While it seems almost impossible that a donor’s wishes would be ignored, it happened recently in Nevada. The donor, Ray Styles, placed $2.5-million in a donor-advised fund with the Friends of Fiji (a California-based fund). The fund administrator made gifts of $600,000 from the fund to pay its two directors. When Mr. Styles objected and sued to recover the $2.5 million, a court rightfully ruled that he had signed away his rights to control any of the money. Furthermore, additional gifts were made from the fund to defend Friends of Fiji in the resulting law suit.
While we may not like the outcome of this legal case, the ruling was the right one. Through donor-advised funds, people, like Mr. Styles, give money to a community fund or other nonprofit and then are allowed to recommend where the money will go. In some ways, this looks like a charitable checking account. But the giftors of donor-advised arrangements get a tax deduction in the year they contribute the money to the fund and, in return, give up the right to control the money.
This example is certainly an extreme one. In reality, donor advised funds provide wonderful flexibility for individuals, multiple generations of families, and businesses. They are one of today’s most popular gift planning vehicles. But donors should learn about the limitations they set as well, and they should take steps to protect themselves when making gifts with restrictions. You can read more about donor-advised funds and why they are so popular in the Wall Street Journal article ‘Family Charities Shift Assets to Donor Funds.’
*Katherine Swank is a consultant for Target Analytics. You may reach her at email@example.com.