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TCN Donor Advised Funds and the new Pension Protection Act of 2006
Pension Protection Act of 2006 Will Affect How TCN Operates
Please read this memo carefully regarding important changes to Foundations at TCN
Dear Donors:
Title XII, Subtitle B (“Reforming Exempt Organizations”), Part 2 (“Improved Accountability of Donor Advised Funds”), Sections 1231-1235 of H.R. 4 (“Pension Protection Act of 2006”) imposes stringent restrictions on distributions of funds from donor advised funds.
This new law came as a surprise. This bill was passed by the House and Senate as they rushed to adjourn for the “summer recess.” This new bill was passed late at night on Thursday, August 3rd, 2006. President Bush has since signed it into law.
Summary of Key Provisions Affecting Foundations at TCN:
The new law defines “donor advised funds” as funds maintained by an Internal Revenue Code (“IRC”) §501(c)(3) “sponsoring organization,” such as TCN, as to which the donor or any person designated by the donor reasonably expects to have “advisory privileges,” either as to distributions or investments. Foundations at TCN are regarded as “donor advised funds” for purposes of the new law.
1. No distribution may be made from any foundation at TCN to any donor-advisor, an advisor to a donor, or appointed by a donor, or other individual as a grant, loan, compensation, or reimbursement of expenses. An excise tax of up to 200% is imposed on the recipient of any such distribution.
2. No disbursements may be made for any expenses related to the operation of any charitable program, including but not limited to reimbursement for expenses, travel, payment of invoices, consulting fees, salaries, grants, scholarships, fund raising events, printing, postage and telephone costs, - in effect anything related to the accomplishment of a charitable program.
According to this new law, TCN from now on will not be able to make any distributions from funds allocated to any foundation to any donor-founder or any person designated by the donor-founder to have “advisory privileges” with respect to recommending either the “distribution or investment of amounts” allocated to the foundation at TCN. This includes Development Officers or charitable consultants.
This prohibition also applies to: (1) any family members (broadly defined) of the donor-founder or any person designated by him or her (e.g., an advisor or a consultant) to have such “advisory privileges” and (2) any business entity in which the donor-founder, his or her designee with “advisory privileges” or any family member of either (or both) together hold a 35% or greater equity interest (or functional equivalent).
TCN, effective immediately, may only make grants to IRC §501(c)(3) organizations, such as public charities, churches, schools, universities, hospitals, etc. You are permitted to continue to make recommendations to TCN for disbursements from funds allocated to your foundation to these types of IRC §501(c)(3) organizations.
We realize that many foundations that are carrying out charitable, educational, or religious projects will wish to continue to do so. We encourage you to consider incorporating your project as a non-profit corporation and applying to the IRS for recognition as an independent tax-exempt organization with the same IRC §501(c)(3) status as that of TCN. If you decide to do this, we will help you. Once you attain this status, your IRC §501(c)(3) organization will be eligible to apply to TCN for a grant from funds allocated to your foundation at TCN. TCN will use its discretion to consider each proposed grant on its merits.
If you wish to consider seeking IRS recognition of your project as an IRC §501(c)(3) organization, like TCN, please call me to discuss at (800) 822-6711.
For those interested in reading a detailed explanation of the provisions of the Pension Protection Act of 2006 that affect donor advised funds, we recommend the official explanation by the staff of the Joint Committee on Taxation. This explanation can be found on-line at: http://www.house.gov/jct/x-38-06.pdf. The relevant pages are 342-351.
Sincerely,
Dan Pompei
Executive Director
Trust Counselors Network, Inc.
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