Tuesday, October 21, 2014

Do Donor Advised Funds Create a Double-Counting Problem?

Consider these headlines from the past week:

What do these headlines and the many more like them have in common? Yes, they show an important donation to a critical need. Beyond that, though, they also are technically incorrect. Why do I say this? What some (but not all) of the articles mention in the details is that the gift is not exactly from Zuckerberg and Chan, but rather from their donor-advised fund at the Silicon Valley Community Foundation. Seeing as how all of these news outlets also publicized their initial gifts to the donor-advised fund in the first place, this seems to me like double-counting (or in this case, double-publicizing) of donations. I say this not as a criticism of Zuckerberg and Chan (they deserve any publicity they get for their generosity, which is by any measure extreme) nor as a critique of journalists covering this news. Rather, I say it to highlight the inherent contradictions of donor-advised funds (DAFs).

The sequence of events around donations to DAFs is as follows. First, a donor transfers funds (typically appreciated securities) to a DAF. These assets remain in the DAF as investments until it is decided that they will be distributed for charitable use (typically at the "advice" of the donor). It is safe to say that the donor only makes one donation here, so treating both the initial gift and the subsequent distribution as donations amounts to double-counting. True, it's not the biggest issue at play here; but as an accountant, I can't help but pay attention to questionable counting. And, if one motivation for donations is the public or intrinsic benefit one receives from making them, it seems the tendency to double-count that DAFs create gives them added appeal.

The bigger question is when is a donation to a DAF a donation? Ask most people and they will say it's not really a donation until the funds are transferred or at least pledged to an operating charity. However, for tax purposes, the donation is considered to be made when the funds are handed over to the DAF, after which there is little, if any, regulation of when they are put to use. This confusion is just one of several concerns that have been raised about donor-advised funds and the lack of requirements placed on them -- see the work of Ray Madoff and Alan Cantor for more. With the increasing prominence of DAFs, these issues are sure to take on on greater importance.

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