Last week, we looked at the first two of our six misconceptions about donor-advised funds. Today we’ll explore two more misconceptions, these related to flexibility and control. Next week, we’ll look at two final myths related to the efficacy and value of donor-advised funds.
#3 – Donor-advised funds lack the flexibility of a foundation
It is certainly true that there are certain statutory restrictions that apply to grants from donor-advised funds. However, private foundations are subject to many similar legal restrictions.
For example, grants may not be made from a donor-advised fund that fulfill a charitable pledge made by a third party (like the account advisor). Likewise, DAFs can’t be used to make grants for the purpose of sponsoring a table at a charitable event if, as a result of the sponsorship, something of greater than “de minimus” value is received. However, similar statutory restrictions also apply to private foundation grants.
Should a private foundation fulfill someone else’s pledge, the private foundation bestows an impermissible benefit upon the person who made the pledge. As a consequence, the foundation, and, in some cases, individuals associated with the foundation, may be subject to substantial monetary penalties. In the case of a private foundation sponsoring a table at a charitable event, except in certain circumstances that very often don’t exist, if something more than a de minimus benefit is received as a result of a grant, substantial penalties may be imposed against the foundation and, in some cases, its managers and others associated with the foundation – just as in the case of a donor-advised fund. Indeed, many of the restrictions imposed on grants from donor-advised fund accounts are more-or-less identical to restrictions imposed on grants from private foundations, but not in all cases.
Private foundations may make direct grants to individuals for various charitable reasons, such as for scholarships or for hardship and emergency assistance (though most don’t because of the strict rules and stringent administrative requirements surrounding direct grants to individuals from a private foundation). Donor-advised fund accounts are prohibited from making direct grants to individuals. However, working with the DAF sponsoring organizations, it is usually possible to accomplish something similar.
For example, donor-advised fund advisors can identify a university or other school where they would like to sponsor a scholarship and ask the DAF-sponsoring organization to approach the university about establishing a scholarship to be funded with grants from a DAF account. If the university agrees, funds from the account will be granted to the university that runs the scholarship program and not directly to an individual. For many donors, this accomplishes the same charitable goals as running a scholarship program from a private foundation.
In the case of hardship and emergence grants, rather than granting directly to an individual, a DAF advisor can request that a grant be made to a charity rendering assistance to those affected by the hardship or emergency of concern to the advisor. In most cases, with a bit of creativity, most any charitable objective a donor can accomplish with a private foundation may also be met using a donor-advised fund account.
Beyond charitable goals, in other ways, donor-advised accounts offer more flexibility than a foundation. Use of a donor-advised account in place of a private foundation removes the inflexible requirements of annual federal and state tax filings applicable to private foundations, not to mention eliminating the initial, costly, and time-intensive process involved with establishing a private foundation.
#4 – Donor-advised fund accounts leave me with less control over my charitable intent
By IRS rule, a contribution into a donor-advised account is an irrevocable gift to the general operating funds of the DAF account sponsoring organization, which is a 501(c)(3), publicly supported tax-exempt organization. Because, by statute, the gift is to the sponsoring organization’s general operating funds, and not a restricted gift, the sponsoring organization is free to do whatever it wishes with my gift. The donor has no rights with respect to the donation; but does retain advisor privileges. This leaves me with less control over my charitable intent than if I had established a private foundation.
However, the funds you donate are accounted for separately on the books and records of the charity, and the charity grants you the privilege of advising that grants be made to other, publicly supported 501(c)(3) charities. Further, the myth that you have reduced your charitable intent doesn’t ring true once you know all the facts.
In the case of a private foundation, while you are allowed to sit on the foundation’s board and can therefore, more-or-less, completely control the private foundation’s governance and operating procedures, you are not free to use foundation funds in any way you wish. Very strict rules govern how foundation funds may be used. The control you have over the assets is as a fiduciary of the charitable dollars. As such, your control is legally, both at the federal and State level, subject to numerous restrictions, which carry with them the potential for significant penalties if breached.
Back to the myth – do you really lose more control of your charitable intent by using a DAF account as your charitable vehicle of choice as compared to a foundation? Arguable, no – provided you chose a DAF sponsoring organization that is compatible with your charitable intent.
Generally, most fund sponsors will heed advice, so long as the recommended grantee is an IRS-approved 501(c)(3) public charity. Donors looking for more assurance that their charitable dollars will be used in accordance to their goals might consider any of the cause-related donor-advised funds instead of the more general-purpose national providers or the geographically focused community foundations.
Cause-related funds, also sometimes called single-issue funds, have some organizing principle, mission, or theme. DonorsTrust is an example of a cause-related fund, offering additional checks on contributions to ensure charitable gifts align with the principles of liberty. Other cause-related funds exist for Christian evangelicals, international givers, social-impact investors, and many other causes.
Every donor, when making a gift, should consider this issue of donor intent, the idea that charitable gifts should get used in a way that comports to the donor’s wishes. Choosing the right vehicle and the right provider should be a part of your donor intent considerations. The irrevocable nature of a donor-advised fund gift makes that consideration all the more important.
Further Reading:
Compare the tax benefits between a DonorsTrust donor-advised fund and a private foundation
Learn more about the importance of donor intent
