NCPG Comments on Donor Advised Funds

NCPG Comments on Donor Advised Funds

News story posted in IRS Notices on 14 June 2007| comments
audience: Partnership for Philanthropic Planning, National Publication | last updated: 18 May 2011


Tanya Howe Johnson, President & CEO of the National Committee on Planned Giving, writing on behalf of the NCPG Task Force on Donor Advised Funds, has submitted comments in response to Notice 2007-21 as requested by the Pension Protection Act of 2006.
Full Text:

National Committee on Planned Giving
233 McCrea Street
Suite 400
Indiana 46225

April 9, 2007


Room 5203
Internal Revenue Service
PO Box 7604
Ben Franklin Station
Washington DC  20044

Comments by the National Committee on Planned Giving (NCPG) on Notice
2007-21 Study on Donor Advised Funds and Supporting Organizations

Submitted on behalf of NCPG by:

Tanya Howe Johnson, President and CEO
233 McCrea Street, Suite 400
Indianapolis, IN 46225
Phone: (317) 269-6274
Fax: (317) 269-6276

Prepared by the NCPG Task Force on Donor Advised Funds:

Jonathan Ackerman, Esquire (Chair)
Ann Barden, Oregon Health & Science University Foundation
Aviva Shiff Boedecker, Marin Community Foundation
Wendell Bryce, Cornell University
Erik Dryburgh, Esquire
Anne McClintock, Harvard University
Dana Ward, The Nature Conservancy
Melanie Schnoll-Begun, Citigroup Smith Barney Philanthropic Services
Eric Swerdlin, ChesterCAP, LLC

On February 6, 2007 and pursuant to Notice 2007-21, the Internal Revenue Service requested public comments on the organization and operation of donor advised funds (as defined in § 4966(d)(2) of the Internal Revenue Code) and of supporting organizations as described in § 509(a)(3) in connection with a study being conducted by the Department of Treasury and the IRS as required by §1226 of the Pension Protection Act of 2006, Pub. L. No. 109-280, 120 Stat. 780 (2006). These comments are submitted by the National Committee on Planned Giving, a national membership association serving more than 10,000 charitable gift and estate planners. NCPG's comments relate solely to donor advised funds and are not technical in nature.

Issue #1: What are the advantages and disadvantages of donor advised funds and supporting organization to the charitable sector, donors, sponsoring organizations, and supported organizations, compared to private foundations and other charitable giving arrangements?

The personal circumstances and financial capacities of donors are as diverse as the charities they support. As today's donors seek to be actively involved in their philanthropy, the availability of diverse charitable giving tools increases the extent and efficiency of charitable giving. Donor advised funds (DAFs) provide donors with a flexible tool for their charitable giving, resulting in benefit to those served by the charitable sector and reducing the burden on government to meet societal needs.

Advantages of DAFs to both donors and charities include:

  • Provides an additional charitable giving vehicle--increasing and diversifying donor support by providing a giving option that makes possible gifts that might not have otherwise been made.
  • The opportunity to collaborate with the donor and the donor's family creates a closer relationship, furthers donor knowledge, and promotes volunteerism. As donors come to better know, and become involved with a charity, they learn more about community needs and often make larger, more effective gifts.
  • Increases the number and diversity of charities supported, by allowing donors to contribute illiquid assets to charities that may not be prepared to accept or administer those funding assets.
  • Provides opportunities for the DAF sponsoring charity to assist the donor in fulfilling his/her charitable goals by providing professional assistance that can help donors create more philanthropic impact from their gifts.
  • Offers simplicity--no tax returns are due, administrative costs and legal requirements are reduced, creation is easy and low cost.
  • Can be funded with a variety of asset types and provides advantageous income tax consequences.

Disadvantages to donors include:

  • Relinquished legal control over all aspects of the contributed assets.
  • Disqualified persons may not be paid from DAF assets, even for reasonable services rendered for reasonable compensation.
  • Possible limitation on perpetuity of the DAF.
  • Some DAFs offer limited investment opportunities.

Disadvantages to charity include:

  • Funds irrevocably designated for the end-user charity might not flow to that charity as quickly as when given outright directly to the end-user charity.
  • Misperception that end-user charities are having charitable dollars taken from them.

