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A Bit of History. Several years ago, the financial giant Fidelity hit the headlines in the financial press with its incorporation of a charitable organization which would serve as a distributor of charitable contributions that were made by its customers (“Donors”). The Donor would take an income tax deduction for the transfer of funds to the Fidelity charitable entity. These funds would be held in a separate account by Fidelity and the Donor could then direct Fidelity to make charitable distributions from that account from time to time.
Headlines reported the fact that these Donor Accounts (called a Donor Advised Fund or “DAF”) were being abused, supporting Donor tickets to society fund raising events, for example.
As a result of the publicity, Donor Advised Funds have been on the “bad” list of Congress and the press for some time. This newsletter is a “Red Flag” on important developments that affect all DAF’s.
Congress Takes Action. The Pension Protection Act of 2006 (PPA), enacted last August, took aim at DAF’s in particular, restricting their use and exacting substantial tax penalties for violations.
As one would expect, the new legislative definition of a DAF is a fund (1) identified with respect to contributions of specific donor or donors; (2) that is owned by a sponsoring organization; and, (3) where funds distributions or investments are directed by the donor or persons designated by the donor. There are a couple of exceptions discussed below. However, this definition is broad enough to include most Donor Advised Funds, whether administered by Fidelity, other major financial firms, or by a Community Foundation.
What Actions are Proscribed? The principal penalized distributions are:
(1) any distribution to any individual for any purpose. This broad prohibition includes scholarships or reimbursement for expenses.
(2) distributions have to be made to a public charity unless the sponsoring organization has “expenditure responsibility” (with certain limited exceptions).
(3) taxes are imposed on a distribution that results in “more than incidental benefit” directly or indirectly to the donor, an advisor, or a member of the donor’s family, or an entity controlled by the donor.
These distributions, which include membership privileges or admission to fund raising events, are often matters of judgment. The new law does not simply penalize the benefit portion of the distribution, but rather the entire amount. Sponsoring organizations will, therefore, have to receive an assurance from the recipient charity that the distribution does not result in “more than incidental benefit” to the donor or member of the donor’s family.
Exceptions. The statute excludes two types of funds or distributions which are excluded from the definition of DAF. The first exception can be a fund that makes distributions only to a single entity. A DAF would also exclude a fund which makes grants to individuals for travel or study, if all of the advisors are appointed by the sponsoring organization, and are not controlled by the donor, and if all grants are made on an objective non-discriminatory basis.
Dealings With a Donor. The new law contains broader definitions and prohibitions for dealings between a DAF and a donor or a related person. Grants or loans to such an individual or entity would be penalized as “excess benefit transactions”. Similarly, investments by a DAF in any entity in which the donor or related persons have a stock interest would be prohibited dealings.
Responsibility of Sponsoring Organizations. The new law (PPA) substantially increases the supervisory responsibilities of sponsoring organizations which have DAF’s. This will particularly be true of Community Foundations in our area where DAF’s represent a substantial part of assets and activities. In my experience, over many years with the Grand Traverse Regional Community Foundation, there are few if any activities or distributions which would give rise to penalties under the new statutes. Perhaps those of us up here in the north woods are not as sophisticated or rather, scheming, in gaming the tax system.
However, Sponsoring Organizations, which include our local Community Foundation, will be monitored by the IRS and will have to institute policies with respect to donors and advisors that are necessary, but may appear somewhat onerous to the individuals affected.
Conclusion. Charitable giving is an important part of estate planning. This is just a summary of these complex changes. Donor Advised Funds are still high on the list of alternatives that should be considered in making tax-advantaged, charitable contributions. They enter into planning with various types of charitable trusts, for example. If you or your clients desire sophisticated planning advice in these matters, please contact Jim Modrall at (231) 941-9660 or any of the other attorneys listed below.
*The author acknowledges the summary of the PPA provisions affecting charities in the December 2006 issue of Estate Planning, written by attorney Richard L. Fox of Philadelphia.
Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Edgar Roy, III, Matthew D. Vermetten, Thomas A. Pezzetti, Jr., John M. Grogan, Vicki P. Kundinger, Susan Jill Rice, Gary D. Popovits, Lawrence K. Kustra, H. Douglas Shepherd, Jonathan J. Siebers and Karin Church at (231) 941-9660
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
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| Brandt, Fisher, Alward & Roy, P.C. Attorneys at Law |
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January
2007 DONOR ADVISED FUNDS - WHO REALLY BENEFITS? by James R. Modrall III, J.D., C.P.A. |