Can Donor Advised Funds Give to Private Foundations?

Donor-advised funds (DAFs) and private foundations (PFs) are distinct charitable giving vehicles. A donor-advised fund is a charitable giving account established at a public charity, called a sponsoring organization. Donors contribute assets, receive an immediate tax deduction, and then recommend grants from the fund to qualified public charities. While donors advise, the sponsoring organization has legal control over the assets.

A private foundation is a non-profit organization typically funded by a single source, such as an individual, family, or corporation. These entities are managed by their own trustees or directors and manage investments and make grants to other charitable organizations. The interaction between DAFs and PFs is subject to specific Internal Revenue Service (IRS) regulations regarding whether DAFs can make grants to PFs.

The General Rule

DAFs are generally prohibited from making grants to private foundations due to differences in regulatory oversight and tax treatment. The IRS imposes stricter rules on private foundations, including an annual payout requirement of 5% of their investment assets and an excise tax on net investment income, currently 1.39%. These regulations ensure funds held by private foundations are actively distributed for charitable purposes.

Allowing unrestricted grants from DAFs to PFs could enable private foundations to circumvent their distribution requirements. For instance, a private foundation might grant funds to a DAF to meet its 5% payout, even if the DAF has no immediate distribution obligation, effectively warehousing charitable assets without immediate public benefit. This could also facilitate self-dealing or provide impermissible private benefits to disqualified persons, which are prohibited transactions under IRS rules.

Permissible Grants and Conditions

While direct grants from DAFs to private non-operating foundations are generally not permitted, specific circumstances allow such transfers. The primary mechanism for a DAF to grant to a private foundation is through “expenditure responsibility” (ER). This process is required when a grant is made to an organization that is not a public charity, ensuring funds are used exclusively for charitable purposes.

Expenditure responsibility involves several steps for the DAF sponsoring organization. Before making the grant, the sponsoring organization must conduct a pre-grant inquiry to assess the grantee’s ability to use the funds for the intended charitable purpose. A written grant agreement must then be executed, specifying the charitable purpose, requiring the private foundation to repay any misused funds, and mandating regular reporting on the use of funds. The DAF sponsoring organization must also receive annual reports from the private foundation detailing how the funds were spent and the progress made towards the grant’s objectives. These grants must be reported on the DAF’s IRS Form 990, Schedule I.

Another exception involves grants to “private operating foundations.” Unlike typical private foundations, a private operating foundation directly conducts its own charitable activities rather than primarily making grants to other organizations. To qualify, the entity must spend at least 85% of its adjusted net income or minimum investment return directly on its exempt activities and meet one of three additional tests: the assets test, the endowment test, or the support test. Grants from DAFs to private operating foundations are generally permitted without expenditure responsibility, as these foundations are considered more akin to public charities in their operational focus.

Required Due Diligence

Ensuring compliance for permissible grants from a DAF to a private foundation requires thorough due diligence from both parties. The DAF sponsoring organization must gather specific information from the private foundation before approving any grant. This includes proof of the private foundation’s tax-exempt status, typically its IRS determination letter, and reviewing its organizational documents. A detailed description of the specific project or purpose for which the grant funds will be used is also essential, particularly for grants requiring expenditure responsibility.

A clear and comprehensive grant agreement is essential for any such transaction. This agreement, signed by authorized representatives of both organizations, must explicitly outline the terms, conditions, and reporting requirements, especially when expenditure responsibility is required. It should specify the grant amount, the project’s budget, the permitted uses of the funds, and the frequency and content of reports the private foundation must submit. The DAF sponsoring organization is obligated to monitor the use of funds, verify adherence to grant terms, and obtain regular reports on progress and financial expenditures.

For the private foundation receiving the grant, obligations include providing all necessary documentation and information to the DAF sponsoring organization in a timely manner. This includes submitting financial statements, a detailed budget for the grant project, and any other information required for the pre-grant inquiry. The private foundation must use the funds exclusively for the agreed-upon charitable purpose and provide accurate and timely reports on the use of funds. Maintaining meticulous records of all receipts and expenditures related to the grant is crucial for the private foundation to demonstrate compliance with both the grant terms and IRS regulations.