Issue #2: How should the amount and availability of a charitable contribution deduction for a transfer of assets to a donor advised fund or a supporting organization, and the tax exempt status or foundation classification of the donee, be determined if:

(Note: In answering each item within this issue, NCPG believes that current law adequately addresses the situation where incidental benefits are provided to a donor in relation to an outright gift, and likewise, the PPA changes should take into account permissible incidental benefits. With regard to incidental benefits in conjunction with the charitable deduction and the tax classification of the sponsoring charity, an outright gift to charity subject to a DAF should not be treated differently than an outright gift to charity not subject to a DAF).

a. the transferred assets are paid to, or used for the benefit of, the donor or persons
related to the donor (including, for example, salaries and other compensation ar-
rangements, loans, or any other personal benefits or rights)?

There is no circumstance where assets of a DAF should be transferred to a disqualified person (as defined under current law). To the extent transferred assets are so used, the sponsoring charity and the disqualified person should be penalized. For instance, the excise taxes imposed under Code Sections 4966, 4967 and 4958 should, in general, be an appropriate mechanism to stop an abuse of these rules. If the sponsoring charity provides such a benefit to disqualified persons on a consistent basis, current law relating to private inurement would jeopardize the tax-exempt status of the charity. Altering the tax deductions from the year of the gift could be administratively difficult to administer.

b. the donor has investment control over the transferred assets?

In a correctly structured and administered DAF, the fiduciary body of the sponsoring charity retains absolute legal control over the investment of the gifted assets. However, there must be a distinction between investment control and investment advice: donors should be permitted to advise the sponsoring charity regarding the investments of their fund, and in such case neither the charitable deduction nor the sponsoring charity should be adversely affected. A donor may be a valuable advisor regarding contributed assets and his/ her advice may assist the sponsoring organization in maximizing the value of a gift for the ultimate benefit of the community.

c. there is an expectation that the donor's "advice" will be followed, or will be the sole or primary consideration, in determining distributions from, or investment of the assets in, the supporting organization or the donor advised fund?

Donors and sponsoring charities should be encouraged to establish and maintain effective, collaborative grant-making processes. A correctly structured and administered DAF provides an opportunity for individuals to advise on charitable distributions, while maintaining a rigorous, independent due diligence process on the eligibility and appropriateness of all grant recipients. If the sponsoring charity relies solely on the advice of the donor advisor, the qualification of the sponsoring charity should be put in jeopardy. If however, the sponsoring charity takes into account the donor's advice as a primary consideration, the sponsoring charity's qualification should not be placed in jeopardy because the legal control of the investment and distribution is ultimately in the hands of the sponsoring charity. Additionally, the sponsoring charity must exercise its fiduciary duty in assuring that the funds are used exclusively for charitable purposes.

d. the donor or the donee has option rights (e.g., puts, calls, or rights of first refusal) with respect to the transferred assets?

In keeping with existing law, if the donor retains certain rights of control the gift may not be complete and the deduction may be denied or otherwise affected. In this regard, the important distinction should be that the charity retains legal control. A donor may be a valuable advisor regarding contributed assets and his/her advice may assist the sponsoring organization in maximizing the value of a gift for the ultimate benefit of the community.

e. the transferred assets are appreciated real, personal, or intangible property that is not readily convertible to cash?

Assets that are not immediately convertible to cash may constitute some of the most significant gifts received by a charitable organization. But, many smaller nonprofit organizations are not equipped to accept and liquidate such assets. Through DAFs, with the assistance of experienced staff or counsel, these assets can be processed efficiently, taking into account liquidity limitations, so as to maximize their ultimate value. The character of the asset to be accepted as a charitable contribution should be left to the prudence of the sponsoring organization, which will bear the ultimate burden of the asset. Other than the rules under existing law (which already require a potentially smaller charitable income tax deduction for these types of assets), there should be (i) no further restriction on the ability of a sponsoring charity to accept these types of assets, and (ii) no adverse affect on the sponsoring charity or on the donor's tax deductions.

Issue #3: What are the effects or the expected effects of the PPA provisions (including the § 4958 excess benefit transaction tax amendments applicable to donor advised funds and supporting organizations) on the practices and behavior of donors, donor
advised funds, sponsoring organizations, supporting organizations and supported organizations?

As is customary with new legislation that has a very broad impact on any sector, the PPA has caused sponsoring organizations that offer DAFs to expend significant resources to understand the requirements of the PPA and to review, and document the reviews, of all funds in order to insure compliance. Effort and expense to insure compliance has always been made by organizations that carefully manage their DAFs. Unfortunately, abusive practices exist in every industry. However, great care should be exercised when limitations are imposed on charity or fundraising, as the charitable sector and American traditions of philanthropy are fundamental bedrock of our society.

