Charitable organizations are engaging with donors who may wish to establish a DAF with the organization and may also receive DAF distributions. A DAF, or donor advised fund, is a fund owned and held by a public charity. Gifts made to the public charity (referred to as a sponsoring organization) for this purpose are placed in a separate fund, named for the donor, and the donor or a donor’s representative may advise (or recommend to) the public charity, on the charitable organizations to receive distributions or grants from the DAF. Donations are tax deductible when made to the DAF and there are no specific requirements for when the donation must be used.
A number of large investment firms have established sponsoring organizations for the specific purpose of providing their customers an easy way to manage charitable giving administration, allowing the donated amount to grow tax free because there is no minimum distribution requirement and assisting with their legacy planning.
The available guidance and rules may not be well understood by donors and their advisors and, in connection with receiving a DAF distribution, the sponsoring organizations may make very specific (and sometimes unreasonable) requests of your charitable organization to document distributions. While there is limited specific legal guidance about DAFs, charitable organizations engaging with donors making distributions from DAFs and working with donors to establish a DAF fund need to be generally knowledgeable about DAF rules. Your charitable organization is not acting as an advisor to the donor about the donor’s legal requirements; however, your organization needs to comply itself and also should be able to generally guide donors for donor stewardship purposes.
Things to Know if Your Charitable Organization Receives a DAF Distribution:
DAF distributions received by a charitable organization can be acknowledged but donors should not receive a tax deductibility receipt because the donor was eligible to take a tax deduction when the donor contributed funds to the DAF.
The IRS has stated that a DAF distribution for the purchase of the tax deductible share of a ticket to a charity-sponsored event is considered to be for the direct benefit of the donor and therefore a prohibited benefit.
Donors may satisfy existing charitable pledges and gift agreement commitments from a DAF if the following requirements specified by the IRS are met:
(1) the public charity holding the DAF makes no reference to the existence of the charitable pledge when making the distribution from a DAF;
(2) the donor and his/her advisor do not receive, directly or indirectly, any other benefit that is more than incidental on account of the distribution; and
(3) the donor/advisor does not attempt to claim a federal income tax charitable contribution deduction with respect to the distribution (because the deduction was already received) even if the charity erroneously sends a tax receipt.
Considerations Before Establishing DAFs:
Your organization may also be asked by donors to establish DAFs. Public charities will need to consider, given all of the facts and circumstances, whether becoming a sponsoring organization is a worthwhile endeavor in light of the additional compliance obligations that need to be managed.
At minimum, the organization will want to ensure that owning and administering DAFs is in furtherance of its mission and governing documents, including the organization’s articles and bylaws. For example, a donor may request that your charitable organization accept a DAF for a charitable purpose totally different from the organization’s own mission.
Be aware that public charities owning DAFs are required to report about their activities on the Form 990, including the number of DAFs it owns, the value of assets held and the contributions to and grants made from the DAFs.
Charitable organizations that own DAFs and fail to administer them in accordance with law and guidance may subject the organization to tax.
