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  • Writer's pictureSteven J. Henriquez, CPA

What You Need to Know About Donor-Advised Funds

Over the years as Donor Advised Funds have become more popular and we’ve gotten a lot of questions from potential donors and charities about what they are, what they can do, and how they should be reported. So we’ve answered a few of the usual questions people have below to give you some basic background regarding Donor Advised Funds. Hope it helps and if you have any other questions please let us know.

What are Donor-Advised Funds?

Generally, a donor-advised fund is a separately identified fund or account that is maintained and operated by a section 501(c)(3) organization, which is called a sponsoring organization (which is also commonly referred to as a Donor Advised Fund – DAF). Each account held by a DAF is made up of contributions made by individual donors who receive an immediate tax deduction for their contribution/donation. Once the donor makes the contribution, the organization has legal control over it and it cannot be reversed. However, the donor, or the donor's representative, retains advisory privileges with respect to the distribution of funds and the investment of assets in the account.

Going forward, when we refer to a Donor Advised Fund we’ll be referring to the sponsoring organization – the 501c3 – not the individual accounts from donors that the sponsoring organization holds.

Popular Donor-Advised Funds

There are a lot out there. Some of the more common ones:

Why are DAF’s so Popular?

Well, basically they are often used because when you make a donation to a DAF you get to deduct the donation in that same year – even if you don’t have the funds distributed to a final charity until some future date. So it acts like charity savings account if you will, but you get the tax deduction right away.

And many of the funds make it easy to make monthly contributions to the DAF, they keep records for you of where you’ve distributed the money and they also invest the funds held so you can grow your account to make bigger gifts later. You can even have your funds go to a successor when you pass so your successor can continue charitable giving after you’re gone.

Who is the donor?

Well the DAF is the donor to the final charity destination. That’s why you (the original donor to the DAF) get the tax deduction right away when you give money to a DAF even if the money is simply sitting with the DAF waiting for your instructions on its ultimate use. For example – you donate to the DAF (here you’re the donor to the DAF and get the tax deduction) then at some future date and at your request the DAF donates to charity X (now the DAF is the donor/grantor and you don’t get any additional tax deduction for this).

So, although many organizations don’t track or report it this way, the DAF is the donor/grantor and should be the one noted on Sch B of the receiving charity’s 990 filing. But obviously organizations want to know the person behind the DAF who is actually authorizing the donation and that’s who they typically register in their accounting and/or donor software.

Can we / should we send thank you letters?

The ”we” here is the final destination charity.

Yes, the final destination charity can – but note that the final destination charity is not actually the donee. The final destination charity is simply receiving a “grant” from the DAF (on the advice of the original donor to the DAF). So the usual letter noting tax-deductibility of donation with the organization’s name, tax ID, etc. isn’t really appropriate here. The original donor has already taken a deduction when they donated to the DAF (and most likely get a receipt from the DAF for it acknowledging their tax-deductible donation) – so don’t want to confuse the original donor by sending them a standard thank you letter and have them take the deduction a second time.

For these reasons, most letters from the DAF that come with the funds usually instruct the final destination charity not to send Thank You letters to the DAF or the individual.

Can DAFs be used to fulfill pledges?

No. Since the pledge was made by the individual and the donation is from the DAF the two are separate. Also, when an individual makes a pledge they usually get a confirmation from the charity of their pending donation and for paying the pledge – so if they used the DAF to pay the pledge they could be double-counting the same funds – one when they donated to the DAF and then when they paid the pledge with those DAF funds.

However, the Tax Cuts and Jobs Act of 2017 – a final destination charity can choose to relieve a donor’s pledge obligation – but the DAF must make no reference to the pledge in its donation and the original donor to the DAF can receive no other benefit. This is something to be very careful with.

Can DAFs be used to buy things such as gala tickets?

The IRS prohibits these transactions if more than an incidental benefit is received. So no.

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