Transparency Talk

Category: "Donor-Advised Funds" (4 posts)

IRS Warns Donor-Advised Funds May Face New Restrictions
February 28, 2018

Lauren Haverlock, CPA, has practiced public accounting since 2004. As a senior manager at Moss Adams LLP, she provides compliance and consulting services to all types of exempt organizations, including public charities and private foundations.

Lauren Haverlock - 150

In recent years, donor-advised funds (DAFs) have gained popularity as a philanthropic tool. The National Philanthropic Trust reports that in 2016, charitable assets under management in DAFs exceeded $85 billion—representing a record amount.

DAFs offer donors a flexible giving option when they want a charitable deduction with administrative simplicity, a long-term distribution of funds, and less transparency than is common with private foundation grants.

But the IRS has indicated that organizations and individuals may be taking advantage of DAFs. Because of this, the IRS has provided a notice warning of tightening its restrictions on the funds.

Background

A DAF is a separately-identified and managed account that’s operated by a section 501(c)(3) public charity—a sponsoring organization—on the original donor’s behalf.

Once a donor contributes to a DAF, the sponsoring organization has legal control over the use and reporting of the funds. The organization then invests the funds until the donor advises they be distributed. Donors often need to follow specific guidelines when advising about fund distribution, but a sponsoring organization has ultimate control.

DAFs and Private Foundations

Private foundations also use DAFs in a variety of ways. Many uses clearly relate to charitable planning, but some are less transparent—including the following:

  • Using a DAF that exists within a community foundation to support the foundation’s initiatives
  • Granting DAFs to another community foundation that offers grant support services for which the foundation doesn’t have its own internal structure
  • Using DAFs to obscure charitable giving. Since the Form 990-PF is public, a grant to a DAF would show up as such on the 990-PF while obscuring the DAF’s recipient
  • Giving funds to a nonqualified recipient. A foundation can bypass giving restrictions—and the additional steps necessary for validating using their grants—by providing a donor-advised fund instead
  • Employing DAFs to help meet minimum distribution requirements—or avoid complex set-aside rules—when it might otherwise fall short

Next Steps from the IRS

In Notice 2017-73, issued in December 2017, the IRS and Treasury Department are considering regulations addressing perceived abuses of DAFs, including some of the above issues. The notice limits the following areas:

Prohibiting Donor Sponsorship or Membership Benefits. The notice prohibits distribution from DAFs that subsidize the donor’s participation in a charity-sponsored event or membership in a charity. This is because the benefit is more than incidental. DAF donors or advisors can only receive an incidental benefit from DAF distributions.

If the prohibited distribution occurs, the donor would be taxed 125%. The fund manager who permitted the transaction would be taxed 10%.

Giving Relief when Distributions Apply to DAF Donors’ Pledges. A charity may use DAF distribution funds to relieve a pledge obligation from the DAF’s donor because the DAF doesn’t provide the donor with a benefit that’s more than incidental.

The guidance provides an example of a benefit that’s incidental and permissible. This rule stems from the difficulty of assessing if the outstanding pledge existed before the donor granted the DAF. To be permissible, a benefit must meet the following criteria:

  • The recipient didn’t reference the pledge when making the DAF distribution
  • The donor didn’t receive additional benefits from the distribution
  • The donor didn’t take charitable contribution deduction, even if the grantee sent them an acknowledgement 

Circumventing Public Support. Donors may no longer be able to use a DAF to anonymize their contribution to a public charity. The notice indicates that the IRS may treat a distribution from a DAF as an indirect contribution from the donor—or donors—that funded the DAF.

If a public charity funds another public charity, the income is considered unlimited public support. If the IRS then treats the DAF as a donation from the original donor, public support could be limited—which could reclassify the charity as a private foundation.

The charity would also face additional donation tracking requirements based on the original DAF donor, and may need to disclose the donor on the Form 990’s Schedule B.

