Managers of Donor-Advised Funds Wary of New Rules

Organizations that manage donor-advised funds could soon

face a wave of new rules, as the Internal Revenue Service weighs recommendations aimed at curbing abuse by donors who use the funds as tax shelters and not for charitable benefits.

As part of the Pension Protection Act of 2006, passed in August, Congress ordered the Treasury Department to investigate donor-advised funds and make recommendations on their use.

As part of that process, the Internal Revenue Service is collecting comments from the public on the subject — an early step in a process that could ultimately force the funds to disclose more information about their donors and grants and might require them to distribute a minimum amount to charity each year.

Staff members of the Senate Finance Committee say they will be looking closely at the IRS recommendations to determine whether Congress needs to place new limits on the funds.

Some lawmakers have proposed requiring donor-advised funds to distribute at least 5 percent of their aggregate assets each year — a move that would put the funds in line with rules that require private foundations to annually contribute at least 5 percent of their assets to charity.

Four groups in the Chronicle’s survey failed to meet that 5-percent threshold in 2006 — Harvard University, the University of Alabama, Ohio University, and the National Heritage Foundation. Eighteen groups, meanwhile, gave away more than 30 percent of their assets as grants.

The National Committee for Responsive Philanthropy, in Washington, recently told the IRS, in response to its request for comments, that the government should require each individual donor-advised fund account to distribute at least 6 percent of its assets annually.

The watchdog organization is also pushing for increased public disclosure of who is creating donor-advised funds — and how the money in those funds is being used.

Donor-advised funds are “a charitable vehicle with great positive elements for philanthropy,” says Aaron Dorfman, the committee’s executive director. “But some people, through ill will or inattention, have turned them into places to just warehouse funds. That’s not helping anyone. That’s not their original intent. The financial-services companies, some of them seem to be more interested in continuing to manage the assets and preserve the tax breaks for their best clients rather than serving as a philanthropic entity.”

Distribution Rates

Many officials at donor-advised funds, however, see the committee’s recommendations as burdensome and unnecessary. With the median distribution rate for donor-advised funds at above 17 percent, according to The Chronicle’s survey, creating minimum giving standards would be superfluous and costly, says Kim Wright-Violich, president of the Schwab Fund for Charitable Giving, in San Francisco, which distributed more than 16 percent of its assets in 2006.

“Some of that is naiveté,” she says of the calls for minimum distributions. “If you don’t have a lot of information and you see that something is growing very rapidly, it is reasonable to assume that assets are accumulating someplace.” But, she notes, distribution rates for some organizations reach 30 to 40 percent.

Creating payout standards for individual funds would probably increase their administrative costs — a move that would make them less efficient, says Benjamin Pierce, head of the Vanguard Charitable Endowment Program, in Malvern, Pa.

Requiring a minimum grant threshold would force respondents to the Chronicle survey to annually provide information to the IRS for 101,188 individual accounts, or a median number of 313 accounts per fund.

At Mr. Pierce’s group, the number would be much higher. “At the aggregate level we should be paying out a minimum of 5 percent. But to do that on the fund level would be a big, big mistake,” he says. “It would really be administratively very, very expensive and cumbersome to administer 6,000 accounts. There’s no reason for it. It’s very expensive and I think it would reduce charitable giving.”

Ms. Wright-Violich says giving could decline if Congress imposed a mininum distribution, because many donors would not give much more than the minimum.

“I bet you would get a 7- to 8-percent distribution rate within weeks, because people would think, ‘That’s what I’m supposed to do,’” she says. “It would be a big mistake if we went in that direction.”

Checking on Compliance

Already, to comply with the Pension ProtectionAct, many charities have been making changes in how they administer donor-advised funds, trying to ensure that donors use the funds for charitable purposes.

“Anyone who offers a donor-advised product has been spending hundreds of hours making sure their funds are compliant with the law,” says Kenneth D. Strmiska, managing director of community foundation services at the Council on Foundations, in Washington. “They have had to go through and look at individual funds in their practice.”

The legislation also pushed one donor-advised fund, Domini Global Giving Fund, in New York, to abandon its operations. Its six-month-old fund, which was set up to offer grants exclusively to the United Nations Foundation, in Washington, did not comply with the Pension Protection Act rule that donor-advised funds have multiple grant recipients. The rule is designed to prevent the use of the accounts as tax shelters. In the past, when funds were allowed to support just one group, some donors set up funds that created college scholarships for their children, members of the Senate Finance Committee say.

The law was passed just one month before Domini was planning to start a major publicity push for the new fund, says Jean J. Moon, the fund’s director. Now, the group is helping its three donors dismantle the fund and redistribute the proceeds.

In the vast majority of cases, though, the Pension Protection Act has meant organizations that previously allowed donor-advised funds to create scholarships and other grants for individuals have had to restructure the funds or advise their donors to find new causes. To rule out potential conflicts of interest, organizations have also been required to review the background of financial advisers who manage the funds.

These efforts have taken resources from other fund-raising activities, says Peter Dunn, vice president of philanthropic services at the California Community Foundation, in Los Angeles, a challenge for smaller staffs.

He says his group had to spend lots of time talking to donors about their funds. “If you have 1,400 funds and you have to go out and contact 150 of them in a short time period, that’s a big issue,” he says. “However, it’s been a useful exercise going out and seeing all of those donors.”