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.
