EFTA00598194.pdf

About GiftLaw Pro http://www.gefece.org/giftlaw/glawpro_subscetion.jsp?VVebID=GL2003-... Wednesday July 20, 2011 ligni k 'c'iliffitiohi :eiffiLitiresithi-kr: 4•0114& GinLAW PRO 7.1.8 Donor Advised Funds Donor Advised Funds Donor Advised Funds: One option for a donor who wants to make a gift to charity is a donor advised fund (DAF). Definition of DAF: A DAF has three specific requirements. Deductible DAF Donations: DAFs are maintained by Sec. 501(c)(3) public charities, and gifts are typically deductible to the 50O/O of AGI for cash and 30% of AGI for appreciated property limits for public charities. Prohibited Payments to Disqualified Persons: Donors and their advisors are disqualified persons for purposes of payouts or benefits from DAFs. Charitable DAF Distributions: DAFs are permitted to make grants to Type I, Type II or Type III functionally integrated SOs. Exce88 Bu8ine88 Holdings: DAFs are subject to Sec. 4943 excess business holdings rules. Disaster Fund Not a DAF: After a natural disaster many companies create disaster relief funds that are designed to permit an employee group to make distributions to employees in need. Creative Use of DAFs: Most DAFs exist to permit annual gifts to qualified exempt public charities. Donor Advised Fund Agreement: DAF v8. Private Foundation: There are three particular benefits of DAFs. Donor Advised Funds One option for a donor who wants to make a gift to charity, does not want to create a private foundation and does not want to pick the charities that will receive the funds right now, but instead wants to both pick the charities and distribute the funds over time, is a donor advised fund (DAF). A DAF is an account that a donor establishes within a public charity, often a community foundation. When a donor makes contributions to the DAF, the donor must give complete control over the donated funds to the public charity. As a result, a I of 9 7/20/2011 8:04 AM EFTA00598194 About GiftLaw Pro http://www.gefecc.org/giftlaw/glawpro_subsection.jsp?WebID=GL2003-... donor gets a current income tax deduction for the full amount of the contribution to the DAF. Despite the fact that the donor relinquishes control over the donated funds, the unique aspect of a DAF is that the donor can remain involved by making non-binding recommendations to the public charity as to investment policy and DAF distributions. As a result, the donor is able to fulfill his or her philanthropic goals in a flexible, tax-favored and cost-effective way. Sec. 4966 creates a comprehensive set of rules for DAFs. The DAF definition, distributions, donors, disqualified persons and deductible donations are all specified. Definition of DAF A DAF has three specific requirements. It must be separately identified and owned and controlled by the sponsoring charity, and the donor must have a reasonable expectation of advisory rights. If all three apply, the DAF is subject to various requirements and a number of prohibitions. Sec. 4966(d)(2)(A). Separate identification is usually accomplished by creating a distinct fund or by naming a fund after a specific donor. Control is measured at the parent organization level. All DAF funds must explicitly note that the parent charity has full control. The existence of advisory rights will be based on the facts and circumstances involved. Even without a formal document, if a donor makes large gifts and regularly recommends gift beneficiaries and purposes that are followed by the donee charity, then a DAF may exist. There are three specific exceptions to the DAF rules. A transfer to a field of interest fund or designated purpose fund will not create a DAF. Sec. 4966(d) (2)(A). This is the case even if the donor does have incidental benefits or involvement in the fund. For example, a donor may be a board member of a charity and make gifts to a specific purpose fund for that charity without that fund's becoming a DAF. Alternatively, a donor may make an unrestricted gift to a school with a child or grandchild in attendance without creating a DAF. Under this exception, a DAF may make grants to students for travel, study or other similar purposes, provided that the donor is a member of the grant committee appointed by the charity, he or she does not have control of the committee, all grants are awarded on an objective and nondiscriminatory basis and the board of directors has approved the process. The grants must also meet the requirements of Sec. 4945(g) for grants by private foundations. The second exception is a gift to a charity in which the donor retains advisory rights, but all distributions will be within that charity. Sec. 4966(d)(2)(B)(i). Therefore, a gift to a university for various programs exclusively at that university would not come within the