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BETTER GIVING

BETTER GIVING

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We feel strongly about philanthropy, and we share our thoughts and experiences here in our blog posts and elsewhere to provoke thinking and action.

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Frequently Asked Questions

Donor-Advised Funds

The steady rise of donor-advised funds (DAF) has fundamentally changed the landscape of philanthropy. High net-worth families, individuals, and even corporations are flocking to this proven giving tool, lured by the promise of easy gifting and giving, compounded growth, low costs, and enticing legacy options.

For development professionals, DAFs can seem like a brick wall dropped directly between their mission and their donors. The perceived lack of visibility into a constituent’s funding potential can cause anxiety and even animosity. But DAFs are not the enemy. Instead, they are a key indicator of long-term major donor intent, and, once understood, can be a fundraiser’s good friend.

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What is a DAF?

A donor-advised fund is a charitable giving vehicle where individuals and families can contribute, invest, and grow assets for the sole purpose of supporting the charities of their choice.

There are several key facts about DAFs that nonprofits and fundraisers need to understand in order to work effectively with their DAF donors:

Owning a DAF is a signal of philanthropic commitment and of more available money for giving. If your donor has a DAF account, you can almost guarantee they have the capacity to give beyond their current commitment.

DAFs can make your life easier and reduce overhead and risk/liability for your charity by turning non-cash gifts into one easy-to-process check.

Money invested in a DAF must go to a charity. There is no other option.

Understanding these simple truths about DAFs, what can you, as a fundraiser and nonprofit organization, do to access this source of giving?

Can a donor roll their Charitable IRA transfer into a Charitable Gift Annuity?

No. The Pension Protection Act of 2006 specifically carved out tax free distributions from an IRA to a CGA. A donor may still use a distribution from an IRA to fund a CGA, but the funds must be received by the donor (ie. constructive receipt and liable for income taxes) and then sent to a charity by the donor to fund a CGA. With the normal tax deductible benefits afforded to a donor by a CGA gift, the tax liability of the IRA distribution may be partially offset.

(From the PPA 2006 language) “The exclusion from income applies only if a contribution deduction for the entire distribution otherwise would be allowable (under present law), determined without regard to the generally applicable percentage limitations.”

Thus, split interest gifts of any type do not qualify since their funding has deduction percentage rules.

Can a donor use the funds from their Foundation or Donor Advised Fund to purchase tickets for a charity gala event?

No (and Yes – see below). This nuanced topic of granting from a donor-advised fund is often referred to as the “bifurcation” of a grant or gift and flags any “personal benefit” that may be received by the donor as problematic. While currently under review by the IRS, grants from DAFs that result in more than an incidental benefit – such as this bifurcated tax situation – are generally not allowed. Grants from DAFs to a charity must be 100% fully deductible under the current language and regulations of the IRS.

For instance, if a donor buys a table at a gala (or a tee-box at a golf event etc) and receives something of consequence in return – like the ability to seat 8 friends around the table for a free meal, or a free entry to the golf event – that return back to the donor is viewed as a personal benefit which is not tax exempt. The gift of a table at a gala in this case goes to cover some event expenses – the tax-deductible portion of the gift – and a non-deductible portion that provides a personal benefit. (“Bifurcate” – to break into two parts).

Example – assume a gala event table of 10 seats is $1000 – and the charity has determined that the gift is 75% tax deductible ($75 of each seat goes to offset costs for the event, and each participant is receiving a $25 meal for free).
The recent IRS Notice 2017-73 provides some interim guidance and directional thinking as the IRS works towards new regulations on this and a few other DAF matters. Under consideration is the possibility for a DAF to fund the tax deductible portion of the event ($750 in the example above), and the donor separately to fund the portion that they would have received as a personal benefit ($250) if they had paid for the full event/table cost.

And Yes. Grants may be made to offset event expenses in full in which there is no split of the tax deductibility of the gift. If there is no personal benefit (maybe the donor has no intent to attend the gala nor take advantage of any benefit offered) the gift is likely to be approved by the DAF.

What happens to the funds held in Donor-Advised account upon the passing of the account advisors?

Let’s start by being clear on two terms that can be confusing: Donor-advised funds (DAFs) are a type of giving vehicle hosted by charitable organizations; these organizations hold a collection of donor-advised accounts (DAAs). You and I can open a donor-advised account at a charity that operates a donor advised fund, but actually “opening a DAF” is for organizations only and requires certification under the regulations for a public charity.

DAFs today offer donors a variety of succession or advisor end-of-life options for their accounts, which are almost always defined in the hosting organization’s terms and policies (that fine print we agreed to when we signed on to open a DAA). Unlike private foundations, DAF accounts are not designed to last in perpetuity.

