Private Foundation Grants to DAFs: Attorney General Charitable Trust Oversight Calls for Disclosure of Use of Funds

Abstract

$3 billion was transferred from over 2,200 U.S. private foundations to five donor advised fund (DAF) sponsors between 2010 and 2018. Within this universe, a growing number of private foundations have made a single grant during a reporting year to a commercial DAF. Looking just at transfers to the top five commercial DAF sponsors, 35 foundations transferred the entirety of their annual grantmaking to DAFs between 2010 and 2018. These transactions offered no tax benefit, but in effect excused private foundations from two legal requirements for U.S.-based private foundations derived from the Tax Reform Act of 1969: reporting grant recipients1 and the 5 percent annual payout requirement.2 Such grantmaking, while facially charitable and in-line with the requirements put forth in the 1969 legislation, not only risks breaches of restrictions established by the foundations’ founding documents but also obscures all aspects of the recipients of private foundation funding by providing no context for when or where the charitable dollars will be used. Private foundation-to-DAF transfers frustrate state attorneys general’s ability to fulfill their supervisory duties to monitor and ensure that charitable dollars held by charitable trusts are used for their intended purpose. This paper examines the governing authority and practices of state attorneys general offices as relating to a special problem of charitable trust enforcement: private foundation grantmaking to commercial DAFs. The authors examine the regulatory challenges based on interviews with both current and former attorneys from nine attorney general offices, as well as interviews with commercial DAF sponsors. Charities regulators’ ability to fulfill their supervisory duties related to private foundation-to-DAF grantmaking is blocked by the lack of transparency on the use of funds transferred to DAFs. Thus, charities regulators cannot ensure that private foundations’ grantmaking fulfills restrictions on their charitable giving, and the public is unable to see charitable activity ordinarily subject to public inspection. In order to equip charity regulators to effectively enforce state charitable trust requirements, the paper concludes with two recommendations: 1. Charitable trusts should be required to report to state attorneys general all grants made or approved for future payment from DAF accounts to which they have transferred funds, subject to public inspection, and 2. Attorney General’s offices should respond to the growth of charitable funds held in trust by devoting increased resources to monitoring charitable trusts and donor advised funds.