If you want to hear your fundraising team groan in agony, simply mention Donor Advised Funds.
It’s not that they’re not valuable. Last year, DAF grants to charities grew to $14.52 billion (yes, billion with a “b”). And with $78.64 billion in DAF assets nationally, DAFs are nothing to ignore.
It’s not that they’re hard to find. At least 1,016 charities sponsor one or more of the existing 269,000 DAF accounts. They are numerous, if not yet ubiquitous, in the philanthropic world. If your organization fundraises, your organization likely receives some DAF funds.
The problem with DAFs, and the source of your team’s angst, rests with the fact that the IRS still has not, as of 6:00pm on December 5, 2016, issued regulations ten years after the Pension Protection Act of 2006 created new DAF rules. That leaves unanswered questions that put your organization, and your donors, at risk of penalties like excise taxes, fines, and rejection of charitable deductions.
Frustrating, sure. But there’s no need to panic. Follow this donor-centered approach and a few simple steps to keep your organization and your donors out of trouble:
Distinguish your donor (legal donor) for tax purposes, from your donor advisor (donor in spirit) for stewardship purposes. If you received $5,000 from the Jane Doe Family Fund at the Wholly Philanthropy Community Foundation, your donor is Wholly Philanthropy. Contact them. Establish a relationship with a fund manager. Find out if they want to receive a tax letter every time you receive a DAF gift from them and manage accordingly. Ensure WP gets the hard credit for the gift in your systems. Jane Doe, on the other hand, is your donor advisor. Do NOT send Jane Doe a tax receipt. She is Wholly Philanthropy’s donor, not yours. Instead, try to send Jane an acknowledgment that can’t be confused with a tax receipt. It should say something like, “Dear Jane, We recently received a gift from Wholly Philanthropy based on your recommendation. Thank you for thinking of us again in your charitable giving!” Give Jane a soft credit in your system. The bottom line is, make Jane feel like a $5,000 donor to your organization, even though she technically isn’t in this situation.
Clarify what benefits you can – and cannot – provide in exchange for a DAF gift. Donors, donor advisors, and related persons cannot receive “more than an incidental benefit” in exchange for a DAF gift. A tax of 125% of the benefit value can be levied on the party who advised the distribution and the party who received the benefit. And the fund manager who allowed the distribution is subject to a tax of 10% of the benefit value, up to $10,000 per transaction. In the absence of regulations, assume that closely analogous private foundation rules against self-dealing apply. That means no DAF gifts for: event sponsorship (unless the table and other benefits are forfeited), event tickets, payments for tuition or services (like summer camp registration or daycare), donor clubs with benefits (like exclusive access to events and complementary parking where others would have to pay). Note, too, that this means no “bifurcation” of gifts where Jane Doe wants to join your Super Special Donor Club, advises one gift from the Jane Doe Fund, and pays the “non-deductible” portion out of personal funds. The simplest way to avoid such prohibited benefits is to keep it clean. Establish guidelines for your donors encouraging DAF gifts and grants for outright support, not payments in exchange (fully or partially) for something, and publish them for your donors to see like International Rescue Committee has done here.
Remember, donors can’t pledge DAF gifts or satisfy binding pledges with DAF gifts. Because DAF funds no longer belong to the donor advisor, she can’t actually commit them, and she can’t use them to satisfy a personal commitment. When your gift officers are talking with donors about promises to give, make sure they’re specifically asking how the donor wishes to fulfill the promise. A donor who expresses a desire to make a long term commitment through a DAF has given you an intent to give, NOT a recordable pledge. Set up your systems to manage both, and make sure fundraising and accounting staff can recognize the difference.
DECEMBER TO DO’S:
The information contained in this blog post is provided as a courtesy. Reading it does not create an attorney / client relationship, and nothing contained in it should be construed as legal advice. If you need that, or would like help reviewing your organization’s policies and practice, give us a call at 206.456.2579.