Donor-Advised Funds Would Face Big Headaches Under IRS Proposal

The New York Community Trust submitted comments on Feb. 15 to the IRS in response to proposed regulations that would damage donor-advised funds and community foundations more broadly. DAFs give donors the ability to set aside tax-deductible dollars in a charitable fund that makes grants over time to the nonprofits they recommend.

Among other things, under the proposed IRS regulations, many funds could be at risk of being reclassified as DAFs, leading to administrative headaches, and increasing the administrative costs of managing our funds—in effect taking money and resources away from community-based nonprofits that urgently need them.

If community foundations are forced to increase the fees associated with a fund to cover administrative costs, less money is available for grantmaking to nonprofits. Additionally, some donors are likely to forgo establishing or contributing to a DAF at a community foundation as a result of increased administrative costs.

The IRS recognized the role of community foundations as sponsors of DAFs in its preamble to the proposed regulations. But a number of the proposals would impose new burdens and discourage the type of donor engagement that community foundations foster. In effect, the rules treat donors and their related parties as a source of concern, which we believe is unwarranted.

Our donors often possess valuable expertise or experience relevant to the charitable purpose or objective of a fund. At the New York Community Trust, donors have worked alongside professional grantmaking staff to identify best-in-class nonprofits working in biomedical research, social work, and wildlife conservation, to name a few.

After creating the first DAF in 1931, and operating thousands of DAFs across decades, our organization knows that people from all walks of life are using these funds to carry out efficient and effective philanthropy by supporting the causes and organizations they care about.

Today, donor-advised funds are central to most of the nation’s nearly 900 community foundations and are a significant source of revenue for community-based nonprofits across the US. In 2022 alone, DAFs at community foundations granted $11.9 billion to US charities. These funds allow community foundations in every corner of our nation to address housing shortages, food insecurity, rising poverty rates, the looming threats of climate change, and a host of other issues.

At community foundations, DAFs are just one vehicle to manage and administer charitable dollars. We also often bring donors together through collaborative funds and giving circles to make grants in specific areas, such as education or health, or to respond to crises, such as when we quickly raised and distributed more than $110 million in New York during the Covid-19 pandemic.

Some donors entrust us with funds designated for specific charities, knowing that the community foundation can put the funds to good use even if the nonprofit closes its doors or changes direction. Still, others leave us permanent funds to address the causes they care about even after they are gone.

We should be looking for reasons to include, not exclude, donors from the philanthropy they care about. With so many urgent causes to address, we should be encouraging more accessible philanthropic giving through a wider range of vehicles—not creating obstacles.

We respectfully urge the IRS to consider the potential consequences of its proposals and hold hearings to gather more information before these regulations become law and have a chilling effect on philanthropy.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Amy Freitag is president of the New York Community Trust.

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