Donor Advised Funds: A Response from Community Foundations

Donor Advised Funds: A Response from Community Foundations

Article posted in Donor Advised Fund on 29 November 2001| comments
audience: National Publication | last updated: 16 September 2012


In the last edition of Gift Planner's Digest, the PGDC posted an article by Philip Tobin entitled, Donor Advised Funds: A Value-Added Tool for Financial Advisors. Originally published in the November 2001 issue of CCH's Journal of Practical Estate Planning, the piece was reproduced on the PGDC as it appeared in the magazine. Since that time, we received several comments from our readers alleging the article contained errors of fact and that it unfairly characterized how donor advised funds are operated by the community foundations. In this supplement to Mr. Tobin's article, we have reproduced the sections with which our readers took issue, their candid comments, and the response of the author.

by Marc D. Hoffman

In the last edition of Gift Planner's Digest, the PGDC posted an article by Philip Tobin entitled, Donor Advised Funds: A Value-Added Tool for Financial Advisors. Originally published in the November 2001 issue of CCH's Journal of Practical Estate Planning, the piece was reproduced on the PGDC as it appeared in the magazine. Since that time, we have received several comments from our readers alleging the article contains errors of fact and that it unfairly characterizes how donor advised funds are operated at the community foundation level.

Opinions of independently contributed articles are those of the authors. Although Mr. Tobin may have been correct with respect to the operating policies of some donor advised funds, it is clear by the responses we received that such characterizations do not represent DAFs sponsored by most community foundations and, in the opinion of some readers, crossed the line from opinion to misstatement. In addition, Mr. Tobin gave the incorrect impression that certain rules that apply to all donor advised funds apply to community foundations alone.

Below, we have reproduced the portions of the article with which readers took issue along with their comments. Excerpts from the article are italicized. Also, in fairness to Mr. Tobin, who has been most gracious and concerned regarding any misstatements he may have made, we forwarded the comments to him for his review and comment. In response, Mr. Tobin decided to revise his original article to incorporate many of the suggestions made here. The revisions have been completed with the revised article appearing in place of the original.

In hindsight, it is clear the PGDC editors should have given representatives of community foundations the opportunity to review the article prior to its republication here. For that we apologize and will be adding one or more community foundation representatives to the PGDC Editorial Board. Also, in early 2002, we will launch a new version of the PGDC that will enable readers to post comments to articles and other areas of content via discussion threads thus creating interactive dialogue. When that happens, responses such as these and other constructive exchanges of ideas can be posted by readers directly to the site.

For additional background on the rules that govern donor advised funds and recent commentary on proposals to regulate them, we encourage you to read the following articles previously published on the PGDC:

Charitable Giving with Donor Advised Funds: Part I and Part II
by Emanuel J. Kallina, II. Esq., Jonathan D. Ackerman, Esq. and Kathy Hanson, Esq.

Article: A DAF is a family foundation set-up under the tax umbrella of a public charity, which acts as host to many DAFs.

Comment: "This is a poor metaphor for a donor advised fund. In fact, not every donor advisor wishes the degree of control over grantmaking or investment strategy that is implied in a family foundation."1

Article: The donor makes an irrevocable gift to the host charity. Because the host charity is recognized by the IRS as a 501(c)(3) tax-exempt organization, the donor gets a fair market value tax deduction in the year of the gift. Assets are deposited into an investment account where they can grow tax-free. The donor retains the right to advise the host charity in administering the affairs of the DAF including naming the foundation, managing investments, recommending grants and selecting a replacement advisor at the death of the donor. Under no circumstances can DAF funds benefit the donor or any other private interest. The donor's role is that of an advisor (hence the name donor advised fund). The donor cannot direct that specific action be taken. The concept of advice is key to a DAF's superior tax treatment by the IRS.

Comment: "The rest of this is fairly clear, but the details that are broken out later, particularly in the lists of features and examples do not bear out what is stated here."2

Article: DAFs are not new. They have been part of the landscape of American philanthropy for many years. DAFs are available from the following sources:

Community Foundations. A community foundation is a public charitable foundation that receives contributions from a broad base of sources, mostly individuals, and manages them as a family of funds under community oversight for the benefit of a defined geographic community. Although most foundations are updating their DAF programs in response to competition from commercial and independent programs, many community foundations emphasize traditional endowment vehicles in which the foundation's trustees, not donors, are responsible for grant-making decisions."