DAF definition. Finally, a fund maintained with a governmental entity is excluded from the DAF definition. Sec. 4966(d) (2)(B)(i). Deductible DAF Donations DAFs are maintained by Sec. 501(c)(3) public charities, and gifts are typically deductible to the 50% of AGI for cash and 30% of AGI for appreciated property limits for public charities. The gifts to DAFs will be deductible under these limits, but after February 14, 2007, the charity must give a "contemporaneous written acknowledgment" of the DAF gift. Sec. 170(f)(18)(B). The receipt must be received prior to the date the donor files his or her tax return for the year of the 2 of 9 7/20/2011 8:04 AM EFTA00598195 About GiftLaw Pro http://www.gcfcmorg/giftlaw/glawpro_subsection.jsp?WebID=GL2003-... gift, or the due date with extensions, whichever is earlier. A DAF receipt must also state that the charity has exclusive legal control over the contributed assets. Deductions are not permitted for gifts to DAFs held by Type III supporting organizations that are not "functionally integrated" with the parent charities. Sec. 170(f)(18)(A). In effect, the typical Type III supporting organization that operates in connection with a public charity and makes grants to the charity is prohibited from maintaining a DAF. However, Type I and Type II supporting organizations may receive deductible DAF contributions. The Type III supporting organization that is operationally integrated into a public charity may also maintain a DAF and receive deductible contributions. Prohibited Payments to Disqualified Persons Donors and their advisors are disqualified persons for purposes of payouts or benefits from DAFs. Sec. 4967(a)(1). The disqualified person rules are similar to the private foundation rules. These rules are designed to minimize the improper use of DAFs in any manner that could produce improper benefits to the donor or his or her advisors. The disqualified person category includes the donor, advisors to the donor, family members and 35% controlled entities. Sec. 4967(a)(1). The family includes donor's siblings, lineal ancestors and descendants, and spouses of lineals. The DAF may not make any grant or loan, pay salary or reimburse expenses for any disqualified person. In direct contrast to other Sec. 4958 excess benefits, the DAF transfer is subject to an excise tax on the entire benefit, not just the excess over fair market value. A sale or lease of property at fair market value is an exception to the prohibited payment rule. Sec. 4958(c)(2). The DAF excess benefit rule will require the donor and family members to cover expenses for travel to board meetings and any expenses related to their personal efforts with respect to the charitable transfers. These personal expenses will be potentially deductible under the normal charitable deduction rules. Family members may not receive substantial salaries for services rendered to the DAF. In addition, an annual winter trip at DAF expense to a tropical climate and similar perks for the purpose of a family review of DAF grants are not possible. Such transfers are termed "automatic excess benefit" transactions. There is a penalty for distribution of "more than incidental benefit" to a donor, family member or donor advisor. The penalty is 125% of the benefit on the donor or family member, and potentially a penalty of 10% on the fund manager if he or she knew of the prohibited benefit. Sec. 4966(a)(2). If a donor has made a legally-binding pledge to a charity, the DAF may not fulfill that pledge. The payment by a DAF of a pledge will constitute a ?more than incidental benefit? to the donor and is not permitted. Sec. 4966(a). Charitable DAF Distributions DAFs are permitted to make grants to Type I, Type II or Type III functionally integrated SOs. Notice 2006-109 describes guidelines for determining if the SO is a Type I, Type II or Type III functionally integrated charity that qualifies for 3 of 9 7/20/2011 8:04 AM EFTA00598196 About GiftLaw Pro http://www.gefeccorg/giftlaw/glawpro_subsection.jsp?WebID=GL2003-... distribution. A grantor may rely on a written representation that the grantee is a Type I or Type II supporting organization, provided that the representation describes how the grantee's officers and directors are selected, and references governing document provisions that establish a Type I or Type II SO. For a functionally integrated Type III SO, a grantor may rely on a written representation that the grantee is so qualified, provided that the grantee identifies the one or more supported organizations with which the grantee is functionally integrated and the grantor collects and reviews grantee's governing documents. This review usually will include review of written representations of the supported organization that