In the United States, a donor-advised fund (commonly called a DAF) is a charitable giving vehicle administered by a public charity created to manage charitable donations on behalf of organizations, families, or individuals. To participate in a donor-advised fund, a donating individual or organization opens an account in the fund and deposits cash, securities, or other financial instruments. They surrender ownership of anything they put in the fund, but retain advisory privileges over how their account is invested, and how it distributes money to charities.
A donor-advised fund is an account at a sponsoring organization, generally a public charity, where an individual can make a charitable gift to enjoy an immediate tax benefit and retain advisory privileges to disburse charitable gifts over time. The contribution a donor makes to their donor-advised fund is 100% irrevocable and destined for a final 501(c)(3) organization.[1] Donor-advised funds provide a flexible way for donors to pass money through to charities—an alternative to direct giving or creating a private foundation. Donors enjoy administrative convenience (the sponsoring organization does the paperwork after the initial donation), cost savings (a foundation requires around 2.5% to 4% of its assets each year to run), and tax advantages (versus individual giving) by conducting their grantmaking through the fund.[2]
On average, the conversion time for a contribution to a donor-advised fund to a grant from the donor-advised fund, is approximately 24 months.[citation needed]
A donor-advised fund has some disadvantages compared to a private foundation, and some advantages. Both can accept donations of unusual or illiquid assets (e.g., part ownership of a private company, art, real estate, partnerships or limited partnership shares), but a donor-advised fund has higher deductions for these gifts (depending on the gift). In addition, the founders or board of a private foundation have complete control over where its giving goes within broad legal bounds. In a donor-advised fund, the donor only advises the sponsoring organization where the money should go. While rare (perhaps unheard of?), a sponsoring organization could conceivably ignore the donor's intent. In addition, most donor-advised funds can solely give to IRS certified 501(c)(3) organizations or their foreign equivalents. This rules out, for example, most kinds of donations to individuals, and scholarships—both things a private foundation can do more easily. As well, it precludes political donations, lobbying organizations, etc.
Donor-advised funds do reap a significant cost advantage (foundations carry a 2.5–4% of assets overhead expense to maintain, a 1–2% excise tax on NET investment earnings and a required 5% spending of assets each year) but may also have one more drawback: a limited lifetime, although this varies depending on the sponsor. American Endowment Foundation for example allows successor advisors in perpetuity.[3] While a foundation can persist for generations or in perpetuity, some sponsoring organizations impose a "sunset" on donor-advised funds, after which they collapse individual funds into their general charity pool.[4]
Because a public charity houses the fund, donors receive the maximum tax deduction available, while avoiding excise taxes and other restrictions imposed on private foundations. Further, donors avoid the cost of establishing and administering a private foundation, including staffing and legal fees. The donor receives the maximum tax deduction at the time they donate to their account, and the organization that administers the fund gains full control over the contribution, granting the donor advisory status. As such, the administrating fund is not legally bound to the donor, but makes grants to other public charities on the donor's recommendation. Most foundations that offer donor-advised funds only make grants from these funds to other public charities, and usually perform due diligence to verify the grantee's tax-exempt status.[citation needed]
In this type of foundation, individuals or other foundations contribute money to the donor directed foundation, and it then makes grants based on the stated preferences of the original contributor. This process ensures that the intent of the contributor is met while also hiding that contributor's identity. Because contributions to a donor directed foundation are not required to be made public, their existence provides a way for individuals or corporations to make anonymous contributions.
Whitney Ball, co-founder and executive director of the donor-advised fund Donors Trust, described donor-advised funds:[6]
A donor-advised fund begins with a donor contributing cash or assets to a public charity, which in turn creates a separate account for the donor, who may recommend disbursements from the fund to other public charities. Technically, the charity that sponsors the fund has the final say on the disbursements, and it is legally required to ensure they go only to charitable purposes, but in normal circumstances the original donor's requests will be followed.
Since 2010, some donor-advised funds have become less like traditional foundations. The simultaneous growth of DAFs[7]and online giving[8] has led to funds like CharityBox,[9][non-primary source needed] that are run by start-up companies through a web/mobile platform. Such companies allow donors to give directly to 501(c)(3) organizations and instantly receive tax-deductible receipts via email.
