The US government has proposed a change to how grants from a private foundation to a DAF are treated. Here is the summary of what is being proposed:
The proposal would clarify that a distribution by a private foundation to a DAF is not a qualifying distribution unless (a) the DAF funds are expended as a qualifying distribution, which does not include a distribution to another DAF, by the end of the following taxable year and (b) the private foundation maintains adequate records or other evidence showing that the DAF has made a qualifying distribution within the required time frame. The proposal would be effective after the date of enactment,
Here is more information on this change. President_Budget_Proposals_on_DAFs_1678564905
Why such a change? As with most charity law regulation, the average person in the philanthropic sector’s first reaction is “why?”. Even philanthropists who have been in the sector for decades often don’t understand “Why?”. Also, there are usually professional advisors who understand exactly why the change is presented, who say “why” and ‘Why do we need more regulation?’
About 10 years ago, I noticed that even in Canada with the proliferation of DAFs that, some groups in Canada, especially private and public foundations, were moving money to DAFs but not to pool money with others or to support an initiative of the DAF or to flow through to another qualified donee, but just to satisfy their disbursement quota with no intention of those funds going anywhere.
There is one key thing that many people don’t understand, even if they are a philanthropist and know 50 other philanthropists. That is that every philanthropist has different motivations. Sometimes these are slight differences, and sometimes these are huge differences. So, for example, you have MacKenzie Scott and then you have Donald Trump and Jeffrey Epstein. All said they were philanthropists, but the last two were not. There is such a big gulf between MacKenzie Scott and Donald Trump/Jeffrey Epstein. Not sure why some cannot understand that point.
Some people have no interest in philanthropy in the sense of making the world a better place. They view it as a tool to achieve their private ends. With Donald Trump, we know that he used it to settle business disputes that he lost without having to have his business pay. In other words, philanthropy was about saving him money. With Jeffrey Epstein, he was probably interested in bolstering his reputation after being convicted of some very bad crimes. Now you might say, don’t almost all philanthropists want to improve their reputation? Probably, but if you cannot see the difference between most philanthropists and Jeffrey Epstein, I am not sure that I can help you.
Also, many people controlling philanthropic funds did not put those funds there (it was their parents or grandparents) or they might have put them there but it was part of a transaction with very significant tax benefits pushed by their tax advisors who did not ask too many questions about whether they were actually interested in philanthropy. I think I once read an Australian study that said 40% of the rich give nothing to charity. So I am not sure why it is so hard for some people to comprehend that some wealthy people are not interested in philanthropy. This also includes some wealthy people who might have ended up controlling a foundation.
Anyway, if you have a $100m private foundation in the US, you would have to spend about $5m and in Canada, until the recent DQ increase, about $3.5m per year. So, if you are a philanthropist who is not interested in making the world a better place, but is interested in having control over your funds, or having people think you must be very successful because you control lots of money, instead of giving the $5m or $3.5m to an operating charity to use, you give it to a donor advised fund to hold so that you can one day recommend how the funds will be used. So, in essence, you are getting huge tax breaks for putting money into your private foundation and additional tax breaks as the investment gains are tax-free, and you are not actually benefitting any real beneficiaries. But you are maintaining your family’s control over assets.
So, the US government is trying to stop this practice. If a private foundation gives funds to a DAF, then the funds have to be spent within a year or they don’t count as a qualifying disbursement.
The situation with DAFs is a little different in Canada. First, the US has quite a bit of regulation around DAFs. We don’t in Canada. They are treated like other charities with little by way of particular rules. We now have one case that specifically refers to DAFs in Canada. Also, as a result of the lack of regulation of DAFs, we have very little transparency about DAFs. Any Canadian charity could be a DAF or have a DAF. Other than those who publicly proclaim they are DAFs, we would have no idea which organizations have DAFs. There is no requirement by Canadian charities to have to report on whether their charity has any donor-advised funds. This is something we have said should be rectified as a separate matter. It could be as easy as CRA asking a few questions, such as does your charity have a donor-advised fund? If so, how many? What is the total value of the DAF assets? But at the moment no questions on donor-advised funds on the T3010. For 99% of charities, the answer is simply no. So not much of a regulatory burden to have to answer that question. For normal DAFs, they could answer that question in about five minutes. ‘But why even burden them with having to spend five minutes answering the question?’, I know someone will say! Well, if you look at how public trust in the charity sector in Canada has plummeted, it has, in large part, been because of a lack of transparency in the charity sector, which causes a lot of suspicion and also allows bad actors to get away with a lot of shenanigans.
I am sure that I will hear from one or two DAFs that this is not necessary, as they would never allow a group to do this. All the power to them. They would not but others would. Also, even if you forced a private foundation that has a DAF with your DAF to disburse say 5% then it is actually only 5% of 5% that should have gone to an operating charity. I am not good at math but that is a very small percentage. I don’t think that the powers that be that thought people should get such a large tax incentive for donating to charity, ever thought that so little would get to charitable beneficiaries.
Also, in the Canadian context, it would probably make sense that if such a rule was brought in, it would apply to both public and private foundations. The US has a different system of private foundations and public charities and they don’t divide their system into charitable organizations, public foundations and private foundations.
Perhaps Finance in Canada will act on this. One thing is clear.It will affect very few public and private foundations because very few are trying to play these sorts of games. But it is unfair to the beneficiaries and other charities if this sort of game is allowed to continue.