set forth the qualifying relationship. But for the involvement of the grantee in performing functions of the supported organization, the supported organization would carry out those activities itself. Alternatively, the grantor may rely on a reasoned written opinion of counsel of either the grantor or the grantee concluding that the grantee is a Type I, Type II or functionally integrated Type III supporting organization. A DAF foundation considering a grant to a Type I, Type II or functionally integrated Type III SO may need to obtain a list of grantee's supported organizations to determine whether they are controlled by disqualified persons of the private foundation. If such control exists, the private foundation will be required to exercise expenditure responsibility. Control by a disqualified person is defined in Reg. 53.4942(a)-3(a)(3). An SO is controlled by disqualified persons if they may aggregate votes and require the SO or supported organization to make an expenditure or collectively prevent an expenditure. Excess Business Holdings DAFs are subject to Sec. 4943 excess business holdings rules. Gifts by disqualified persons who together with attributed family and entities hold 20% (or 35% with outside control) of an entity will trigger application of Sec. 4943. Disqualified persons include donors and family members and 35% controlled entities. Sec. 4943(e)(2). For DAFs that receive a gift of a business interest, generally the interest must be sold within five years, or potentially 10 years with Treasury approval. This provision is designed to remove the ability of family members to maintain control of the family business through a DAF. Disaster Fund Not a DAF After a natural disaster many companies create disaster relief funds that are designed to permit an employee group to make distributions to employees in need. The disaster relief funds must meet Notice 2006-109 guidelines for objective and fair allocation of grants in order to avoid classification as a DAF. Treasury excludes an employer-sponsored disaster relief fund from DAF status if it meets several requirements. It must serve a single identified charitable purpose to provide relief from a qualified disaster under Sec. 139(c)(1), (2) or (3). The class must be large or indefinite and grant recipients must be objectively selected by an independent committee. No disaster payments may be to officers, directors or independent committee members. Finally, adequate records must be maintained to show actual need by the grant recipients. 4 of 9 7/20/2011 8:04 AM EFTA00598197 About GiftLaw Pro http://www.gefecc.org/giftlaw/glawpro_subsection.jsp?WebID=GL2003-... Creative Use of DAFs Most DAFs exist to permit annual gifts to qualified exempt public charities. For those DAFs that are invested in securities, make no payments to donors and family members and annually make grants only to public charities, the DAF rules will present no major obstacles. However, creative uses of DAFs may be rather limited. Sales of DAF assets to family members must be explicitly at fair market value. In addition, the private foundation excess business holdings rules apply to DAFs. Generally, transfer of business interests into DAFs will require sales of the assets within five years, or potentially 10 years with Treasury permission. Finally, the annual Form 990 includes reporting requirements for the number of DAFs, their assets and distributions. Donor Advised Fund Agreement DONOR ADVISED FUND AGREEMENT This Donor Advised Fund Agreement ("Agreement") is made on the date specified below between of (hereafter referred to as the "Donors") and the of , a not-for-profit charitable organization (hereafter referred to as the "DAF Charity"). I. DAF Creation The Donors hereby contribute to the DAF Charity the property specified in Attachment "A" as the initial contribution to the Donor Advised Fund (DAF). This value is equal to or greater than the minimum required DAF amount of . The DAF Charity by resolution of its Board of Directors has approved the acceptance of gifts and bequests of property for the purpose of creation of DAFs. All DAFs shall be component funds and the exclusive property of the DAF Charity, subject to the control of the DAF Charity with respect to all distributions of income and principal. Funds are a name or other appropriate designation as requested by the Donors. II. Advisors The Donors may advise the DAF Charity in writing regarding the distribution of the fund income and principal. In addition, the Donors may designate one person to act as their spokesperson in advising the DAF Charity. The Donors may in writing designate one or more persons, usually children, to serve as DAF Advisors for a term of up to years after the deaths of the Donors. The DAF