The first donor-advised funds appeared back in the 1930s but were not formally recognized in the Internal Revenue Code until the Pension and Protection Act of 2006. Today, these funds are one of the fastest-growing vehicles for making current charitable contributions but are also being incorporated in many tax planning strategies. Exactly, what are donor-advised funds?

A donor-advised fund (DAF) is a separately identified and managed charitable investment account that is operated by a Sec. 501(c)(3) organization, also known as a sponsor or sponsoring organization. Often these sponsoring organizations are affiliated with brokerage houses and community foundations, but more recently with hospitals, universities, charities associated with affiliated corporations and religious institutions. Increasingly more DAFs are being used to facilitate workplace giving and online fundraising. Recent reports indicate that more than 1000 DAFs exist.

How does a DAF operate? Many times, donors have never heard about a DAF before this donation strategy is recommended by an accountant, attorney, tax planner or investment manager. Generally, the donor makes what will become a charitable donation to an existing DAF. The donor benefits by enjoying an immediate tax benefit for the contribution. That contribution is 100% irrevocable and is ultimately destined for distribution to a 501c3 organization, including a foreign equivalent of a 501c3. The final distributions to a grantee are not necessarily immediate, or even in the same tax year, hence the ongoing controversy surrounding DAF giving. Once received, the sponsoring organization has legal control over those funds. The donor retains advisory rights with respect to the investment of those funds and the ultimate distribution of those funds. At some point after the original donation, the donor or the donor’s representative, recommends that the sponsor donates to a public charity. The sponsor is not legally bound to the donor’s request and will usually perform due diligence to verify the grantee’s tax-exempt status and may reject the donor’s request. The great end result, the charity gets its donation.

The donor would be wise to research DAFs before randomly selecting one. Some of the factors to consider:

• Is there a minimum initial contribution?
• Are there minimums for additional contributions?
• What assets will the DAF accept? Cash, stocks, bonds, IRA and 401k funds, cryptocurrencies, life insurance, real property?
• What investment options are available for the account?
• Is there a minimum amount for grants to charities?
• How often can grants be recommended by the donor?
• How much are the annual admin fees, investment fees and maintenance fees? DAFs make money from these fees.
• What is the reporting, performance and governance of the DAF?

Many donors are seeking local impact, so they might be more interested in a community DAF as opposed to a larger sponsoring organization. Some sponsors offer customizable DAFs based on the donor’s impact, geographic and investment preferences.

Donors can make contributions in a variety of ways including induvial giving, supporting charitable special events, creating private foundations or opening a DAF fund, to name a few.

What are the advantages DAF fund donors enjoy:

• DAF funds are relatively simple and cheaper to establish.
• DAF giving works for all levels of wealth.
• Administrative work shifts from the donor to the DAF sponsor.
• Donors may retain investment decisions or allow fund managers to make these decisions.
• Charitable donations can be bundled for tax purposes into one year, while outgoing grants can be spread over time.
• Many sponsoring organizations allow the donor to name a successor of the DAF if the donor should become incapacitated or pass away.
• Multiple donors can contribute to the DAF. Think about bequest and memorial type contributions.
• Allows a donor to reach international charities and other non-governmental organizations while still receiving a federal tax credit.
• Helps a donor create a philanthropic vision, philosophy and legacy.
• Allows for the more beneficial tax treatment of contribution as opposed to donating to a private foundation and finally,
• Protects the privacy of donors, by allowing the individual donors and grants to be kept private.

So, what are some of the disadvantages?

• The contributions to the DAF are irrevocable.
• The donor gives up full control over the funds and relies on the sponsor to approve their recommendations.
• Investment options and contribution amounts might be limited by the sponsor.
• DAF participants cannot receive any personal benefit from a grant request, such as tickets to a charity gala.

The controversy and what to watch for your future giving

The great debate about donor-advised funds is centered around the fact that DAF sponsoring organizations are not getting funds out fast enough to the charities. Not that the DAFs are inefficient, but that there is no required distribution amount or percentage for a DAF like there is for a private foundation.

Introduced in July 2021 a Senate bill, proposes to influence the deductibility of charitable contributions if not disbursed within certain time frames like 15 or 50 years. Under current law, assets can remain in a DAF indefinitely, tax-free. There are great debates on both sides of this discussion, including the impact on sponsoring organizations as well as charitable recipients. In February 2022, the House introduced its version of the legislation on this issue calling the “Accelerating Charitable Efforts Act” the “ACE Act” The House version, which almost mirrors the Senate bill, would place additional restrictions on the deductions for contributions to DAFs, establishes minimum payouts and establishes failure to payout taxes.

No matter, where you fall on this great debate, if you are a DAF donor or a charity recipient of DAF donations, new legislation will impact those contributions.

If you have any questions regarding DAFs, please reach out to an HBK Tax Adviser.

People support charitable organizations for philanthropic reasons. But they are also motivated by the tax deduction afforded by the U.S. Tax Code. To substantiate a donation and take the related deduction, a donor is required by the IRS to acquire and keep “contemporaneous written acknowledgement” from the charitable organization. Depending on the amount and type of donation, the required documentation comes in various forms. Practically speaking, charitable organizations are responsible for knowing what type of information must be provided to their donors, though the onus is on the donor to keep the documentation and meet any other recordkeeping requirements.

Generally, contemporaneous written acknowledgement issued by the charitable organization must include the following, as applicable:

• The amount of cash donated
• A description of any non-cash property donated
• A statement and good faith estimate of the value of any goods or services related to the donation of cash or property (if the donor received more than a de minimis item—that is, an amount too small to merit consideration)
• Acknowledgement if the organization provided intangible religious benefits
• A description of out-of-pocket expenses incurred by the donor and whether the donor received goods or services in exchange for out-of-pocket expenses

The organization must provide the written acknowledgment when it receives a single donation of $250 or more from a donor. It can be provided at the time of the gift, or once for the entire tax year. The organization is not required to acknowledge separate donations of less than $250 each, even if they total more than $250 for a tax year. However, charitable organizations often send an annual statement to donors reporting their total donation for the year, regardless of the amount.

The IRS does not require organizations to follow a prescribed format for the written acknowledgment. It can be paper-based, such as a statement, letter or postcard, or electronic. To qualify as contemporaneous, a written acknowledgment must be received by a donor before the earlier of the date the donor files their original federal tax return for the year the contribution was made, or the due date, including extensions, for filing their tax return for that year.

In addition to documentation obtained from a donee organization, a donor is also required to maintain written records that include the following:

• Name and address of the organization
• Date and location of the contribution
• Description of the property
• Fair market value of the property (or cost, if elected)
• Details regarding contributions of partial interests of property, if applicable
• The terms of any conditions associated with the contribution
• For separate contributions of $500 or more, details of how and when the property was acquired and the property’s cost or basis (Cost basis is not required for donations of publicly traded securities.)
• For separate contributions of $5,000 or more, a qualified appraisal to be obtained and attached to the income tax return

There are also other forms and documentation required for donations of property, such as artwork, securities, vehicles or inventory. Click here to view the chart that summarizes the IRS’s rules for substantiation and documentation.

Donors typically expect to maximize their tax deductions for charitable contributions. Proper documentation is the primary requirement established by the IRS to take the deductions. Organizations can help their donors satisfy this requirement by ensuring they issue the proper acknowledgment.

Organizations or donors with questions about the documentation or substantiation requirements can contact an HBK tax advisor.