March 25, 2024

The Uncertain Future of Donor Advised Funds

By Ariana N. Jordan, Senior Manager, Tax & Business Services

The Uncertain Future of Donor Advised Funds Nonprofit & Social Sector

Be it good or bad, finalized Donor Advised Funds (DAF) regulations are still unavailable. The proposed rules found within Section 4966 are intended to provide a firmer regulatory framework, inclusive of definitions and explanations of how certain existing code sections should apply to DAF entity types. One key area of discussion concerns a donor’s advisory rights or influence, as these rights apply to the definition of a Donor-Advisor.

One reason the Treasury has yet to formalize these new regulations is that it has welcomed feedback and recommendations on said proposals, presumably with the intent of considering multiple vantage points and reliance upon the professionals within the industry. This collaborative approach is significant because it’s crucial to recognize the many scenarios in which a DAF might be unintentionally formed. Practitioners have responded to the Treasury to safeguard what seems to be a multitude of ways a DAF could be inadvertently created. One question raising this concern is, when does a gift agreement or advisory right retained by a donor create a DAF?

Change is inevitable. Charities are no exception; they are known to evolve to meet society’s changing needs. Making these changes could require restructuring, changes in purposes, programs, or missions. A charity that existed to eradicate chicken pox in 1990 was likely a thriving entity. In 2024, when this vaccination is recommended and routine, this same entity would need to dissolve or adapt.

Donors who contribute to a Designated Fund—different from a DAF—currently have specific rights. They can earmark funds for a particular use or time or choose specific charities to benefit from their gift.

A consideration being requested on behalf of charities and the profession from the viewpoint of the AICPA calls for the acknowledgment that Designated Funds are not DAFs and that construing a change in the donor’s initial instruction to create a DAF is in discord with the evolution of society. When entities face change, and they will, a reasonable expected result is a change in a donor’s designation. Of course, with all things, a measurable framework could be applied to limit the frequency or number of changes. This could help to ensure changes are intentional and made within reasonable shifts made by recipient charities or annual distributions.

Until finalized, the AICPA is currently asking the Treasury to reconsider restricted gifts, resulting in the creation of a DAF. Until then, we wait.