Gifts from Private Foundations to Donor-Advised Funds

Gifts from private foundations to field of interest funds, designated funds, and other funds that are not donor-advised, are entirely permissible and do not raise special concerns. Gifts to a donor-advised fund can raise red flags as a potential donor control issue. The law does not prohibit gifts from private foundations to donor-advised funds, nor does it exclude such gifts from being treated as qualifying distributions. However, we believe there is some risk that the IRS would challenge such a distribution when used to meet a private foundation’s payout requirement. 

The concern from some lawmakers has been that these distributions are ripe for abuse, a way for a private foundation to avoid meeting the IRS requirement to annually make “qualifying distributions” roughly equaling 5% of foundation assets. Critics believe that the funds will simply be “parked” in a donor-advised fund rather than being put toward charitable use. To address this concern, we recommend that when a distribution to a donor-advised fund from a private foundation will be used to satisfy the private foundation’s payout requirement, the gift should be fully expended within a relatively short period of time. It is helpful to follow the out-of-corpus rule, an IRS rule that applies when a gift is made from one private foundation to another. Under the out-of-corpus rule, the contributed funds are fully spent no later than the close of the community foundation’s next tax year. In other words, a contribution received in one tax year must be fully spent by the close of the community foundation’s subsequent tax year. Again, use of the out-of-corpus rule is not required in this situation, but does ensure the funds are promptly put toward charitable use in the community.

Community foundations should consider adopting the out-of-corpus rule as a matter of policy for handling private foundation gifts to donor-advised funds. Exceptions to this practice may be warranted in certain situations, such as when there is a specific charitable reason for holding the funds longer than the desired timeframe or for distributions that are part of a termination or substantial contraction of the private foundation.

A gift that the private foundation does not plan to count as a qualifying distribution would not warrant use of the out-of-corpus rules.

Last revised May 2017.