Comment: "The paragraph under "Community Foundations" is the most egregious. In a section about donor advised funds and community foundations, the author writes that a community foundation "receives contributions . . . and manages them . . . for the benefit of a defined geographic community." Although community foundations obviously exist to support a specific geographic community, grants from donor advised funds at community foundations may be made anywhere in the United States (and often overseas as well). Therefore, the first sentence is misleading, as it appears under the heading of donor advised funds. This represents a huge misconception, which community foundations are constantly trying to clarify.

The sentence stating "many community foundations emphasize traditional endowment vehicles in which the foundation's trustees, not donors, are responsible for grant-making decisions" simply makes no sense in an article attempting to describe donor advised funds at community foundations. First, by law ALL donor advised funds afford donors an opportunity to serve in an "advisory" capacity; in all cases, the organization offering the donor advised fund must, by law, retain the final decision with respect to a grant in order for this to be a completed gift. This final decision-making role is in no way unique to community foundations. Second, donor advised funds at community foundations are not necessarily "endowment vehicles." Upon establishing the fund, the donor may elect to make grants from income only or from both income and principal. Therefore, the sentence would appear to more accurately describe discretionary grantmaking at community foundations, which comes from the income from the unrestricted portion of a community foundation's endowment. None of this has anything to do with donor advised funds -- except to the extent that a donor can elect to make a grant from her donor advised fund to the foundation's discretionary pool of funds. This gives the donor another option in grantmaking, which is an advantage." 3

Comment: "Mr. Tobin stated in his article that some Community Foundations "the trustees, not donors are responsible for grant-making decisions" -- that is not true at Grand Rapids Community Foundation, I'm not aware of any community foundation where that is true. All donor advised fund grant recommendations must be approved by the charity and the charity must be able to accept or reject them -- regardless if the fund is held at a community foundation, a commercial charitable gift fund or an independent charitable gift fund. That is not a community foundation rule; that is an IRS rule. If that were not the rule the DAF would be no different than a private foundation." 4

Comment: "The last sentence in the above explanation is patently false. The endowment aspect has nothing to do with the grantmaking decision process -- they are separate. Whether a fund is a "pass-through" or designed to maintain an endowment, the grantmaking is still subject to an approval process, no matter how routine it may seem." 5

Comment: Since community foundations originated donor advised funds more than 30 years ago, it's misleading to say that they are "updating" them. Few community foundations--if any--have emphasized so-called traditional endowments over donor-advised funds for years. Check the web site of virtually any community foundation and you will find donor-advised funds featured prominently. Most important, trustees and boards of ANY donor-advised fund sponsor are legally responsible for their grant-making decisions--including those they approve from donor advised funds. 6

Article: Independent Charitable Gift Funds. Public charitable organizations like American Endowment Foundation (AEF) of Hudson, Ohio, and Christian Community Foundation (CCF) of Woodland Park, Colorado, sponsor donor advised fund programs. These foundations are "independent" in that they are not affiliated with financial institutions. They do not manage money nor do they provide financial planning services. They rely on the advice of the donor in outsourcing investment management of DAF assets through the donor's financial advisor.

Comment: "It is difficult to understand how a charity can rely on a donor to do investment management. While many sponsoring charities offer donors the opportunity to recommend the use of one or more investment pools or an allocation of assets among approved investment vehicles chosen by the charity, allowing a donor to outsource investment management goes too far. The charity owns the DAF assets and therefore has a fiduciary responsibility to the public at large to prudently manage the fund assets pursuant to its policies. Relying on donor advice without regard to established standards and guidelines seems to violate that duty." 7

Article: Independent programs do not manage investments, nor do they provide financial planning services. Instead, they rely on the advice of the donor and the donor's financial advisor to outsource the investment management of DAF assets. Independent programs do not normally pool donor contributions. Instead, they allow the donor to recommend investment decisions for familiar products and services in separate portfolios much like those of a self-directed IRA account. The donor's financial advisor continues to play a vital and ongoing role in the management of DAF investments and earns income from doing so. Here is an example of this process:

Charles Howland moved his DAF from a commercial program to an independent program. He was not happy having his DAF invested in the growth pool offered by the commercial program. He wanted to structure a portfolio consisting primarily of value-oriented equities and convertibles in an investment strategy much like that of his personal investment account. His financial advisor now manages both portfolios.

