity. Very simple – just request a grant to be sent for the full amount of your account balance to the non-profit of your choice. Or if you like the DAF model in general and find one aligned with your interests and goals, just request the money be sent over there.

All DAFs have terms and policies, and like any financial account, “buyer beware” applies. If you open an account at a DAF that states in the fine print that they won’t issue grants for less than $1000, or to charities that promote fishing, then you shouldn’t be upset when they deny your request to send $250 to “Trout Unlimited”. If that pushes you over the limit, find a DAF that supports fishing and grants below $1000, and send your account balance to that DAF where they will happily approve your requests for grants to fishing organizations.

DAFs know this about their granting rules, and it is not uncommon for a DAF to send checks, and full account balances from time to time, to another DAF. As long as the final grant request is for a valid charitable purpose to an IRS approved charity, and within the rules of the DAF account that you opened, they really don’t have a good reason not to pass along the monies of your request.

But remember, read the small print of the DAF’s terms. Within the options offered by most DAFs, there are three very common succession plan choices named by advisors for their DAAs:

1. pass the account responsibilities to the person(s) of their choice (often called the successor advisor);
2. immediately distribute the balance in the account to one or more charities; and
3. direct the balance to be distributed at the discretion of the hosting DAF, most often by applying the dollars to a fund or funds under the control of the trustees.

There are hybrids, too; whether a combination of these, or possibly the creation of a new endowed account within the DAF that has a clear payout plan, over time, to a charity or charities. DAFs have the right to create their own policies here; like placing a limit on the number of successor generations that may play out from (i) above, and limiting the charities the DAF will make grants to. The current advisor(s) of a DAA — again, within the terms of the program — can change the succession plan at any time. This is a common right of the “advisor,” as these are donor “advised” accounts. Ah, “control from the grave,” as I used to call this. DAFs are certainly within their right to allow continued direction as requested by a (now-deceased) advisor, but the burden of managing the possible variations can add expense to most common DAF models. While there are ways it can be handled, depending on the particular request, it’s not usual. That’s one of the very interesting dynamics of DAF programs: If an advisor doesn’t like the terms of the DAF where they have opened an account, it’s usually not difficult to exit that particular program. As most DAFs allow account holders to grant funds to a wide variety of charities – other DAFs included – the dissatisfied account advisor can simply request a grant for the account assets to be issued to another DAF with terms that are more aligned to their interests.

Some DAF terms, often seen at college/university and other single mission DAFs, require a certain percentage of the account balances to remain at their institution, and so grants for only the remaining balance of their funds can be directed to an alternate DAF. Brad Caswell is the President of the Acadia Squam Group, a business helping charities develop their fund-raising efforts in two areas – understanding and accessing funds in DAFs, and promoting and accepting gifts of complex illiquid assets. His background includes 12 years as COO at Vanguard Charitable, a large national donor-advised fund, and a number of years in the tech industry with HP and Compaq.

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