Here's a Reminder of Who Really Controls the Money in Donor-Advised Funds

Donor-advised funds (DAFs) continue to be a major force in charitable giving. The Journal of Financial Planning once called the DAFs “a simple, affordable charitable-giving tool.” These tax-exempt charitable entities are not without their detractors and not all DAFs are the same. Before jumping into one, every donor must check into the details. The fine print does say that the sponsoring organization has final approval on all grants. And while that approval tends to be pro forma, as long as grant recipients are qualified tax-exempt charities, there may be more restrictions on where funds can go than many donors realize. 

First some background. Donor-advised funds are attractive to individuals because they offer up to three tax benefits: an immediate income tax deduction; avoidance of capital gains taxes on gifts of appreciated property; and a reduction of the donor’s gross estate. In addition, the sponsoring organizationthe public charity that manages the DAFdoes all the legal, philanthropic and accounting work. 

DAFs were once operated primarily by community and public foundations. These organizations had the ability to attract large sums of money providing them the ability to maximize their investment returns through investment diversification, which in turn attracted more donors. Of course, these foundations charged for their servicesusually charging both an administrative and investment fee. However, these fees are much less than the cost of creating a private foundation and provide the donors with many of the advantages of private foundations.

Lately, the charitable arms of for-profit financial service institutions such as Fidelity, Schwab and Vanguard have done a booming business with their DAFs. The Fidelity Charitable Gift Fund, the Schwab Charitable and Vanguard Charitable Endowment Program are public charities operating out of these for-profit investment houses. They operate exactly like any other DAFaccepting contributions into a fund that remains in the donor’s name; investing the assets, usually in funds managed by the institutions themselves, and distributing contributions as specified by the donors. Given the small initial required deposit (usually around $5,000) these charitable vehicles are very attractive to the less wealthy philanthropic individual.

In addition to the large foundations and national organizations that act as sponsoring DAF entities, many individual charitable organizations are now accepting DAF donations. This is a great way to expand a charity’s available funds for investment, thereby providing the additional ability to further diversify the portfolio, and stabilize and potentially increase investment returns.

However, one very important concept to keep in mind is that the amounts given to a DAF sponsor become the assets of the sponsor. Contributions into a DAF are irrevocable. Technically, donations directed to a recipient charity by a DAF donor are actually donations made by the DAF sponsor. As such, the responsibility for compliance with IRS charitable donation rules and regulations rests with the DAF sponsoring entity. Part of the fine print in the DAF agreement is that the sponsoring entity has the final authority over the proposed charitable donation.

This fact was recently the center of an issue between the Jewish Community Foundation of Los Angeles (JCFLA) and one of its DAF donors.

The donors, Lisa and Joshua Greer, had established their DAF fund five years ago. At one point, the fund had grown to approximately $1 million. Recently, the Greers directed JCFLA to make a $5,000 donation to IfNotNow. This is a Jewish charitable organization working to end American Jewish support for the Jewish Occupation of Palestinian territory in the Middle Easta mission not without controversy!

JCFLA informed the Greers that they would not make this charitable contribution. While the intended recipient organization qualified for the charitable contribution according to the IRS, JCFLA indicated that it could not make such a donation because it “would directly conflict with our (JCFLA’s) core values.” As noted above, although DAF donors have the right to make “recommendations,” the funds contributed by the DAF donor belong to the DAF sponsor and contributions by the sponsor are made in the sponsor’s name and listed as such in the DAF sponsor’s IRS Form 990.

Many donors might assume that the DAF sponsor’s role is limited to making sure the ultimate recipient organization is really a 501(c)(3) charity. With the national DAF funds (Fidelity, Schwab, etc.) this is most certainly the case. These funds are issue- and geography-blind. However, other DAF sponsors may have other agendas that could get in the way of your charitable gift intentions.

Donor beware!