21 April 2015

Donor-Advised Funds

The Manhattan Institute defines donor-advised funds (DAFs) as individual charitable-giving accounts housed within “sponsoring organizations”—notably, national DAF sponsoring organizations, community foundations, and single-issue charities. DAFs allow donors to deposit cash and other assets and avail themselves of a federal tax deduction, for the same tax year, for the full value of their donation. With the exception of overhead—around 1% annually for NDAF-based DAFs—donations, once deposited, may be used only for charitable purposes. Account holders can then, at their discretion, recommend grants from such funds over the remainder of their lifetimes: hence the name “donor-advised.” DAFs can also be inherited.

According to the National Philanthropic Trust, 2012 saw a large increase in the number of DAFs to more than 201,000 accounts nationwide. Contributions to these DAFs also reached an all-time high in 2012, totaling over $13 billion and bringing the average account size to over $224,000. Because DAFs are controlled and administered by sponsoring public charities, their management costs are much less expensive than those needed to establish private foundations, which also have stringent reporting and operating requirements. Additionally, because funds from DAFs can quickly be disbursed, they are ideal for funding emergency situations and disaster relief.

In 2014, then-House Ways and Means Chairman Dave Camp (R-MI) released his tax reform discussion draft. Among the provisions in the draft was a requirement that all contributions to a DAF to be distributed to public charities within five years of receipt. If this requirement is not met, organizations that oversee these funds would face an excise tax equaling 20% of the contributions not distributed from the specific account within the five-year window.

Payout rates from DAFs from 2007 through 2012 annually exceeded 16%, according to the National Philanthropic Trust. When contrasted with the payout rate of a private foundation—which usually hovers around the statutory minimum of 5%—the requirement in the Camp draft appears misguided and unnecessary.

You can access additional information in ACR’s May 2014 webinar that examined DAFs and the possible ramifications of the proposed requirement in the Camp draft.

To see previous updates about DAFs, click here.