Charity is not obligated to follow the recommendations of the Advisors, but in its sole discretion may elect to make the recommended distributions. In the event that no written advice is received by the DAF Charity with respect to distributions of income or principal for three (3) consecutive years, or in the event of the deaths of the Donors with no appointment of a child as Advisor for the above term of years, the DAF Charity may deem that no person has further interest in advising with respect to the fund. In 5 of 9 7/20/2011 8:04 AM EFTA00598198 About GiftLaw Pro lutp://www.gefecc.org/giftlaw/glawpro_subsection.jsp?WebID=GL2003-... this circumstance, the DAF Charity may give written notice to the last known designated Advisor or spokesperson that the right to give further advice and counsel is terminated. Any remaining DAF assets shall then be the exclusive and unrestricted property of the DAF Charity. III. Distributions from the DAF Fund The DAF Charity may make distributions from the fund of principal and income. The Donors shall recommend at least annually each year the appropriate distributions. All recommendations shall be for distributions in amounts in excess of the minimum distribution established at the discretion of the DAF Charity Distribution Subcommittee, or any minimum distribution required under current or future state or federal law. No distributions shall be made to fulfill a legally binding pledge of Donors. Distributions shall be made to qualified Sec. 501(c)(3) charities or to qualified entities that are their integrated auxiliaries. All distributions shall be to qualified exempt charities, with a minimum of _% of distributions to IV. Administration The DAF Charity shall accept contributions and administer the fund in accordance with resolutions of the Board of Directors. These resolutions and policies may be amended as required by the Board. While the DAF is a component fund of the charity, the assets may be commingled for investment purposes and invested in units of any common investment fund of the DAF Charity. The DAF Charity shall have the right to convert any gifted property to securities or other assets of a common fund. Each fund may be assessed charges and proportionate investment costs similar to those applicable for similar funds managed by the DAF Charity. V. DAF Remainder This DAF is intended to be operational during the lives of the Donors. If Donors notify the DAF Charity in writing, a child or children may serve as successor Advisors for the permitted term of years and the fund shall continue for that additional term. After the deaths of the Donors or the expiration of the term of years, as applicable, the fund shall become the exclusive and unrestricted asset of the DAF Charity. The Donors and, if selected, the child or children of the Donors, may prior to the termination date make recommendations for distribution of principal from the fund upon the termination date. VI. DAF Provisions This DAF agreement is irrevocable. Nevertheless, solely to ensure that the fund is a qualified component of the DAF Charity for Federal tax purposes, the DAF Charity, acting alone, shall have the power to modify the terms of the agreement solely to the extent required to ensure such qualification. The agreement shall be governed by the laws of the State of IN WITNESS WHEREOF and in grateful appreciation, the DAF Charity and the Donors have executed this Agreement on the date specified below. Date: Donor Date: 6 of 9 7/20/2011 8:04 AM EFTA00598199 About Gift Law Pro http://www.gefccc.org/gi ftlaw/glawpro_subsection.jsp?WebID=GL2003-... Donor By Title Date: Officer of DAF Charity DAF vs. Private Foundation There are three particular benefits of DAFs. These are reasonable start-up costs, an excellent opportunity for the donor to research charitable organizations and find a match for his or her interests and the ability for moderate income donors to involve family in charitable giving. For donors with more substantial charitable intentions, a DAF may also be considered as an alternative to a private foundation. These are the main advantages of a DAF over a private foundation: 1. Higher Grant Distribution Rates. DAFs often make grants of 15% to 30% each year. The councilor Foundations website indicates that private foundations grant an average of 6.23% of assets to charity on annual basis. Many DAFs transfer 15% to 20% of assets each year to charity. 