DONOR-ADVISED FUNDS ANYONE?

Having worked at the Evanston Community Foundation, an exemplary organization in my hometown, I’m a little concerned about IRS focus on community foundation donor-advised funds. (DAF for short.) I’m also curious about how a non-profit organization could involve donors in an advisory role for an endowment fund emulating DAFs – smell my wheels burning?

You and I are in luck because I’m going to share with you an exchange I had with Attorney Gene Takagi, an attorney for nonprofits in San Francisco.

As background, the IRS description of these funds follows (if you know this, skip this paragraph). “A donor advised fund is a separately identified account maintained and operated by a section 501(c)(3) organization. These accounts have become very popular in recent years. Each account is funded with contributions made by a donor or a group of donors. For the payment to qualify as a completed gift, the charity must have legal control over the donated funds. While the donor, or individuals selected by the donor, may advise on the distribution of funds from the account and the investment of assets in the account, the charity must be free to accept or reject the donor’s recommendations. For example, a donor may contribute $1,000,000 to a donor advised fund and claim the whole amount as a charitable deduction for the year in which the contribution is made. In future years the donor may advise the fund as to desired distributions to qualified beneficiaries (e.g., other charities). In operation these funds allow considerable input from the donor but are not classified as private foundations. Again, in a legitimate donor advised fund, the charity must have legal control over the donated funds and must have the right to disregard the donor’s advice.”

It is always chilling when the IRS says something like this: “We have seen abuses in this area…. we are aware that some promoters encourage clients to donate funds and then use those funds to pay personal expenses, which might include school expenses for the donor’s children, payments for the donor’s own ‘volunteer work’, and loans back to the donor. We have over 100 individuals under audit in connection with such cases.”

Abuses aside, my question is: If people can receive a tax deduction for donations to community foundations, are there any drawbacks to or less incentive for those same people making earmarked donations to non-profit organization endowment funds, in essence donor advised funds (DAF)? Non-profits don't have the 5% payout rule community foundations face.

Gene responded:

“There are of course many advantages to contributing to a DAF as opposed to an endowment fund of a nonprofit, including:
· The ability to advise on distributions to a different charity or charitable area from one year to the next;
· The opportunity to have a discussion with community foundation staff regarding the effectiveness of their contributions and the reputations and progress of the charitable beneficiaries.

“On the other hand, where the donor’s intent is to give to one particular charity with which the donor has a strong connection, a gift to the endowment may better fulfill the donor’s desires. It may also result in greater recognition. Note that endowments have their own payout requirements.

“The endowment payout requirements are generally established by the organizations, consistent with the applicable state laws (e.g., UMIFA or UPMIFA). While state laws do not set a minimum payout, I don’t believe many organizations will allow you to set up an endowment that is subject to restrictions against annual distributions. [My emphasis added.] Note as well discussion on the Hill about a 5% payout requirement for university endowments.”

We’ll have more on lawmakers' backlash over Harvard/Princeton/Yale endowments at a later date. I’m curious as to how you involve your donors once they have made gifts to your endowment. If so, are you marketing that? Care to share?

In appreciation for Gene Takagi’s insight, I extend my thanks to him and I will leave you with the following from him:

Circular 230: This communication was not written or intended to be used, and may not be used, by any taxpayer for the purpose of (i) avoiding any tax-related penalty under the Internal Revenue Code, or (ii) promoting, marketing or recommending a tax-related transaction described herein.

The Law Office of Gene Takagi 703 Market St., Suite 1412 San Francisco, CA 94103415.977.0558 (office) 415.977.0559 (fax) gene@attorneyfornonprofits.com www.attorneyfornonprofits.com www.nonprofitlawblog.com