Comment: "Managing investments is not as flexible as the author implies. Just because a DAF allows donors to have their professional advisors manage the investments of the DAF, the legal basis for allowing that degree of control is questionable. While a DAF sponsoring charity may allow donors to recommend the use of different approved investment pools, allowing donors to choose the money manager and, presumably investment policy, goes beyond mere advice. It would appear that without guidance and guidelines from the sponsoring charity, the donor is effectively in control, contrary to the limitations on such donor control. There is virtually nothing to distinguish this type of arrangement from a donor-directed private foundation." 8

Article: Some DAF programs are more flexible than others in allowing the donor to stay involved. Here is an example of creative donor involvement:

Grants. Bob Toland wanted to support his church but his local community foundation would not allow grants for religious purposes. The church needed a way to underwrite expenses on the old sanctuary while a new sanctuary was being built. At Bob's recommendation, the host charity structured a "program related investment" or recoverable grant. Under this arrangement, Bob's DAF would make a loan to the church instead of an outright grant. The loan would be repaid when the old church building is sold and the funds no longer needed. Because of the church's charity status, the host charity fashioned a favorable interest rate arrangement including the deferral of interest payment until the note is paid off. When the old building is eventually sold, the sales proceeds will be used to liquidate the loan and repay outstanding interest. Bob will then have the funds in his DAF to make grants to other needy charities.

Comment: "This example suggests that community foundations forbid grants to religious institutions, which is FALSE. Grants from donor advised funds are made to churches and other religious institutions ALL THE TIME for general purposes, capital building campaigns (as described in this paragraph) or for no specific purpose at all. Once again, this author appears to have confused grants made from donor advised funds and those made from discretionary grantmaking pools, which may limit discretionary grants to religious institutions for social programs sponsored by those institutions."9

Comment: "Such a prohibition is in fact NOT typical of a community foundation. Although a community foundation might not give unrestricted monies to a religious institution, most give a significant percentage of grants to religious institutions through donor advised funds." 10

The following comments were attributed to the article in whole:

Comment: "In general, Mr. Tobin appears to imply that the benefits of promoting family involvement and passing on the value of philanthropy are exclusive to DAF's and not available with supporting organizations or private foundations. The reality is that all three types of philanthropic vehicles can be used effectively to promote the values of philanthropy within a family. Indeed, many public charities now offer substantial services to donors, regardless of the fund vehicle chosen, as a means of helping families organize their philanthropy and partner with others to make an impact in the community." 11

Comment: "Mr. Tobin, like some other recent contributors, has found a way to market his own product through the PGDC website by carefully crafting the wording of his article.

Community foundations emphasize the support donors can provide through a DAF for worthy causes in their local communities, and they offer donors wise counsel on how their philanthropy can be best directed to meet local needs. Commercial DAFs, and national DAFs like Mr. Tobin's, stress tax advantages, investment alternatives and professional advisor compensation rather than assistance with the philanthropic process. This approach works best for donors who already know which charities they want to support and are just searching for an administrator.

I would suggest that your editorial board reject contributors whose goal is primarily to promote their own product. Keep the contributions to the PGDC focused on objective content." 12

PGDC Editor: Objectivity is relative to one's perspective. The PGDC endeavors to present a forum for many views. We all have something to promote; be it the mission of our not-for-profit organization and the services we offer donors, or the products or services we represent as professional advisors. With donor advised funds being promoted by community foundations, financial services companies, and independent foundations, donors and their advisors are presented with a wide variety of options. Our job here is to present them all accurately and fairly so advisors can assist their clients in finding the vehicle that best accomplishes their philanthropic objectives.

The following comments came from Susan Barry of the Rhode Island Foundation. Ms. Barry has perhaps best captured the essence of donor advised funds from the community foundation perspective:

Susan Barry:

Dear editor:

Establishing a donor advised fund at a community foundation has become popular for charitably inclined individuals and families that wish to be actively involved with the daily management of grant money but not burdened with daily management of a fund . It allows donors to establish a named fund, enjoy ongoing involvement with their charitable gift, benefit from the tax advantages afforded to public charities by the IRS and ensure that their gifts create a permanent charitable legacy.