Provide Your Input

The IRS has requested comments on how foundations use DAFs. Comments and data pulled from Form 990-PF reporting could determine the IRS’s future actions in the area.

Specifically, the IRS wants to know:

  • How private foundations use DAFs in support of their charitable purpose
  • Whether a private foundation’s transfer of funds to a DAF should only be treated as a qualifying distribution if the DAF-sponsoring organization agrees to distribute the funds for charitable purposes—or to transfer the funds to its general fund—within a certain timeframe.

Comments may be submitted by March 5, 2018, to notice.comments@irscounsel.treas.gov, or to the following address:

Internal Revenue Service

CC:PA:LPD:PR (Notice 2017-73) Room 5203

P.O. Box 7604, Ben Franklin Station

Washington, DC 20044

Please include “Notice 2017-73” in the subject line. Comments will be available for public inspection and copying.

The Future of DAFs

We expect the popularity of DAFs will continue to grow—especially as the tax landscape evolves. DAFs continue to be a great philanthropic tool for individuals and foundations, so restricting their use could have a wide impact. If you have strong opinions on the matter, now’s the time to let the IRS know.

--Lauren Haverlock, CPA

Trend to Watch: Using SDGs to Improve Foundation Transparency
September 19, 2017

(Janet Camarena is director of transparency initiatives at Foundation Center. )

Janet Camarena PhotoAs Foundation Center's director of transparency initiatives, one of the most interesting parts of my job is having the opportunity to play "transparency scout," regularly reviewing foundation websites for signs of openness in what is too often a closed universe. Some of this scouting leads to lifting up practices that can be examples for others on our Transparency Talk blog, sometimes it leads to a new transparency indicator on our assessment framework, and sometimes we just file it internally as a "trend to watch. "

Today, it's a combination of all three; we are using this blog post to announce the launch of a new, "Trend to Watch" indicator that signals an emerging practice: the use of the Sustainable Development Goals to improve how foundations open up their work to the world.

Sustainable Development GoalsThe United Nations' Sustainable Development Goals (SDGs), otherwise known as the Global Goals, are a universal call to action to end poverty, protect the planet and ensure that all people enjoy peace and prosperity. There are a total of 17 goals, such as ending poverty, zero hunger, reduced inequalities, and climate action. Written deliberately broad to serve as a collective playbook that governments and private sector alike can use, they can also serve as a much needed shared language across philanthropy and across sectors to signal areas of common interest, and measure shared progress.

And let's face it, as foundation strategies become increasingly specialized and strategic, explaining the objectives and the nuances can become a jargon-laden minefield that can make it difficult and time consuming for those on the outside to fully understand the intended goal of a new program or initiative. The simplicity of the SDG iconography cuts through the jargon so foundation website visitors can quickly identify alignment with the goals or not, and then more easily determine whether they should devote time to reading further. The SDG framework also provides a clear visual framework to display grants and outcomes data in a way that is meaningful beyond the four walls of the foundation.

Let's take a look at how some foundation websites are using the SDGs to more clearly explain their work:

Silicon Valley Community Foundation (SVCF)

One of my favorite examples is from a simple chart the Silicon Valley Community Foundation shared on its blog, because it specifically opens up the work of its donor-advised funds using the SDGs. Donor-advised funds are typically not the most transparent vehicles, so using the SDGs as a framework to tally how SVCF's donor-advised funds are making an impact is particularly clever, refreshing, and offers a new window into a fast-growth area of philanthropy.

A quick glance at the chart reveals that quality education, good health and well-being, and sustainable cities and communities are the most common priorities among Silicon Valley donors.

