Good Guidance for Donor Clients: Things They Need to Know on Using a Donor Advised FundSubmitted by American Endowment Foundation on December 27th, 2016
By Eric Kinaitis
A recent study concluded that there are nearly 270,000 donor advised funds (DAFs) in existence today, up from 184,000 as recently as 2010, with the average fund balance in excess of $235,000. The flexibility and tax saving power that donor advised funds represent have helped them grow into a powerful giving tool.
However, there are IRS regulations that do oversee how donor advised funds can be utilized. For donor clients and their trusted advisors, understanding these requirements in advance can ensure that the ability to make grants to their favorite causes can be a smooth and enjoyable process.
Incidental vs. Non-Incidental Benefits
Grants from a donor advised fund can only be made exclusively in furtherance of charitable purposes. Per IRS regulations, related to donor advised funds, donors, donor advisors, and related persons may be subject to excise taxes and other penalties if they receive more than an incidental benefit from a donor advised fund (IRC 4967.)
A benefit is considered more than incidental if, as a result of a distribution from a donor advised fund, such person receives a benefit that would have reduced or eliminated a charitable contribution deduction if the benefit was received as part of the transaction.
Examples of Non-Incidental Benefits ( Not OK)
- Certain dues or membership fees
- Goods bought at charitable auctions or tickets for charitable events that entitle the attendees to any material benefit
- Preferential access/seating not available to the general public
- Satisfying a legally binding pledge from a donor advised fund account
Examples of Incidental Benefits ( Generally OK)
- Coffee mugs
- Key chains
- Intangible religious benefits
Other impermissible private benefits include grants for school tuition or scholarships sent directly to individuals. Also, grants may not be used for lobbying, political contributions, to support political campaign activities, or any other non-charitable purpose.
Being aware in advance of what sort of charitable efforts that could be considered a non-incidental benefit can help donors avoid instances where their grant may not be able to be processed.
A Pledge vs a Grant: What's the Difference?
Many donors and their advisors regard the word pledge as a synonym for grant, commitment or promise. Unfortunately, many do not realize that when the word “pledge” is used in context to charitable giving, it takes on a very specific legal meaning.
A pledge is considered a legally binding commitment to an organization. For instance, if you pledge to a charity that you will send them money for their “Building Fund” and they move forward on hiring a contractor to build a new facility with the funds you pledged, this would be legally binding. The charity would book this pledge as income for their organization based on that expectation. The charity has moved forward on this action because they are relying on this pledge from the donor.
Per IRS regulations, no donor advised fund can be used to satisfy a pledge. As part of our due diligence at American Endowment Foundation(AEF), any time a grant recommendation is received that uses the word “pledge”, we must investigate further to determine if this is indeed a pledge as a legally binding commitment or if the word pledge was merely used in a generic manner.
We usually communicate with the charitable organization mentioned in the recommendation directly to determine if the donor has a specific legally binding pledge with the organization. If it is determined that the pledge does exist, then the grant unfortunately cannot be made. If it is determined that no formal pledge exists, then we are able to proceed with making the grant as the donor originally requested.
Unfortunately, it can sometimes take up to a week or two to determine this and solve the matter. For donors, the best way to ensure that your grants are received in a timely manner by your favorite charitable causes are:
- Recognize that no payments from a donor advised fund can be used to satisfy a legally binding pledge.
- Avoid the use of the word “pledge” or “pledging” within your grant recommendation form.
Following this guidance will get the grant money from your donor advised fund off to your favorite causes in a timely manner, allowing them to continue to do their good work.
Contact or call us at 1-888-660-4508 and let us discuss how donor advised funds can play a role in charitable giving.We look forward to discussing your needs and interests in greater detail.