Community foundations have been around since 1914 when the Cleveland Foundation got its start. True, most community foundations were established in order to meet the needs of particular geographic areas (cities, states, counties) but the fact is that today the more than 600 community foundations in the United States reach far beyond their "geographic boundaries" when partnering with individuals and families who have established donor advised funds. And donor advised funds are not new either -- community foundations have been offering them for decades. Our experience as historic "centers for philanthropy" enables us to assist our donors with making grants to the charitable causes and communities they care about around the country and, in fact, around the world.

When I meet a potential donor who has a desire to make a difference and who wants some help building relationships with the places and people he holds dear, I know that our community foundation can find a way for him to "give back." When I meet a potential donor who wants some help sorting through interests and community, I know that our community foundation can find a way for him to "find his passion."

It is a simple message; donor advised funds through a community foundation are:

  • Flexible
  • Simple to establish
  • A way to provide a charitable legacy for the donor and/or his family
  • Professionally managed, and
  • Include an array of grantmaking support services

The community foundation offers donors expert personal attention to help them reach their philanthropic goals. When donors wish to take an active role in grantmaking and in selecting grantees each year, technically, this is considered "advice," but as a practical matter, a community foundation will follow their advice so long as their recommendation is made for a legitimate charitable purpose.

In closing let me share a story with you. We just mailed our last newsletter of 2001 to our donor-advisors. In it we introduced six organizations that don't often get lots of attention (or grants) from our donors. But we had a hunch that if we could just "tell the story" our donors would respond. And they did! I was pleased to hear from one of our donor advisors today that he plans to recommend a $12,000 grant for one of those charities in 2002. He said it was a "perfect fit" with the goals he has articulated for the fund. We think so too!

Community foundations give you the chance to find the magic, joy and the community in giving, without the hassle of paperwork and the time and expense of all the research and monitoring. We take care of that for our donors so that they can spend their time making dreams come true.

Donor advised funds at a community foundation §a partnership that works?forever.

Susan A. Barry
Manager for Development Services
The Rhode Island Foundation

Closing Thoughts from Philip Tobin: "I appreciate receiving comments from community foundations regarding my article on Donor Advised Funds. Many of their comments have merit. Accordingly, I have revised sections of the article in an effort to address their concerns and encourage you to re-read it. I believe we have a better product as a result of their input and the effective role the PGDC has played in bringing these issues to light.

I encourage community foundations to continue to emphasize the value of the philanthropic support services they offer donors. This is one of community foundations' most valuable, value-added services --- one that distinguishes them from DAF programs offered by financial services affiliated and independent sponsors. No one understands the charitable needs and opportunities of the community better than the local community foundation. It would be economically difficult, if not prohibitive, for other DAF sponsors to duplicate the programmatic resources that already exist at community foundations. In fact, when we come upon a donor who interested in that special service, we refer them to their local community foundation.

In spite of the stir I created, I am an outspoken advocate of community foundations. In fact, I am the founding trustee of the country's newest--The Hudson Community Foundation, located in Hudson, Ohio."

Click here to return to the revised version of Phil Tobin's article, Donor Advised Funds, A Value-Added Tool for Financial Advisors.


  1. Jim King, Development Officer, The Community Foundation of Greater Birminghamback

  2. Id.back

  3. Nadia A. Yassa, Esq., Director of Gift Planning, The Boston Foundationback

  4. Molly Parker, Vice President of Development, Grand Rapids Community Foundationback

  5. Jim King, Development Officer, The Community Foundation of Greater Birminghamback

  6. Frank Miller, Communication Director, Greater Milwaukee Foundationback

  7. Michael I. Friedman, J.D., Vice President, Planned Giving and Endowment, The Associated: Jewish Community Federation of Baltimoreback

  8. Id.back

  9. Nadia A. Yassa, Esq., Director of Gift Planning, The Boston Foundationback

  10. Jim King, Development Officer, The Community Foundation of Greater Birminghamback

  11. Michael I. Friedman, J.D., Vice President, Planned Giving and Endowment, The Associated: Jewish Community Federation of Baltimoreback

  12. Thomas W. Smith, CFP, Senior Philanthropic Adviser, The Vermont Community Foundationback

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