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Brian Mittendorf is a designated professor of accounting at the Fisher School of Business at Ohio State University and former associate accounting professor at Yale School of Management. Brian has been featured in several academic journal including The Accounting Review and The Journal of Accounting and Economics. Today we discuss all about donor advised funds and charitable giving.
Donor Advised Funds
Donor advised funds lie somewhere between a traditional charity and a private foundation. They're almost miniature private foundations, though many are quite big. A donor can make contributions to this organization, receive tax deductions for the contribution, and then make decisions down the road as to how the funds are used.
A private foundation is a charity that's established and run by individuals. They face additional restrictions by the IRS to ensure the tax deduction they receive was justified given that the organization is run by the donors.
In the last decade, there has been substantial growth in donor advised funds. Originally, it was larger community foundations. Now, there are larger sponsors.
A donor advised funds serves as an intermediary between the donor and individual charities. This third party separates the timing of the tax deduction from the donation. The timing on the tax deduction takes place upon donation to the fund, not disbursement to the charities.
Additionally, there is the consideration of donating cash vs. appreciated assets. Examples include stocks, cryptocurrencies, and limited partnership interests. Not every charity can handle these appreciated assets.
The initial gift to the donor advised fund can immediately be claimed as a tax deduction. As a donor adviser, the donor can still exert some form of control on the asset, despite having legally transferred any right to ownership. The blurred boundaries between the donor and the fund has created some challenges.
"A gift to a donor advised fund would be treated the same as a gift to any charity, for tax purposes. The big distinction is between a public charity and a private foundation. Private foundations, those gifts are subject to much more limitations."
Abuse of DAFs
From a donor standpoint, you can claim a tax deduction before knowing what you want to do with the funds. You have a tax deduction before the funds have been put to use. The donor will never get the funds back, but the question is: "Is enough being done with these funds to justify the tax deduction?". Brian believes the jury is still out on this question.
"The risk of abuse is getting a tax deduction for something that's not benefiting a charity or benefiting society in the near term."
Net Effect on Charitable Giving
There is an increase in charitable giving through donor advised funds. However, we don't yet know if these funds would have been given elsewhere or not given at all. In terms of the overall charitable market, there has been a large increase in DAFs. It's sort of a revolution in charitable giving.
The DAF sponsors have been very effective because the tax impact of giving appreciated assets is substantial. DAFs have specialized in receiving appreciated assets. The largest DAF sponsors receive appreciated assets roughly 2/3 of the time.
There is an increasing amount of controversy around DAFs. Once the money goes into the fund, there is no legal requirement that the funds are distributed to charities. We may have an increase in scrutiny and regulation on donor advised funds, to force the funds to pay out overtime in a shorter time horizon.
Additionally, as a very wealthy donor, a donor advised fund obscures the donor and anonymizes giving, as opposed to a private foundation, that has quite a bit of regulation and disclosure required. This question of transparency will also come up.
Learn more about Brian and his work on Twitter @CountingCharity
