CPA, MST, Partner & Exempt Organizations Tax Services Leader
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Donor-advised funds: Benefits for high-net-worth individuals, and possible updates
Among the various ways in which high-net-worth individuals can make an impact with available funds, donor-advised funds have long been an intriguing option. There are a number of benefits to this approach to charitable giving. However, those benefits are now subject to question, as the Internal Revenue Service has added regulating donor-advised funds to its priority plans. While changes may be on the horizon, this approach may still be worthwhile for donors aiming to make an impact. Read on for a brief exploration of what a donor-advised fund is, the potential advantages, and what changes may be ahead.
A donor-advised fund, or DAF, is a separately identified fund or account maintained and operated by a 501(c)(3) organization, commonly referred to as a “sponsoring organization.” When donating to a DAF, the donor (or their representative) retains advisory privileges with respect to distribution of those funds, i.e., what charity/charities to donate those funds to. The donor would receive a charitable contribution deduction at the time the donation is made (subject to limitations), and the DAF would be a publicly supported organization. The donor would also maintain anonymity, as the DAF would be considered the donor to those earmarked charities.
- In addition to anonymity, benefits of a DAF have included the following.
- No minimum distribution requirement, as would be required for a private foundation
- Convenient account set-up, usually with minimal fees
- Reduced administrative burden
- Public charity tax-exempt status (through the sponsoring organization)
- No annual tax filing requirement
A DAF would, however, take away the donor’s control, beyond the advisory privileges.
Pending regulations could have a significant impact on DAFs, calling into question the usual benefits of using DAFs as a charitable vehicle moving forward.
On Nov. 4, 2022, the Department of the Treasury released the IRS 2022-2023 Priority Guidance Plan (PGP). While the release included several items noted in previous PGPs, the below items relating to DAFs are new additions. This does not necessarily indicate when these items may be addressed – the list contains over 200 items – but it does make clear that these items will have an impact on DAFs moving forward. As such, each item may impact the cost/benefit analysis when considering how to support a charitable cause.
Relevant items include, as listed in the PGP:
- Regulations under Section 4966 regarding donor-advised funds, including excise taxes on sponsoring organizations and fund management.
- Regulations under Section 4967 regarding prohibited benefits, including excise taxes on donors, donor advisors, related persons, and fund management.
- Regulations under Section 4958 regarding donor-advised funds and supporting organizations.
- Guidance regarding the public-support computation with respect to distributions from donor-advised funds.
While the addition of DAFs to the IRS priority guidance plan means changes are potentially coming, with over 200 items on the list and limited IRS resources, these changes may take some time to become effective. The current rules still provide benefits for donors, and there is no clarity regarding when the changes will come or what the final impact to existing benefits may be when the regulations become effective. For now, DAFs remain a beneficial approach to giving and driving impact; however, donors and their advisors should keep an eye out for what the IRS has in store.
Zach Segal, CPA, Senior Manager, Exempt Organizations Tax Services
516.417.5356
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