Gifts from Private Foundations to Donor Advised Funds

More than 12,454 private foundations made 25,772 contributions to 2,007 nonprofits that operate donor advised funds (DAFs) this most recent fiscal year, for a combined total of over $2.7 billion in contributions. The vast majority of these recipient nonprofits (i.e., sponsoring organizations) are community foundations that operate DAFs. Educational institutions (and their foundations), religious organizations, and national donor advised funds — often operated by financial institutions like Fidelity Charitable Gift Fund or National Philanthropic Trust — are also common donation recipients. Private foundation grant sizes were a median of $5,324, and most ranged from $1,000 to $31,565. Of the private foundations, two sponsored donor advised funds themselves.

Trends of DAF nonprofits receiving private foundation grants

Donor advised funds come in all shapes and sizes. Remember that DAFs are operated by 501(c)(3) public charities — the sponsoring organizations — and are a special tool allowing donors (whether individuals or private foundations) immediate recognition of their donations, and advisory influence over to whom the DAF subsequently provides grants. Some nonprofits exist solely to operate DAFs (e.g., Vanguard Charitable Trust), whereas others created DAFs as one means of raising funds to accomplish their missions (e.g., Seattle Foundation). While the Form 990 doesn't provide details on whether private foundations donated specifically to donor advised funds, we do know when private foundations provide gifts to nonprofits that operate donor advised funds. What types of nonprofits operating donor advised funds do private foundations give to?

Most private foundations that give to DAFs concentrate their giving in their own metro areas. Only 25% of private foundations that give to donor advised funds make grants nation-wide. This coincides with the fact that 35% of private foundation grants to DAFs go to sponsoring organizations that are community foundations. The remaining sponsoring organizations are mix of all types of nonprofits — remember that almost any 501(c)(3) can sponsor a DAF.

Large financial firm DAFs

Donor advised funds became a major vehicle for donations in large part due to commercial DAFs operated by financial institutions such as Schwab Charitable Fund, Vanguard Charitable Endowment Program, and Goldman Sachs Philanthropy Fund. While these DAFs undoubtedly have the most assets under management, they aren't a major source of contributions from private foundations. Of the 12,454 private foundations that donated to DAFs, only 392 of them donated to any of the top 10 financial institution DAFs, across 392 different transactions. However, the total amount across these 392 transactions was $345,439,623, with a median grant size of $93,499. So while not common, gifts to the major DAFs were quite large.

Perhaps the private foundations were donating to DAFs in order to meet their 5% annual distribution requirement. For example, Sordello Family Foundation, a Los Angeles private foundations with ~$10M in assets, made six grants / contributions in 2018:

• Schwab Charitable: $220,000
• Cancer Carepoint: $19,580
• Humane Society Silicon Valley: $25,000
• Santa Clara University: $8,500
• St Andrew's Episcopal School: $7,500
• Archbishop Mitty High School: $10,030

The most logical guess as to the significant gift to Schwab Charitable, when the tax advantage of a private foundation and a DAF are largely similar, is to avoid the 30% excise tax on undistributed income. From their 2017 Form 990-PF, they were required to distribute $286,706 in 2018 (Form 990-PF, Part XIII, Line 6f) or else pay the excise tax. They ended up distributing $290,610, just over the required amount to avoid paying the excise tax. So for them (and perhaps other private foundations), donor advised funds offer a relief valve to avoid paying excise taxes on undistributed income.

Can a donor advised fund donate to a private foundation?

While DAFs do donate to private foundations, in general, DAFs are only allowed to give to private foundations if the private foundation is an operating foundation. Private operating foundations are private foundations that conduct their own direct charitable activities (versus just giving away money). A donation from a DAF to a private non-operating foundation would be a donation for a non-charitable purpose, which is prohibited

Arguably, if a private foundation gave to a donor advised fund to meet its 5% annual distribution requirement, and then "advised" the DAF to donate back to the private foundation, that would be an improper distribution, and each transaction would be taxable expenditure, subject to a 20% excise tax.

While this does happen, it doesn't happen often at all. Among the 1,086 nonprofits sponsoring DAFs that private foundations donated to, only 28 of them made donations back to private foundations across 35 transactions. And in only one instance did a private foundation donate to a DAF, and then that DAF donate back to the same private foundation (or vice-versa): The Los Angeles 84 Foundation, a private foundation concentrating in youth sports, donated $50,000 to Newport Aquatic Center, a 501(c)(3) athletic facilities complex that sponsors a donor advised fund. In the same fiscal year, Newport Aquatic Center also gave $100,000 to Los Angeles 84 Foundation. Whether these transactions are qualifying distributions or taxable expenditures subject to excise tax is up to accountants and the IRS to decide.