It has been reported recently that charitable giving had its largest decline since the 2008-2009 financial crisis, citing circumstances such as 2018 tax law changes as one reason for the decline. In a blog published in August 2019, AAFCPAs Wealth Management outlined charitable giving strategies donors should consider in order to maintain charitable goals while optimizing their tax benefit. Donor Advised Funds (DAFs) are recommended as one of these tax efficient charitable giving structures. AAFCPAs encourages fundraisers to educate, inform, and get your donors excited about utilizing this strategy to maximize tax deductions for their charitable giving.
A DAF is defined as a fund or account owned and controlled by a sponsoring organization (i.e. section 501(c)(3) organization), which is separately identified by reference to contributions of a donor or donors, and with respect to which the donor, or any person appointed or designated by such donor, has advisory privileges with respect to the distribution or investment of the funds. A DAF allows a donor to take immediate tax deductions when the donor makes contributions to it without needing to make a final recommendation at that time on how the fund will be used and when the distributions from the fund will be made. In addition, since the donor has advisory privileges over their donated assets, a distribution from a DAF may be used to satisfy the donor’s pledge made to a charity, according to the Notice 2017-73 issued by IRS on December 4, 2017.
When Does the DAF Fulfill the Donor’s Pledge?
The Treasury Department and the IRS are of the view that it is the responsibility of the recipient charity to determine whether an individual’s charitable pledge is legally binding and whether the distribution from the DAF fulfills the donor’s pledge. In other words, it is not the responsibility of the sponsoring organization to differentiate between a legally enforceable pledge by the individual donor to the recipient charity and a mere expression of charitable intent.
In order for the distributions from a DAF, that the recipient charity treats as a fulfilling pledge made by the donor, not to result in a more than incidental benefit to the donor, the sponsoring organization shall make no reference to the existence of a chartable pledge when making the DAF distributions. It certainly presents some challenges for the recipient charity to identify the asset received, i.e. is it a new donation from the supporting organization’s DAF or fulfillment of a specific donor’s pledges? Additional challenges include recording and evaluating multi-year pledges made by a donor who indicates the pledges will be fulfilled by a DAF over a period of time. Since the DAF is controlled by the sponsoring organization, not the donor, the uncertainty of the collectability of the pledges might increase.
AAFCPAs advises nonprofit clients to modify their gift acceptance policies to provide guidance to prospective donors when making gifts to your organizations, including charitable pledges made through a DAF. Having a formal process in place will reduce the challenges of navigating this increasingly common funding vehicle as it relates to revenue recognition for financial statement purposes.
If you have any questions, please contact Hui-Ting Grady, CPA, at 774.512.4106, firstname.lastname@example.org; Tom Muldoon, CPA, CGMA at 774.512.4032, email@example.com; or your AAFCPAs Partner.