Giving Compass’ Take:
• David Levitt explains how donor-advised funds (DAFs) can be used as an effective impact investing tool.
• Impact investing has existed for a decade, but it has only recently gained momentum. How would you use a DAF in today’s investing environment?
• Want to learn more? Seattle Foundation offers these basics on impact investing.
Impact investing, broadly defined as investing for the purpose of generating both a social or environmental as well as a financial return, continues to grow in popularity. Impact investing can also include the use of environmental, social, and governance (ESG) factors in making investment decisions. Donor-advised funds (DAFs) can prove to be a useful tool for impact investing, provided that donors and their advisors are aware of certain points before making these investments.
Are there any limitations on to whom a DAF may make an impact investment?
A DAF administrator (the charity that sponsors the fund) wants to avoid making any distribution that could be deemed a taxable expenditure. Usually, a distribution from a DAF is in the form of a grant to a charitable organization to fulfill its charitable purpose.
Can a DAF own too much equity?
A DAF, together with its donor advisor(s) and family members and related businesses, may own no more than 20% (in some cases 35%) of the voting shares of a corporation or of the profits interest in a partnership or limited liability company. To avoid the possibility of an inadvertent excess business holding, a donor-advised fund could make loans or other non-equity investments.
Can there be co-investment by a donor advisor and a donor-advised fund?
This could raise questions. A donor advisor may wish to invest personally, or already has invested, in the same vehicle in which the DAF might invest. The DAF sponsor and the donor advisor should consider whether the DAF investment could result in a “more than incidental” benefit to the donor.
Can an impact investment result in taxable income?
DAF investments could be subject to unrelated business income tax (UBIT), in particular, investments that involve debt or that are made in flow-through entities such as a partnership or limited liability company.
Read the full article about donor-advised funds and impact investing by David Levitt at The National Center for Family Philanthropy.
To read more by NCFP, check out their Family Philanthropy magazine on Giving Compass.
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