A donor advised fund is an unusual concept - it was created to avoid long-term charitable arrangements that avoided the self-dealing rules. The approach…

A donor advised fund is an unusual concept - it was created to avoid long-term charitable arrangements that avoided the self-dealing rules. The approach allows a person to effectively control how charitable funds given to charity for investment may be invested, and directed in future years to charities. Technically, the donor advised fund (DAF) was written into law in 2006 and provides that a donor-advisor may advise a sponsoring organization to make grants from a specified fund to almost any charitable organization.

Almost, because, the sponsoring organization can take charities off their list. Or the charity loses its exempt status. This happened to my client almost 20 years ago, when he had to switch the DAF associated with his religious giving after it was caught up in some legal troubles. It happened again just a few months ago when another charity found itself in hot water.

ProPublica reported that Fidelity Charitable, Vanguard Charitable and Schwab’s DAFgiving360 stopped donor-advised fund grants to the Southern Poverty Law Center after its indictment.

A family puts money into a donor-advised fund, takes a charitable deduction, and recommends which charities should eventually receive it. The account may have the family's name on it. The family can see its balance, recommend investments, and make grant requests online. It can feel a lot like another investment account.

But the family has already made its gift. The recipient is the sponsoring charity that operates the fund. That organization owns the assets and controls the grants.

The distinction matters because there are two different transfers. First, the donor gives property to the sponsor. That is the contribution for which the donor claims a deduction, subject to the applicable limits. Later, the sponsor makes a grant to the operating charity. That second transfer does not produce another deduction for the donor.

Suppose a family contributes $1 million in December, expecting to support several charities over the next five years. The family has completed the charitable gift even though it has not chosen every recipient. But if the sponsor later declines one of those recipients, the family cannot treat the fund as a bank account and withdraw the money to make the gift itself.

The sponsor's own rules matter too. Most note that an account holder has no enforceable right to require a particular grant. IRS recognition of a charity does not promise that a particular sponsor will fund it.

For advisors, choosing a donor-advised fund includes choosing the organization that will exercise that authority. Before a family commits a large amount, read the grant policies and ask how the sponsor handles the charities the family wants to support. The tax deduction comes from making the gift. The family needs to understand who will be making the decisions afterward.

Tax Planning in the News · Secret Art of Planning