Donor Advised Funds: An Overview
What’s wrong with Donor Advised Funds?
Absolutely, nothing.
Drew Lindsay of the Chronicle of Philanthropy (the leading publication on all things related to current events of philanthropy) published in an Article January 17, 2019, that assets under the management of donor advised funds have grown to over 110 billion dollars in 2017. In the National Philanthropic Trusts 2018 Donor Advised Fund Report, close to 20 billion was given by donor advised funds to qualified charities, which is roughly 20% whereas private foundations gave $45 billion dollars to qualified charities with all assets from private foundations totaling roughly $855 billion dollars which is 5% (the mandatory distribution requirement under Section 4942 of the Internal Revenue Code).
That being said, depending on the scenario donor advised funds may or may not be the right charitable structure, it depends on the a variety of factors including the “inputs” and the “outputs”.
Can a private foundation legally make a gift to donor advised fund?
100%, obviously, the charitable gift must comply with all applicable rules and regulations. A donor advised fund is in fact a recognized 501(c)(3) public charity thus, it can receive (and a private foundation can grant) funds to the donor advised fund. The further question would be whether the gift would be eligible as a “qualified distribution” for the private foundation five (5%) mandatory distribution rule. The answer is it would as long as once the gift is made the foundation has “lost” control of the funds.
I am a significant contributor to a 501(c)(3) public charity such that aggregate of our contributions may jeopardize the 501(c)(3) status of the recipient public charity, is there any way to avoid this?
Yes, this concept is known as “tipping”, where the funding for a public charity (which is supposed to receive no more than 1/3 of its from general public receives so much funding from an individual (or corporation) that it might violate this rule. To avoid this, the donor may utilize a donor advised fund subject to all of the applicable rules. The donor would make an irrevocable gift to the donor advised fund without conditions and restrictions.