2. Access for Most Donors. Many individuals are able to create a DAF with $10,000 or more. Private foundations are much more expensive to fund and operate. The development or creation of a private foundation could involve an expenditure of $10,000 simply to create the organization. In addition, the private foundation has substantial operating costs each year. 3. Staff Oversight and Donor Support. About 5% of private foundations have professional staff. Nearly all public charities with DAFs have highly qualified staff with great expertise in making effective charitable grants. Giving grants with optimum charitable impact requires a level of expertise that is more likely to be found with the public charity staff managing a DAF. Case Studies on Donor Advised Funds Helping Victims of Crisis with a DAF: David Hall, 55, is a long-time fire fighter with numerous medals and recognition for bravery. After 25 years of service to his city, David reluctantly decided five years ago to retire due to an injury. He has become a very successful banker during that time, yet he still remains very close to his local fire fighting brothers and sisters. In fact, he is a regular attendee of fire fighter events and fundraisers. A Unitrust with a DAF for Education: Elizabeth Johnson, age 70, was a distinguished professor of biochemistry who devoted countless hours to research, writing and lecturing. During her years of study, she had attended many universities. 7 of 9 7/20/2011 8:04 AM EFTA00598200 About GiftLaw Pro http://www.gefecc.org/giftlaw/glawpro_subsectionjsp?WebID=GL2003-... Ducky Don Benefits His Duck Friends: Donald Holden Ducksworth, Ill (Ducky Don to friends) was a lifelong outdoorsman. He loved to hunt and fish. Each fall, Ducky Don and his friends would gather for the opening of duck hunting season. Gift of Philanthropy to Two Sons: Lorraine Moore, a widow age 75, has an estate valued at $1 million. Her estate consists of her home valued at $100,000, liquid investments of $400,000 consisting primarily of bonds and some stock and an apartment building valued at $500,000. As a former high school history teacher, she lives comfortably with her pension and the income from her investments. The apartment building generates an income stream of about $20,000 per year after expenses. Private Letter Rulings PLR 200037053 Internet Donor Advised Fund Approved: Charity X is an exempt organization under Sec. 501(c)(3) that primarily serves the public through an Internet site. The web site maintains information on 700,000 charitable organizations. It includes Form 990, Form 990EZ and Form 990PF. PLR 200150039 Charity's Creation of a Donor Advised Fund Approved: C is a newly formed tax-exempt 501(c)(3) charitable organization. C wants to establish three types of donor advised funds (DAFs): an endowment fund, a regular DAF, and a general fund. The endowment fund will allow donors to specify in advance the charities that will receive fund principal and income. PLR 200518012 Grandma's Creative Gifting: Grandmother established a donor advised fund (DAF) during life. In grandmother's living trust she bequeathed all of her tangible personal property to her grandchildren in equal shares. In the trust, grandmother included a provision that should any of the grandchildren disclaim the gift, those assets would be transferred to a sub-fund of grandmother's DAF. Further, the grandchild who gave the disclaimer would have the ability to serve as an advisor of the sub-fund. PLR 200821204 Fund Contribution and Repurchase: Taxpayer (T) owns common voting shares in holding company X, individually and through T's own grantor-trust. T's family members also own common voting shares in X. T is one of X's board of directors, and none of T's family members are directors of X. Related Topics on Donor Advised Funds 7.1.7 Community Foundations: A donor who wants to make a significant gift to charity (either in life or at death) and does not 8 of 9 7/20/2011 8:04 AM EFTA00598201 About GiftLaw Pro http://www.gefeccorg/giftlaw/glawpro_subscetion.jsp?WebID=GL2003-... desire to create a private foundation may give to a community foundation. A community foundation is a public charity created to receive and administer funds contributed by members of a particular community and disburse those funds for charitable purposes within the community. Reg. 1.170A-9(e)(10)-(14). Many community foundations serve as primary resources to match donors and donated funds with needs in the communities they serve. Often, community foundations also offer charitable gift annuities and donor advised funds and serve as host to supporting organizations. Viralam: In Setty Gundanna Viralam et ux. v. Commissioner; 136 T.C. No. 8; No. 21355-03 (13 Feb 2011), the Tax Court denied a deduction for a charitable gift to an organization maintaining donor advised funds for doctors. In addition to not receiving the charitable deduction, the doctor was subject to capital gains tax on sale of the stock and an accuracy-related penalty. Quiz-Basic PRINT Copyright 19992011 Crescendo Interactive. Inc. 9 of 9 7/20/2011 8:04 AM EFTA00598202