Note: The following discussion is provided for informational purposes only and is not intended to serve as legal or tax advice. For specific information about provisions of the Pension Protection Act of 2006 that affect donor-advised funds, consult your attorney or tax advisor.
The December 2006 Question of the Month asked, "Are you aware of the provisions affecting donor-advised funds contained in the Pension Protection Act of 2006?" A little over half—52 percent—of participants said they were. The remaining 48 percent replied that they were not. Here, then, is a brief summary.
What Is a Donor-Advised Fund?Thousands of donor-advised funds have been created since the early 1990s. Fidelity and Vanguard run the largest, and almost all community foundations have some aspects of one. In general, a donor-advised fund is a charitable fund maintained by a third party, which collects charitable contributions then distributes them as directed by the donors. Most donor-advised funds charge an administrative fee for managing these accounts.
How Donor-Advised Funds Have Worked in the PastA donor (an individual, a family, or other entity; for the sake of simplicity, we will use the singular form here) made a charitable contribution to the fund, which created an account for the donor. The donor could then direct the fund to distribute part or all of the money in his or her account to charity or leave the money in the fund until a later date. If the money was left in the account, the fund's administrators invested it; income from the investments accrued to the account for distribution at a later date.
Frequently, the entire amount of the donor's contribution was tax deductible as soon as it was given to the fund; income generated by the fund, however, was not deductible. Further, the donor's gift to the fund was irrevocable; a donor could not reclaim money from a donor-advised fund, nor could he or she withdraw any interest generated by that money. Money in a donor-advised fund either remained in the fund or was distributed to an organization the IRS deemed eligible to accept tax-deductible contributions.
Donor-advised funds proved attractive to people who had substantial sums to give to charity—until recently, many of the larger funds required a minimum gift of $10,000 to create an account—but who did not want to or were unable to create a private foundation. Many of these donors also liked seeing their charitable dollars grow as a result of the funds' investments.
Official ConcernsAs the number of donor-advised funds and the amount of money placed in them grew, lawmakers and government charity regulators became concerned about several issues. First, there was no legal definition of donor-advised fund. Second, there were only minimal restrictions on the types of organizations that could receive grants from the funds. Third, there was no required payout from a donor-advised fund. Fourth, a donor who placed money in a donor-advised fund often could declare that amount as a charitable tax deduction immediately, even if the contribution had not been distributed from the fund to a charity. The Pension Protection Act addresses these concerns.
A New Legal DefinitionSigned into law August 17, 2006, the Pension Protection Act of 2006 stipulates that a donor-advised fund is a "fund or account"
- "which is separately identified by reference to the contributions of a donor or donors,"
- "which is owned and controlled by a sponsoring organization," and
- "with respect to which a donor (or any person appointed or designated by such donor) has, or reasonably expects to have, advisory privileges with respect to the distribution of or investments of amounts held in such fund or account by reason of the donor's status as a donor."
Grants from Donor-Advised FundsThe law also restricts distributions or grants from a donor-advised fund. Grants to individuals are prohibited, as are grants to any entity if the payment is not for a charitable purpose. The following types of grants require the fund to exercise expenditure responsibility, i.e., to ensure that the recipient qualifies under the law to receive the grant:
- Grants to private non-operating foundations (grants to private foundations related to the donor are prohibited).
- Grants to Type III supporting organizations.*
- Grants to Type I and Type II supporting organizations, if the donor or advisor controls the organization.*
- Grants not made to IRS-recognized 501(c)(3) organizations.
No mandated minimum payouts from donor-advised funds are required at this time.
Donors' Control over Contributions to a Donor-Advised FundThe act specifies that donors have advisory privileges—not rights—over payouts from a donor-advised fund. A donor's contribution may still be deductible as soon it given to the fund, and a donor cannot reclaim money he or she has placed in a donor-advised fund. Nor can a donor have access to income generated by the fund.
Other ChangesThe Pension Protection Act of 2006 imposes a number of new prohibitions regarding self-dealing and excess benefits. It also requires each donor-advised fund to report on its Form 990 the total number of funds, total assets held by the funds, and total contributions to and distributions from the funds.
Finally, the law instructs the Treasury Department to report back to Congress on the following questions by August 17, 2007:
- Should donor-advised funds be subject to a payout requirement?
- Is the current contribution deduction appropriate?
- Can donations really be treated as completed gifts if the donor retains advisory rights over it?
- Are there other forms of charities for which the above are also issues?
- The IRS has issued "Interim Guidance Regarding Supporting Organizations and Donor Advised Funds."
- The IRS Web site links to the text of the Pension Protection Act and to summaries of the legislation prepared by the Joint Committee on Taxation and the House Committee on Ways and Means. Scroll to the bottom of this page to find the links.
- The Council on Foundations has posted resources on the Pension Protection Act of 2006, including information on donor-advised funds.
- A number of firms that provide services to nonprofits have posted summaries of the provisions affecting charitable organizations. Try entering "pension protection act 2006 nonprofit" into an Internet search engine to find them.
- For information about organizations that provide free or discounted legal or accounting services to nonprofits, see "Nonprofits That Help Nonprofits" and "Pro Bono and More: On-line Legal Resources for Nonprofits."
The preceding is a guest post by Charles E. McLean, GuideStar's vice president for research and data quality.
The preceding is a guest post by Dan Moore, GuideStar's vice president for public affairs.
The preceding is a guest post by Suz. E. Coffman, GuideStar's director of communications and editor of the Newsletter.