It is NCPG's overall view that the new rules imposed by the PPA should not, in general, adversely affect donors or DAF sponsoring organizations. However, it is too soon to know the ripple effect of these changes, as the charitable and regulatory communities are still working to understand the operation and implications of the new law.

Issue #4: What would be appropriate payout requirements, and why, for:

a. donor advised funds?

NCPG recommends that there be no payout requirement for a DAF for a variety of reasons. A donor's philanthropic goals may require a "build-up" of value in order to accomplish a specific charitable vision. In some cases, certain types of assets (such as real estate) may require more time to sell, and requiring a forced sale may prove to reduce the benefit to charity. The opportunity for fund growth and the ability to gift complex assets encourage and attract both new and returning donors, benefiting not only the DAF sponsoring charity, but the charitable sector as a whole. Lastly, in NCPG's experience, most DAF sponsoring charities routinely pay out in excess of five percent (5%) of a fund's aggregate
value each year.

If it is determined that a payout requirement must be imposed, such requirement should be no more than five percent (5 %) of the aggregate asset balance of all of the sponsoring charity's DAF funds per rolling twelve (12) quarter periods. Using a rolling period and an aggregate fund payout flattens the effect of market changes and provides the opportunity for growth in individual funds. Individual fund growth may prove to be a key component of the philanthropic strategies for many donors.

b. funds that are excepted from donor advised fund treatment by statute or by the
authority of the Secretary, but for which the donor retains meaningful rights with
respect to the investment or use of the transferred amounts?

Endowments and quasi endowments are important permanent or semi-permanent funding sources for charitable organizations. Agreements between donors and charities (and/or state law) dictate the handling of endowment accounts. Imposing a payout requirement on such accounts would unnecessarily reduce the size and scope of this significant charitable giving option. A payout requirement could lead to an untimely liquidation that would unnecessarily penalize the charity and those who benefit from its services. Such a requirement could undermine a long held tradition in American philanthropy that an endowment account maintain the value of its principal, while paying out a reasonable amount of income, sustaining the account in perpetuity. Donors and charities should be free to structure endowed accounts within the bounds of the existing law.

Issue #5: What are the advantages and disadvantages of perpetual existence of donor
advised funds or supporting organizations?

It is important to distinguish between the perpetual existence of a charitable fund (whether it is labeled 'donor advised' 'core fund,' 'field of interest,' or something else) and the continued involvement of the donor or donor's family in such a fund.

Advantages of allowing donor advised funds to be endowed and/or perpetual:

  • Endowed donor advised funds, and those that continue to exist in perpetuity, provide continuing resources for community needs.
  • The predictability of a charitable income stream builds a stable base of support for the work of charities in a community.
  • Permanent donor advised funds allow donors to transmit philanthropic values to successive generations, and for sponsoring charities to engage younger generations with whom they may not otherwise have involvement.
  • Donors and the community benefit from the continuing activities of the sponsoring charity and the oversight and guidance of qualified staff and an independent board.
  • Some donors give more when allowed to incorporate into their giving their conviction that endowments serve important charitable purposes.

  • Some DAF sponsoring charities may limit the length of time that the donor advisors may recommend grants to one or two generations.  This undermines the opportunity for families to use a DAF for teaching and instilling philanthropic values and promoting philanthropy in children and grandchildren.
  • In a poorly managed program a fund might continue for too long without making any  grants.
  • In a poorly managed program, perpetual funds that did not make any grants would not benefit charitable mission.

Issue #6: What other types of charitable giving arrangements give rise to any of the
above issues?

In these recommendations NCPG has focused solely on issues concerning donor advised funds.

Thank you for the invitation for public input. We hope that you will favorably consider our comments. Please feel free to contact NCPG for any further information.

Submitted by:

Tanya Howe Johnson
President and CEO
National Committee on Planned Giving

The National Committee on Planned Givingr is the professional association for individuals whose work includes developing, marketing, and administering charitable planned gifts. The profession encompasses fundraisers for nonprofit institutions, and consultants and donor advisors working in a variety of for-profit settings.  The mission of NCPG is to increase the quality and quantity of charitable planned gifts by serving as the voice and professional resource for the gift planning community.

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