DAF alternatives for IRA QCD gifts

     When we near the end of a year, donors age 72 and above start thinking about Required Minimum Distributions (RMDs) from their retirement accounts. RMDs are a big deal. When you take the distribution, you pay taxes on it. And if you don’t take it out, the IRS gives you a 50% penalty. (Yes, half! It’s quite the penalty.) 

         For folks with charitable goals, an ideal approach is to make a Qualified Charitable Distribution (QCD). This sends money directly from the IRA or IRA rollover to a charity. It counts against the RMD. (Although the QCD is not limited to RMD. Donors age 70.5 and older can make QCDs up to $100,000 per year regardless of the size of their RMDs.)

         Giving this way is highly tax advantaged. Rather than receiving income and then taking a charitable deduction, the donor simply avoids the income in the first place. This not only keeps taxes low, but it keeps Adjusted Gross Income (AGI) low. A lower AGI can have many benefits. It can lower Medicare Part D payments and help to qualify for many types of tax credits and deductions.

         As donors become more familiar with Donor Advised Funds (DAFs), a natural thought is to send the QCD to a DAF. The idea is, “I’ll send the QCD to a DAF today and decide what to do with it later.” But there’s a problem. The problem is… you can’t do this. Internal Revenue Code (IRC) §408(d)8 defines a QCD. §408(d)8(B)(i) says the QCD must go to a public charity. But it must go to a public charity “other than any organization described in section 509(a)(3) or any fund or account described in section 4966(d)(2)”. In other words, it cannot go to a “supporting organization” [§509(a)(3)] or a DAF [§4966(d)(2)].

         Case closed, right? No QCDs to DAFs. That’s correct. That’s correct, but. But there are many arrangements with a charity that don’t qualify as DAFs. They might look a lot like DAFs. They might act a lot like DAFs. But they aren’t technically DAFs. If they aren’t DAFs, the QCD can go to a charity to fund these arrangements.

         What sorts of arrangements are allowed? Designated funds are allowed. QCD money can go to a charity to be used for a specific purpose. It can also go to a charity for a specific endowment. In fact, it can go to fund any type of arrangement for which the donor does not have “advisory privileges” regarding distributions or investments [§4966(d)(2)(A)(iii)]. If the donor doesn’t have “advisory privileges,” it’s not a DAF.

         Suppose a donor works with a community foundation to create a permanent fund. It will support the donor’s church, the donor’s university, and the local Salvation Army. It will pay 5% of principal each year to each charity in preset shares. Can a QCD fund this? Sure. Why? Because it’s not a DAF. It’s not a DAF because the distributions are fixed. The donor can’t change them. (Nor can the donor direct the investments of that endowment.) Since the donor can’t change anything, the donor doesn’t have advisory privileges.  If the donor doesn’t have “advisory privileges,” it’s not a DAF.

         What else can the donor do? The code describes other arrangements that are not DAFs. §4966(d)(2)(B) explains,

“The term “donor advised fund” shall not include any fund or account—

(i) which makes distributions only to a single identified organization …”

         Suppose the donor sets up a fund with a community foundation to support his favorite local charity. The donor retains advisory privileges. He decides when distributions from the fund will be made. But because distributions can be made only to one specific organization, it’s not a DAF. Suppose the donor wants to support three organizations this way. That’s fine, too. The donor could set up a fund for each charity. Each fund could receive QCD distributions.

         So, a QCD can go to a single fund with preset distribution rules to any number of charities. Because the rules are preset, the donor has no advisory privileges. Because there are no donor advisory privileges, it’s not a DAF. Also, a QCD can go to a fund with donor advisory privileges if distributions can go to just one named charity. Because distributions can only go to one charity, it’s not a DAF.

         And there’s something else a donor can do. A QCD can go to a scholarship fund where the donor sits on the committee that decides who gets those scholarships. §4966(d)(2)(B)(ii) outlines the rules for this arrangement.

         But wait, there’s more! A QCD can also go to a “field of interest” fund. This is a fund dedicated to a specific cause. Suppose a donor wants to support programs to address homelessness in her local community. She can establish a fund, or give to a pre-existing fund, to support that cause. A committee (not including the donor) can then decide when and where to distribute the funds to support that specified cause.

         A QCD can’t go to a DAF. But it can go to a non-DAF fund that the donor finds or creates. A QCD can go to

·      A fund going to a single charity where the donor controls the future distribution timing.

·      A fund with a preset distribution plan going to any number of preset charities.

·      A scholarship fund, even when the donor sits on the recipient selection committee.

·      A “field of interest” fund supporting a specific cause where the donor does not sit on the recipient selection committee.

         A donor can send QCDs to any such funds. (This works whether or not the donor was the one who originally created the fund.) So, final answer, can a QCD go to a DAF? Nope. But it can go to other funds that aren’t DAFs, even if they are a little bit “DAFFY”.