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IRS Proposed Regulations: Impact on Donor Advised Funds

By Corey Schunemann, CPA, Manager at Blue & Co.

The IRS issued proposed regulations that could dramatically affect the landscape and operations of Donor Advised Funds (“DAF”). While many organizations hold DAF funds, this change is especially relevant to community foundations. It is important to keep in mind that these are only proposed regulations which are not legally binding, yet they do point to the thought process of the IRS and may foreshadow final regulations in the future.

A DAF is a fund or account that meets three criteria:

  1. Separately identified by reference to contributions of a donor or donors,
  2. Owned and controlled by a “sponsoring organization”, and
  3. The donor (or donor-advisor) has, or reasonably expects to have, advisory privileges with respect to the distribution or investment of amounts held in the fund or account.

While the proposed regulations have many nuances and expanded definitions, one key definition expansion is to the term “donor-advisor.” Under the proposed regulations, a third-party investment manager who advises both the DAF and the personal funds of the donor could be considered a “donor-advisor.”

This expanded definition is significant – if the DAF pays investment management fees to the investment manager, it could be characterized as a taxable distribution subject to excise taxes up to 25 percent of the payment.

The proposed regulations have an important exception: if the investment manager also advises the sponsoring organization as a whole and charges a uniform fee across all DAFs, the investment management fee will not be characterized as a taxable distribution subject to excise taxes.

In addition to the excise taxes, the donor-advisor must return the entire fee to the sponsoring organization.

If the proposed regulations become final, donors and sponsoring organizations may face significant increases in administrative costs that outweigh the benefits of Donor Advised Funds. Investment managers and sponsoring organizations may no longer be willing to manage DAFs. Large Donor Advised Funds and donors may be able to absorb the additional administrative burdens, while those with less funds may be better off finding other means to give and manage their charitable gifts. Ultimately, we can hope that the IRS changes their mindset.

Contact your Blue & Co. Advisor if you have any questions.

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