Two Vehicles, One Home: Fiscal Sponsorship and Donor Advised Funds

On June 1, Social Impact Commons hosted a great practitioner conversation on the intersectionality between fiscal sponsorship and donor advised funds (“DAFs”). The following is a description of the event:

We increasingly see fiscal sponsors accidentally or intentionally developing Donor Advised Fund (DAF) programs and, likewise, organizations running DAFs finding themselves acting as fiscal sponsors. Whether accidental or strategic, more and more organizations simultaneously managing DAF and Fiscal Sponsorship programs harbor unique challenges and opportunities. Join us for a practitioner conversation to explore intersections and opportunities to amplify impact by putting together both of these models of shared management.

A brief description of two of the legal issues that arose in the conversation follow:

Accidentally-formed DAFs

Fiscal sponsors may establish a restricted fund in connection with a fiscally sponsored project that also meets the definition of a DAF. If they fail to recognize this, the project’s funds may be expended in a manner that violates one or more of the DAF laws. See, e.g., Donor-Advised Funds: What You Should Know. Common violations include grants to individuals and grants to non-public charities without expenditure responsibility (ER). See, e.g., International Grantmaking: Expenditure Responsibility (the DAF ER rules track the private foundation ER rules).

If the restricted fund for a fiscally sponsored project (FSP) includes funds from one or more related donors over which such donor(s) have or reasonably expect to have advisory privileges regarding their investment or distribution, those funds probably fall within the definition of a DAF. For example, if a fiscal sponsor receives a grant from a private foundation for an FSP, and the private foundation advises the fiscal sponsor / FSP to use its grant to make subgrants to specific other organizations, the grant funds from the private foundation are likely part of a DAF in addition to being part of the restricted fund for the exempt (charitable) purposes of the FSP.

Related Fiscally Sponsored Projects and DAFs

Persons associated with an FSP may ask a fiscal sponsor to act as a sponsoring organization of both the FSP and a related DAF from which grants are made in furtherance of the FSP’s charitable purposes. Such structures are sometimes desired because of the lower “administrative fees” associated with sponsoring a DAF relative to a FSP. For example, if the fiscal sponsor charges an “administrative fee” (which is really an intra-organizational allocation) of 10% for FSPs and 2% for DAFs , FSP leaders may reasonably prefer to make all grants from the DAF rather than the FSP. But for reporting and compliance purposes, the fiscal sponsor must recognize that a fund isn’t a DAF simply because parties agree to call it a DAF.

If the fund called a DAF consists of funds contributed by multiple unrelated parties, the fund as a whole probably isn’t a DAF. See Staff of the Joint Committee on Taxation, Technical Explanation of H.R. 4, The “Pension Protection Act of 2006” as Passed by the House on July 28, 2006, and as Considered by the Senate on August 3, 2006 (JCX-38-06) at 342, available at (download):

The first prong of the definition requires that a donor advised fund be separately identified by reference to contributions of a donor or donors. A distinct fund or account of a sponsoring organization does not meet this prong of the definition unless the fund or account refers to contributions of a donor or donors, such as by naming the fund after a donor, or by treating a fund on the books of the sponsoring organization as attributable to funds contributed by a specific donor or donors. Although a sponsoring organization’s general fund is a “fund or account,” such fund will not, as a general matter, be treated as a donor advised fund because the general funds of an organization typically are not separately identified by reference to contributions of a specific donor or donors; rather contributions are pooled anonymously within the general fund. Similarly, a fund or account of a sponsoring organization that is distinct from the organization’s general fund and that pools contributions of multiple donors generally will not meet the first prong of the definition unless the contributions of specific donors are in some manner tracked and accounted for within the fund. Accordingly, if a sponsoring organization establishes a fund dedicated to the relief of poverty within a specific community, or a scholarship fund, and the fund attracts contributions from several donors but does not separately identify or refer to contributions of a donor or donors, the fund is not a donor advised fund even if a donor has advisory privileges with respect to the fund.

However, that doesn’t necessarily meant that such fund doesn’t include one or more true DAFs within the fund. This may happen if the fiscal sponsor is tracking a part of the fund with respect to its specific donor or funder that has advisory privileges or reasonably expects to have advisory privileges regarding the investment or distribution of such part of the fund, which is not an uncommon scenario where the fiscal sponsor is acting as an intermediary that regrants funds to other parties.

Another observation made during the conversation is that it may be challenging for the fiscal sponsor to reject a prospective FSP when the person proposing the FSP is an existing donor to a DAF sponsored by the fiscal sponsor. Nevertheless, the risks and burdens of fiscal sponsorship are much higher than those of a DAF, and fiscal sponsors must be careful not to accept an FSP that would be a poor fit for the fiscal sponsor. See, e.g., Fiscal Sponsor: Before You Accept a Project …. If operating the FSP becomes more problematic than its value to the fiscal sponsor, terminating the relationship may risk greater harm than not accepting it in the first place. See, e.g., Fiscal Sponsorship Exits: Not Always Easy – Part 1, Part 2.