A donor-advised fund or DAF is a giving account established as a public charity. The IRS defines a DAF as a fund or account owned and controlled by a sponsoring organization. Donor-advised funds (DAFs) have been around since the 1930s. They gained broad-based appeal in the 1990s after National Foundation, Inc. won its case against the IRS in 1985. In 2006 they were formally recognized in the Pension Protection Act. DAFs are the fastest growing philanthropic vehicle used by high-net-worth individuals and families.
Today, more than ten percent of giving in the U.S. comes from donor-advised funds grants. DAFs are popular philanthropic vehicles among wealthy donors for many reasons such as:
maximizing tax benefits
creating a charitable legacy
simplifying organization and administration
choosing how they wish to be acknowledged
One of the most common questions asked by donors who establish DAFs relates to personal pledges.
Yes, a grant from a DAF can satisfy a pledge so long at the DAF sponsoring organization does not reference the pledge in the grant letter or check.
No donor or advisor will receive any benefit, such as auction items or sports tickets.
The donor/advisor does not claim a charitable contribution deduction for the grant.
Another common question is whether or not a DAF grant can be used to satisfy a portion of a donation or a bifurcated donation, where one part is tax-deductible, and the other is not.
No. Section 3 of IRS Notice 2017-73 prohibits benefits that are “more than incidental” to the donor or donor advisor.
This prohibition includes charity-sponsored events and memberships.
DAFs can recommend grant support to any qualified 501(c)(3) public charitable organization. However, all grant recommendations must be approved by the grant sponsoring organization. Each sponsoring organization has its own guidelines regarding grants to new or international charities, grants to scholarships, events, and memberships. Some will not award grants to political parties or to private non-operating foundations.
The IRS has been seeking input on proposed regulations for donor-advised funds for several years. In November of this year, they released revised proposed regulations which address restrictions and taxation on DAF distributions. Comments on the proposed regulations are due January 16, 2024. Click HERE to include your comments and feedback regarding donor-advised funds regulations.
Michelle Crim, CFRE
Dynamic Development Strategies can help. We offer coaching, grant writing, and fundraising services for our nonprofit clients. We specialize in small to mid-size organizations because we understand your challenges. Please contact us for more information.