GHR Foundation

A good example of how the SDGs can be used as a shared language to explain the intended impact of a grant portfolio is from GHR Foundation in Minnesota. I also like this example because it shows how the SDGs can be effectively used in both global and domestic grant portfolios. GHR uses the SDG iconography across all of its portfolios, as sidebars on the pages that describe foundation strategies. GHR's "Children in Families" is a core foundation grantmaking strategy that addresses children and families in need on a global scale. The portfolio name is a broad one, but by including the SDG iconography, web visitors can quickly understand that GHR is using this program area to address poverty, hunger, as well as lead to outcomes tied to health and well-being:

GHR is also able to use the SDG framework to create similar understanding of its domestic work. Below is an example from its Catholic Schools program serving the Twin Cities:

Through the visual cues the icons provide, I can quickly determine that in addition to aligning with the quality education goal, that this part of GHR's portfolio also addresses hunger and economically disadvantaged populations through its education grantmaking. This could also signal that the grantmaker interprets education broadly and supports the provision of wrap-around services to address the needs of low-income children as a holistic way of addressing the achievement gap. That's a lot of information conveyed with three small icons!

Tableau Foundation

The most sophisticated example comes to us from the tech and corporate grantmaking worlds--the Tableau Foundation. Tableau makes data visualization software, so using technology as a means to improve transparency is a core approach, and they are using their own grantmaking as an example of how you can use data to tell a compelling visual story. Through the interactive "Living Annual Report" on its website, Tableau regularly updates its grantmaking tallies and grantee data so web visitors have near real-time information. One of the tabs on the report reveals the SDG indicators, providing a quick snapshot of how Tableau's grantmaking, software donations, and corporate volunteering align with the SDGs.

As you mouse over any bar on the left, near real-time data appears, tallying how much of Tableau's funding has gone to support each goal. The interactive bar chart on the right lists Tableau's grantees, and visitors can quickly see the grantee list in the context of the SDGs as well as know the specific scale of its grantmaking to each recipient.

If you're inspired by these examples, but aren't sure how to begin connecting your portfolio to the Global Goals, you can use the SDG Indicator Wizard to help you get started. All you need to do is copy and paste your program descriptions or the descriptive language of a sample grant into the Wizard and its machine-learning tools let you know where your grantmaking lands on the SDG matrix. It's a lot of fun – and great place to start learning about the SDGs. And, because it transforms your program language into the relevant SDG goals, indicator, and targets, it may just provide a shortcut to that new strategy you were thinking of developing!

What more examples? The good news is we're also tracking SDGs as a transparency indicator at "Who Has Glasspockets?" You can view them all here. Is your foundation using the SDGs to help tell the story of your work? We're always on the lookout for new examples, so let us know and your foundation can be the next trend setter in our new Trend to Watch.

-- Janet Camarena

An Insider’s Guide to Giving Day
November 28, 2016

(Mike Berkowitz and Daniel Kaufman are co-founders and principals at Third Plateau Social Impact Strategies. Whitney Caruso is a director at Third Plateau. They are the authors of the recent report, “Beyond the dollars: the long-term value of giving days for community foundations.”)

Mike Berkowitz
Mike Berkowitz

Giving days can be incredible tools for place-based foundations to catalyze nonprofit fundraising. We have witnessed this up close through monitoring and evaluating 49 giving day campaigns as part of the Knight Foundation’s Giving Day Initiative and through advising the Sacramento Region Community Foundation on its BIG Day of Giving. We are also the authors of Knight Foundation’s Giving Day Playbook, a how-to guide with resources and recommendations for giving day organizers. Based on our experiences, however, we have also seen that just hosting a giving day is no guarantee of community impact.

Here are three key tips for foundations in accelerating community impact with giving days and other community-wide online fundraising campaigns:

Caruso Headshot
Whitney Caruso

1. Become a data hub. The power of big data to improve programs and accelerate social impact is becoming increasingly apparent. Giving days enable communities to collect large amounts of data from participating nonprofits and donors, which they can utilize to inform programs and ideas to improve their communities. In Miami, the community foundation is creating a map of the nonprofits and donors that participated in Give Miami Day in 2015. Community foundation staff have said that this will give them a firm understanding of where nonprofits and donors come from and enable them to identify gaps in services and more strategically engage specific neighborhoods. Going a step further, technology expert Amy Webb, speaking at Knight Foundation’s 2016 Media Learning Seminar, argued that community foundations have the potential to use data not just to map current community needs, but to predict them.

