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Compliance in Alternative Investments within Donor Advised Funds

Compliance in Alternative Investments within Donor Advised Funds

Natalie Leniski avatar
Written by Natalie Leniski
Updated over 5 months ago

  1. What compliance risks exist for alternative investments in DAFs?

    • Excess Business Holdings: If a DAF owns more than 2% of an entity, excise taxes may apply.

    • Unrelated Business Income Tax (UBIT): This tax applies to income from business activities not related to the DAF’s purpose.

    • Valuation Errors: Using unqualified appraisals or failing to follow IRS rules can cause reporting issues.

  2. What is a qualified appraisal, and why is it necessary?
    A qualified appraisal is a professional valuation that meets IRS standards. Unlike a 409A valuation, it ensures compliance with federal tax regulations and avoids penalties.

  3. What are the consequences of non-compliance?

    • Tax penalties, such as excise taxes.

    • Reporting errors leading to scrutiny or financial loss.

    • Potential legal or financial setbacks for the DAF.

  4. How can advisors ensure compliance with IRS regulations?

    • Understand rules for excess business holdings, UBIT, and valuations.

    • Regularly consult the Complex Assets team for guidance.

    • Use qualified appraisers for all valuations.

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