History
The New York Community Trust pioneered donor-advised funds in 1931, and the second such fund was created in 1935.[10] Since then, commercial sponsors, educational institutions, and independent charities have started offering the service. As of 2015[update], donor-advised funds were the fastest growing charitable giving vehicle in the U.S.—more than 269,000 donor-advised accounts held over $78 billion in assets.[11]
Regulation
Current[when?] U.S. tax law allows the donor of appreciated securities or other assets to get a tax deduction for the market value of the donation and avoid capital gains taxes. This double tax advantage can make donating appreciated assets to a charitable organization more attractive than selling the assets and donating cash. By donating appreciated assets to a donor-advised fund and then advising the fund to make donations to several charities, one can reap these tax advantages without the hassle and paperwork of transferring non-cash assets to several organizations. This combination of convenience and full tax advantage is one reason that donor-advised funds are used.
While private foundations in the United States are heavily regulated by the Internal Revenue Service, including rules on oversight and minimum annual payouts, donor-advised funds housed in public charities are not subject to the same tax restrictions.
In 1985, National Foundation, Inc. (NFI, now WaterStone) defended its standard for the management of donor-advised funds against the Internal Revenue Service in the United States tax court in National Foundation, Inc. v. United States.[12] The court found that NFI was eligible for tax-exemption and could be classified as a 501(c)(3) non-profit organization based on their management of donor-advised funds. NFI had complete control and ownership of what would later be called donor-advised funds, and could exercise discretion in authorizing charitable distributions of the funds. Donors maintained advisory privileges, but NFI was not obligated to use the funds based on their recommendations, especially if the receiving party did not comply with the five standards of a charitable organization, identified by the court: 1) that it be consistent with the charitable purposes specified in section 501(c)(3); (2) that it has a reasonable budget; (3) that it be adequately funded; (4) that it be staffed by competent and well-trained personnel; and (5) that it be capable of effective monitoring and supervision by NFI. The outcome of this case opened the door for many other providers to launch donor-advised fund programs.
On August 17, 2006, President George W. Bush signed the Pension Protection Act of 2006 (H.R. 4) into law, which includes a number of changes to the regulatory framework for donor-advised funds. The Pension Protection Act of 2006 established guidelines for the management of donor-advised funds, using NFI's standards as a framework. The sections dealing with donor-advised funds include:
Legal definition of a donor-advised fund.
A list of prohibited payments to donors and advisers to donor-advised funds.
New rules about what grants can be made from donor-advised funds.
The documentation required for all contributions to donor-advised funds.
Tax efficiency example
Under United States federal income tax law, there is a benefit to the donor for contributing appreciated securities rather than cash, as illustrated in this example taken from Vanguard's marketing material for their plan.[citation needed] Suppose one has 1,000 shares of stock that was purchased 15 years ago (which qualifies as long term capital gains under U.S. tax law). Assume the stock was acquired for $10 per share and it is now worth $100 per share. Here is a comparison of the cost to the donor of making a contribution of $100,000 to a charity, assuming a 35% income tax rate and 15% long term capital gains tax rate.
Option 1: Contribute cash from sale of securities
Immediate cost of donation: $100,000
Capital gains tax incurred: $13,500 (15% times ($100k minus $10k))
Net income tax saving: ($21,500) (35% times $100k deduction, minus the capital gains amount)
Charity receives $100,000 for a net cost to donor of $78,500
Option 2: Contribute appreciated securities
Immediate cost of donation: $100,000
Income tax saved: ($35,000) (35% times $100k)
Charity receives $100,000 for a net cost to donor of $65,000
Thus, by donating appreciated securities rather than selling them, one can contribute the same total amount with reduced effective donor cost. This is true whether or not one uses a donor-advised fund.
If the securities increase in value after they have been given to the donor-advised fund (but before the grant recommendation is actually made), no additional tax deduction can be claimed by the taxpayer. On the other hand, if the securities decrease in value, the taxpayer's original tax deduction (based on the value of the securities when given to the donor-advised fund) remains valid.
Even though the tax efficiency is the same, there are differences between giving directly to a charity and giving via a donor-advised fund.
Some charities are not set up to receive gifts of securities.
The amount that the donor wants to give to the charity may be an awkward or small number of shares (for example, it could be administratively complicated to give five shares each to 20 charities, but it is easy to give 100 shares to the donor-advised fund and then make 20 separate grant recommendations).
Giving to a donor-advised fund lets the donor take the tax deduction when it is advantageous. For example, a taxpayer can get a tax deduction for a contribution to a donor-advised fund and decide later which charities are the ultimate beneficiaries.
Some donor-advised funds process gifts to foreign charities. Direct gifts to foreign charities by individuals are generally not tax deductible.
However, there is a cost to donor-advised funds. Most donor-advised funds charge an administrative fee (e.g., 1% per year). This is in addition to management fees that, for example, any mutual funds the donor fund is invested in.
The donor-fund administrator may also charge fees for every grant, especially if to a foreign charity.