Daniel
Daniel Kaufman

2. Build local nonprofit capacity. This kind of fundraising does not necessarily come naturally to all organizations. Trainings are a central component of giving day organizers’ responsibilities and provided community foundations a chance to teach nonprofits important new skills. To build the capacity of nonprofits for the giving days and beyond, community foundations ran trainings on topics such as online fundraising, communications and branding, major donor cultivation and donor retention.

The Sacramento Region Community Foundation had a sophisticated training series for its Big Day of Giving. The “Boot Camp” series included sessions on building a GivingEdge profile, maximizing social media, engaging nonprofit donors and boards, and developing an eight-week work plan for the campaign. Post-event surveys in 2015 found that these trainings paid off, as nonprofits whose representatives attended all four sessions of the series raised 100 percent more than those that did not.

3. Build awareness of broader foundation efforts. Giving days should not operate in a vacuum, and community foundations increasingly tied the campaigns to their other strategic initiatives. For example, the Community Foundation of Grand Forks used its giving day in 2014 as part of an existing effort to engage the community around two issues (homelessness and limited access to health care) and two opportunities (adventure and public arts).

4. Connect fund holders to the broader community. Community foundations found the giving days to be a useful and exciting opportunity to engage fund holders. Thirteen community foundations enabled DAFs to donate through their giving days, resulting in 592 DAFs donating $3,556,129 to participating nonprofits.

Giving days are not for every foundation, so if a giving day does not align with your foundation’s goals, you may be better off skipping it than trying to get in on the campaign just because everyone else is. But as with most things in life, the more experience you have with giving days, the better you will be at using them to your organization’s full advantage—particularly if you see them as learning opportunities and track donation and marketing data to help shape future efforts.

Good luck, and happy holidays!

--Mike Berkowitz, Whitney Caruso, and Daniel Kaufman 

Glasspockets Find: Better transparency for community foundations’ donor-advised funds
December 20, 2011

The Community Foundation of Middle TennesseeDonor-advised funds (DAFs) are an increasingly popular vehicle for philanthropic donors. DAFs are often administered by community foundations and comprise a significant and growing portion of their management portfolios. Grantseekers who visit the Foundation Center often ask about how to learn more about the specifics of securing support from this below-the-radar source of funding, and the truth is many individuals like the privacy aspects a donor-advised fund can provide since little disclosure is required.

A colleague recently shared the 2010 report to the community of The Community Foundation of Middle Tennessee. We both agreed that it did a nice job of providing, in a brief paragraph, some transparency for many of the foundations' DAFs. Here's a sample narrative for the Lady Bird Charitable Advised Fund, established in 2005:

"Lady Bird has been an involved civic leader in this community for decades. Most recently, "President Lady" led the Nashville Rotary Club through a campaign to double its endowment, while serving the Bredesen Administration as President of the Governor's Books from Birth Foundation, which has built on the Imagination Library Program created by Dolly Parton and currently provides free books to more than 170,000 children under age five in Tennessee."

Are there examples of donor-advised funds' transparency to which you would like to draw attention?

-- Mark Foley

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About Transparency Talk

  • Transparency Talk, the Glasspockets blog, is a platform for candid and constructive conversation about foundation transparency and accountability. In this space, Foundation Center highlights strategies, findings, and best practices on the web and in foundations–illuminating the importance of having "glass pockets."

    The views expressed in this blog do not necessarily reflect the views of the Foundation Center.

    Questions and comments may be
    directed to:

    Janet Camarena
    Director, Transparency Initiatives
    Foundation Center

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