There is growing concern among community trusts at the potential impact of proposed regulations by the IRS targeting donor-advised funds (DAFs). Comments recently submitted by The New York Community Trust warn that these regulations could pose threats to the broader function of community foundations. DAFs, at their core, offer donors the chance to set aside tax-deductible dollars in a charitable fund, which, over time distributes grants to non-profits they endorse.
Several issues arise in light of the proposed IRS regulations. For one, a great number of funds could be at risk of being reclassified as DAFs. This, in turn, would lead to increased administrative costs due to the upkeep and management of these funds, directly impacting community-based non-profits who are in dire need of these resources.
Forced to increase the fees associated with a fund to cover these administrative costs, community foundations would have less money available for grantmaking to non-profits and would therefore, lose potential donors.
The IRS does acknowledge the role of community foundations as sponsors of DAFs in the preamble to the proposed regulations. However, the regulations present a set of burdens that could deter donor engagement and cast donors and their related parties as a source of concern – a concern that may not be warranted.
Valuable expertise or experience that donors bring to the table in terms of the charitable purpose or objective of a fund should not be overlooked. At The New York Community Trust, this is manifested through donors working alongside professional grantmaking staff to identify top-tier nonprofits in fields ranging from biomedical research to social work, and wildlife conservation.
DAFs have been a cornerstone for the nation’s nearly 900 community foundations and a major source of revenue for community-based non-profits throughout the US. In 2022 alone, DAFs affiliated with community foundations granted a whopping $11.9 billion to US charities.
Such funds permit community foundations across the country to tackle housing shortages, food insecurity, rising poverty rates, the impending threats of climate change, and an array of other issues. Donors may allocate funds for specific charities, assured that said funds can be utilized even in case of organisational transition or closure.
The prime focus should be on inclusivity for donors in philanthropy by encouraging philanthropic giving through a broader range of vehicles and not creating hurdles. Therefore, it is imperative that the IRS meticulously considers the potential consequences of its proposals and convenes hearings to gather more information before these regulations become law, potentially leading to a stagnation in philanthropy.
This article peer-reviewed by Amy Freitag, President of the New York Community Trust.