Strengthening Community Philanthropy Ad Hoc Working Group Releases Donor-Advised Funds Recommendations
Community foundations have a long history of working locally to bring together leaders, nonprofits, donors, and others to address persistent problems and identify paths forward. The ongoing pandemic has underscored how local philanthropy, in particular, can address community needs in times of acute crisis through a variety of giving vehicles, including donor-advised funds (DAFs). These funds also ensure there are stable charitable resources to support community needs not only during moments of economic strength, but also economic downturn.
The Strengthening Community Philanthropy Ad Hoc Working Group, convened by the Council on Foundations, released the following recommendations on donor-advised funds, outlining steps to improve their effective and transparent use. These recommendations focus on strengthening the sector and better positioning it to continue addressing ongoing challenges. The recommendations were driven by community foundations working on the ground and informed by available data and the experiences and expertise of the Working Group. We remain committed to working with the sector to further inform this process.
How the Recommendations Were Developed
Given the ongoing conversations about DAFs, including their use and possible areas for reform, the Council engaged a diverse group of community foundation leaders to develop concrete and practical recommendations that can:
- Promote consistent, effective, and transparent use of DAFs
- Strengthen trust in philanthropy
The Working Group included 11 community foundation leaders serving communities and nonprofits across the nation. The Working Group used a collaborative process to ensure their recommendations reflected the diverse and valuable experiences of those who operate community-based philanthropic organizations across rural, urban, and suburban regions in deep partnership with nonprofits and community members. Collectively, the Working Group examined the benefits and challenges associated with the use of DAFs.
Between July 2021 and January 2022, the Working Group reached consensus on the following recommendations.
Detailed Description of the Recommendations
Inactive Fund Policy
- All community foundations should develop and enforce an inactive funds policy with key elements and encourage all sponsoring organizations to develop similar policies that they share with their donors and the public as a best practice for the sector.
- Encourage the U.S. Department of Treasury to include the percent of inactive funds on Form 990 with an opportunity for organizations to provide important context for why such funds are categorized as inactive.
Annual Distribution Requirement
- Community foundations should establish a minimum annual distribution requirement of 5 percent of the total assets held in their DAFs. Community foundations that distribute more than 5 percent of their DAF assets may carry forward the excess for up to 5 years to address any future shortfall.
Interaction between Private Foundation and Donor-Advised Funds
- Funds contributed to a DAF by a private foundation should be distributed within five years for the distribution to be considered part of the private foundation's qualifying distribution.
Donation of Complex Gifts
- The charitable community should convene to develop recommendations for managing the donations of complex and illiquid assets that apply to all section 501(c)(3) organizations, not just donor-advised funds.
Expanding Charitable Giving
- Tax laws should encourage individual giving and benefit all donors by incorporating changes like the Universal Charitable Deduction or charitable tax credits for taxpayers who do not itemize and including distributions from an IRA to a DAF as part of qualifying charitable distribution.
