The Donor Advised Funds Debate

MoneyPilingUpThe rapid growth of donor advised funds (DAF) has sparked a spirited debate.

A DAF is a tax exempt fund to which a contributor can contribute money and get a tax deduction in the year of contribution.

The money, however, doesn’t need to be given to a charity that year in order for the contributor to receive a tax deduction.

With a DAF, there is, in fact, no obligation that the funds ever go to a charity. The funds may remain in the DAF, presumably invested and accumulating income tax free, forever. The donation is irrevocable, however, so the donor can’t get the money back.

This timing differential between the donor’s receipt of a tax deduction and actual receipt of funds by a charity has prompted issue among some in the non-profit community.

Concern has been expressed that separating the timing of the tax deduction from actual receipt of funds by a charity deprives charities of needed funding now.

Supporters of DAFs point out that DAFs enable donors to contribute whenever money is available and the tax deduction is useful but contribute to charities over time, perhaps, making charitable giving less lumpy.

At this point, there may not be enough evidence to conclude just how DAFs will influence charitable giving.

It wouldn’t surprise me if DAFs further increase donor influence on charities by increasing the competition among charities for DAF funds.

Therefore, DAFs may ultimately favor newer, more responsive charities to the detriment of larger, more established but less flexible charities.

Unless DAFs are eliminated by a change in tax law, the debate will likely continue.

The New York Times “Dealbook” provides a commentary on the negatives of DAFs (click here).

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