Donor-Advised Funds (DAF) are investment accounts for charitable donations to nonprofits. These have boomed since the changes brought about by changes in tax law since 2017. DAFs offer greater tax benefits, less regulation, and greater flexibility compared to setting up a private foundation. But the lack of rules governing the operation of DAFs has begun to worry regulators.
Brian Mittendorf filed this report for The NonProfit Times:
Donor-Advised Funds (DAFs) continue their growth and influence, seemingly unabated. Every year seems to suggest a tipping point, but it’s worth watching to see if 2020 finally brings regulatory scrutiny. There are two developments which suggest this year could be different.
First, in lieu of federal action, states have have begun looking at whether additional requirements should be placed on DAFs to ensure they’re operating consistent with the spirit of the public charity category. Such state action might compel broader changes.
A second development is the potential window into the inner workings of commercial donor-advised funds that the Fairbairn v. Fidelity Charitable case might bring. How involved are financial advisors in the process and how are they compensated for directing funds toward DAFs? What implicit promises do commercial DAF sponsors provide to donors that helped fuel their growth? How are DAF funds invested and who receives fees for them?
These questions and more are largely out of the view of the public due to the nature of the relationships between the DAF sponsors and their commercial affiliates. But this lawsuit could bring them to the forefront which may turn out to bring oversight in play.