DAFs: Appointed or Designated Advisors and Their Advisory Privilege

Recently, a community foundation contacted the Council regarding a recommended grant from one of its funds. This fund, a donor advised fund (DAF), had been established by an organization, but had designated a specific individual to make grant recommendations. While it was the advisor’s job to make recommendations, he was instructed to stick to grants that aligned with the organization’s mission, vision and values, thus seemingly limiting his advisory privilege.

At issue is a request to fund a project of a private non-operating foundation. The community foundation was aware that under the Pension Protection Act of 2006 (PPA), a DAF may grant to a private non-operating foundation so long as Expenditure Responsibility was exercised. The community foundation believed, however, because the advisor’s privileges were limited and recommendations were not being made by the donor itself, the fund should not be classified as a DAF, thereby eliminating the need for Expenditure Responsibility.

Seeking guidance, the community foundation reached out to Legal Affairs.

The Council’s legal team advised while the advisor was given parameters in which to make grant recommendations, he was still appointed or designated to have advisory privileges, making the fund look like a DAF. In this regard, Expenditure Responsibility would be required.

Section 4966 of the Internal Revenue Code defines DAFs as one:

With respect to which a donor (or any person appointed or designated by such donor) has, or reasonably expects to have, advisory privileges with respect to the distribution or investment of amounts held in such fund or account by reason of the donor’s status as a donor.

In this particular situation, the advisor was appointed or designated by the donor and has, or could reasonably expect to have advisory privileges to the fund, albeit only within a designated scope. As such, it was the legal team’s opinion that the IRS would classify the fund as a DAF. Furthermore, while advisory privilege limitations may add some ambiguity to whether the fund is in fact a DAF, the legal team advised the lack of Treasury Regulations for DAFs makes granting to private non-operating foundations without Expenditure Responsibility a risky endeavor in light of the strictures of the PPA.