A charitable trust is an irrevocable trust established for charitable purposes. In some jurisdictions, it is a more specific term than "charitable organization". A charitable trust enjoys varying degrees of tax benefits in most countries and also generates goodwill. Some important terminology in charitable trusts includes the term "corpus", referring to the assets with which the trust is funded, and the term "donor," which is the person donating assets to a charity.
Charitable contribution deductions for United States Federal Income Tax purposes are defined in section 170(c) of the Internal Revenue Code as contributions to or for the use of certain nonprofit enterprises.
Fundraising or fund-raising is the process of seeking and gathering voluntary financial contributions by engaging individuals, businesses, charitable foundations, or governmental agencies. Although fundraising typically refers to efforts to gather money for non-profit organizations, it is sometimes used to refer to the identification and solicitation of investors or other sources of capital for for-profit enterprises.
A charitable organization or charity is an organization whose primary objectives are philanthropy and social well-being.
Matching funds are funds that are set to be paid in proportion to funds available from other sources. Matching fund payments usually arise in situations of charity or public good. The terms cost sharing, in-kind, and matching can be used interchangeably but refer to different types of donations.
Baton Rouge Area Foundation is a community foundation dedicated to enhancing the quality of life in Louisiana's capital region, and is registered with the IRS as a 501(c)(3) tax-deductible nonprofit organization. Since inception, the Foundation has granted over $650 million.
Community foundations (CFs) are instruments of civil society designed to pool donations into a coordinated investment and grant making facility dedicated primarily to the social improvement of a given place. Community foundations are a global phenomenon with 1700 existing around the world, of which over 700 are in the United States. Private foundations are typically endowed by an individual or a single family.
The Tulsa Community Foundation (TCF) is one of the largest community foundations in the United States. Headquartered in Tulsa, Oklahoma, as of January 2011 it was reported to have approximately four billion dollars in assets, and to have donated more than $580 million to local charities and government projects.
A 501(c)(3) organization is a United States corporation, trust, unincorporated association or other type of organization exempt from federal income tax under section 501(c)(3) of Title 26 of the United States Code. It is one of the 29 types of 501(c) nonprofit organizations in the US.
A donor managed investment account is a charitable giving mechanism in which donors receive a full tax deduction at the time they fund the DMI account, but retain investment management rights over the account, and can request donations from the account to charities.
The Pension Protection Act of 2006, 120 Stat. 780, was signed into law by U.S. President George W. Bush on August 17, 2006.
A supporting organization, in the United States, is a public charity that operates under the U.S. Internal Revenue Code in 26 USCA 509(a)(3). A supporting organization either makes grants to, or performs the operations of, a public charity similar to a private foundation.
A private foundation is a tax-exempt organization that does not rely on broad public support and generally claims to serve humanitarian purposes.
A foundation in the United States is a type of charitable organization. However, the Internal Revenue Code distinguishes between private foundations and public charities. Private foundations have more restrictions and fewer tax benefits than public charities like community foundations.
Until 1969, the term private foundation was not defined in the United States Internal Revenue Code. Since then, every U.S. charity that qualifies under Section 501(c)(3) of the Internal Revenue Service Code as tax-exempt is a "private foundation" unless it demonstrates to the IRS that it falls into another category such as public charity. Unlike nonprofit corporations classified as a public charity, private foundations in the United States are subject to a 1.39% excise tax or endowment tax on any net investment income.
Western Indiana Community Foundation ("WICF") was incorporated on November 30, 1990 for the betterment of Fountain County, Indiana and Vermillion County, Indiana and its citizens. The community foundation is a U.S. registered 501(c)(3) non-profit charity.
National Philanthropic Trust (NPT) is an American independent public charity that provides philanthropic expertise to donors, foundations and financial institutions. NPT ranks among the largest grantmaking institutions in the United States.
The Pooled Income Fund (PIF) is a type of charitable mutual fund or charitable trust that pools the securities or cash separately donated by an individual, a family or a corporation to a charity, which is then invested to provide dividends for both the donor's beneficiary and charity. The donations are irrevocable and tax-deductible and must be from personal assets. Capital gains taxes do not apply to securities donated to such a fund. The Pooled Income Fund was created by the Tax Reform Act of 1969 and is governed by IRS Section 642(c)(5).
The Silicon Valley Community Foundation (SVCF) is a donor-advised community foundation serving the Silicon Valley region. It is the largest charitable foundation in Silicon Valley.
National Christian Foundation (NCF) is a US non-profit organization that assists donors in donating to charitable causes. NCF accepts non-cash assets and is the nation's largest provider of donor-advised funds focused primarily on Christian donors. Since 1982, NCF has granted over $14.5 billion to causes and charities.
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