Philanthropy in Democratic Societies: History, Institutions, Values by Rob Reich & Lucy Bernholz & Chiara Cordelli

Author:Rob Reich & Lucy Bernholz & Chiara Cordelli [Reich, Rob & Bernholz, Lucy & Cordelli, Chiara]
Language: eng
Format: epub
Tags: Business & Economics, Nonprofit Organizations & Charities, General, Political Science, Social Science, Sociology
ISBN: 9780226335643
Google: -xTMDAAAQBAJ
Goodreads: 26195610
Publisher: University of Chicago Press
Published: 2016-09-20T12:10:20+00:00

Looking under the Hood: How DAFs Are Able to Provide Such Great Tax Benefits

How is it possible for DAFs to provide the ongoing control of private foundations, while providing donors with the tax benefits afforded outright donations to public charities? Understanding this question involves wading into the weeds of the tax rules governing charitable donations—but it is worth the trip because understanding these details is essential to understanding why the rules applicable to DAFs are based on presumptions that are at odds with reality.

Generally speaking, DAFs are able to provide the tax benefits that they do because (1) although donors are the de facto decision makers regarding distributions from DAFs, under the legal terms of the contract governing their relationship, donors cede all legal control over their funds to the sponsoring organization; and (2) under the current taxonomy provided in the tax code, DAFs meet the definition of a public charity as opposed to a private foundation.

Control. If donors maintained legal control (instead of just de facto control) over their donated funds, then they would not be eligible for a tax deduction until such time as the property was distributed from the fund to the charitable recipient. However, DAFs are able to provide ongoing control to donors because there is a discrepancy between the way that DAFs work in practice and the contract governing the relationship between the donor and the sponsoring organization.

While donors and sponsoring organizations all act as if the donor controls the funds in the donor’s DAF, in order to be eligible for these beneficial tax results, the donor must have no legal ability to control the funds and the sponsoring organization must legally own and control the property in the DAF just the same as it would own an outright contribution. Contractual agreements between donors and sponsoring organizations reflect these requirements. However, despite these legal niceties, everyone understands that any sponsoring organization that wants to stay in business will in fact follow the donor’s “advice.”15 In this way, the relationship between the donor and the sponsoring organization is best described as operating on a “wink and a nod” basis. Donors are told to sign away their rights to control at the same time that they are told that the DAF will give them ongoing control. This understanding is conveyed artfully in the marketing material regarding DAFs. Fidelity Charity describes DAFs as “a type of charitable giving program that allows you to combine the most favorable tax benefits with the flexibility to support your favorite charities at any time.”16 Many sponsoring organizations capture this idea of donor control more colloquially by referring to their DAFs as “charitable checking accounts.”

In 2006 Congress enacted tax legislation regarding donor-advised funds, and this too captured the disconnect between the legal rules and the understanding of the parties. The statute defines a donor-advised fund as a fund or account that is owned and controlled by a sponsoring organization, separately identified by reference to contributions of a donor or donors, and with respect

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