This brief introduction to donor-advised funds (DAFs) accompanies the Blue Avocado article "Donor-Advised Funds: Un-Transparent Tax Shelters for Good."
In 1931, a New York community foundation created the first donor-advised funds (DAFs). But although the term was widely used for 75 years, the phrase "donor advised fund" was not codified until 2006 when Congress passed pension and charity reform legislation.
Most donor-advised funds are held at two types of institutions:
Community foundations, where donor-advised funds are typically the large majority of assets held and grants made
Large financial institutions that handle stock-trading, mutual funds and other for-profit investments; they have now expanded into DAFs, a nonprofit analogue that's a logical extension to their existing business and skill sets.
The IRS describes the features of a donor-advised fund:
Donors contribute to an administering 501(c)(3) to establish -- fund -- a DAF. The charity keeps accounting track of each DAF separately.
Contributions to the DAF cannot be taken back by the donor. Contributions qualify for an income tax deduction at the time of the donation, governed by the usual deduction rules and rates.
The donor has the right to recommend grants from the DAF to qualified charitable recipients. The sponsoring organization may not be legally required accept the recommendation (although implementing the donor's recommendation is the basis of the business model).
In contrast to a private foundation, a DAF typically affords the advantages of two kinds of anonymity for a donor. First, the donor's identity need not be disclosed to the nonprofit which receives a donation from the donor's DAF. Second, the administering organization (a community foundation or Fidelity, say) does not have to report on its 990 grants from DAFs on a fund-by-fund basis.
The DAF administering ("sponsoring") organization typically provides the legal, administrative, investment management, and accounting work for DAFs. Compared to creating a private foundation, DAFs are often lower cost to administer for a donor.
For example, let's say that donor Phil A. Thropy has a high income year, and makes a $1 million donation to a donor-advised fund at Fidelity. That year he can deduct $1 million from his taxable income. The following year, Phil directs $50,000 from his DAF to his alma mater Harvard and $20,000 towards the YMCA. Over the next years (without limit), Phil makes grants from his DAF and can add funds to it as well. He pays Fidelity annually a fee of 0.6% (60 basis points) to administer the fund. (Fidelity charges low amounts for higher deposits.)
When Phil dies, the ability to direct the DAF passes to his heirs or designee. Community foundations often ask DAF donors for a provision that states after the second or third designee, any remaining funds would revert to the community foundation's general fund. In other words, Phil's daughter could continue making grants out of the DAF after his death, but if Phil had agreed to such a provision, upon his daughter's death any remaining funds would become unrestricted assets of the foundation.
How much money is in DAFs?
How many DAFs are there with how much money? The most recent data released by the IRS is for tax year 2006:
2,398 institutions administering donor-advised funds
160,000 donor-advised funds
$31.1 billion held in donor-advised funds
New contributions to DAFs in 2006 were $9 billion
More recently, The National Philanthropic Trust (NPT) published its 2011 Donor-Advised Fund Report. Intended to be "highly indicative" rather than "accurate," NPT collected data voluntarily offered by 478 administering institutions. NPT found that these 478 administered 162,000 DAFS with assets of $30 billion and charitable giving of $6.2 billion.
To return to the article that accompanies this sidebar, "Donor-Advised Funds: Non-Transparent Tax Shelters for Good," click here.