How easy is it to leave a particular Donor-Advised fund now that you've come to realize you don't like their terms or options?

Very simple – just request a grant to be sent for the full amount of your account balance to the non-profit of your choice. Or if you like the DAF model in general and find one aligned with your interests and goals, just request the money be sent over there.

All DAFs have terms and policies, and like any financial account, “buyer beware” applies. If you open an account at a DAF that states in the fine print that they won’t issue grants for less than $1,000, or to charities that promote fishing, then you shouldn’t be upset when they deny your request to send $250 to “Trout Unlimited”. If that pushes you over the limit, find a DAF that supports fishing and grants below $1,000, and send your account balance to that DAF where they will happily approve your requests for grants to fishing organizations.

DAFs know this about their granting rules, and it is not uncommon for a DAF to send checks, and full account balances from time to time, to another DAF. As long as the final grant request is for a valid charitable purpose to an IRS approved charity, and within the rules of the DAF account that you opened, they really don’t have a good reason not to pass along the monies of your request.

But remember, read the small print of the DAF’s terms.

What are some of the most common offerings for the succession plans of a DAA?

Within the options offered by most DAFs, there are three very common succession plan choices named by advisors for their DAAs:

  1. pass the account responsibilities to the person(s) of their choice (often called the successor advisor);
  2. immediately distribute the balance in the account to one or more charities; and
  3. direct the balance to be distributed at the discretion of the hosting DAF, most often by applying the dollars to a fund or funds under the control of the trustees.

There are hybrids, too; whether a combination of these, or possibly the creation of a new endowed account within the DAF that has a clear payout plan, over time, to a charity or charities. DAFs have the right to create their own policies here; like placing a limit on the number of successor generations that may play out from (i) above, and limiting the charities the DAF will make grants to.

Who gets to decide what succession options are applied to the DAA?

The current advisor(s) of a DAA — again, within the terms of the program — can change the succession plan at any time. This is a common right of the “advisor,” as these are donor “advised” accounts.

Can a DAF be directed to follow the wishes of the original donor beyond his/her lifetime, similar to the terms seen in private foundations?

Ah, “control from the grave,” as we used to call this. DAFs are certainly within their right to allow continued direction as requested by a (now-deceased) advisor, but the burden of managing the possible variations can add expense to most common DAF models. While there are ways it can be handled, depending on the particular request, it’s not usual.

What if an advisor opens a DAF account and then finds he/she doesn't like the succession options offered?

That’s one of the very interesting dynamics of DAF programs: If an advisor doesn’t like the terms of the DAF where they have opened an account, it’s usually not difficult to exit that particular program. As most DAFs allow account holders to grant funds to a wide variety of charities – other DAFs included – the dissatisfied account advisor can simply request a grant for the account assets to be issued to another DAF with terms that are more aligned to their interests.

Some DAF terms, often seen at college/university and other single mission DAFs, require a certain percentage of the account balances to remain at their institution, and so grants for only the remaining balance of their funds can be directed to an alternate DAF.

Q & A Podcasts

In this Q&A session, Brad Caswell talks with Joe Tumolo, CEO of Gift Planning Development, LLC about rules, trends, and opportunities for Donor Advised Funds (DAF’s) that you may not have thought about.

Materials & Tools

Below are some materials and tools you can use to further your understanding of these fund-raising ideas.

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How to Access Funds at Donor-Advised Funds (5 Questions to Consider)

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Charitable Solutions’ resource book, Charitable Gifts of Noncash Assets

Download a copy here:

Case Studies and Success Stories

An effective way of explaining how our ideas and solutions work in real life is through stories of successful gift situations. These can be shared with peers and colleagues, and many have found them to be a good way to illustrate gift possibilities to donors as well.

(click a box below to read the full story)

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Real Estate Gift

This real estate gift netted almost $6 million to fund a donor-advised account to further benefit charities of the donor family’s choosing.

Business Interest Gift

A partial interest in a web-based business made charitable gifts possible of over $10 million to each of 4 charities.

Retained Life Estate Annuity

The structure of this donation provides a triple benefit: it allows the property owner to remain in their house until they pass AND pay them $65,000/year AND is still expected to have funds to issue significant grants to charities upon the owner’s death.

Donor Inquiries

Unsure of how to talk to donors about illiquid asset gifts? These discussions can be involved and can take a few conversations – but don’t say “no” too fast. These inquiries can build and expand your relationships with your donors that can lead to lifelong support of your work, and can bring large dollar gifts to support your mission.

Explanations & Thought Leadership Pieces

Here are some resources and information that further support our thinking and our work to help charities raise more money for their important missions.

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Illiquid Assets Explained

Bryan Clontz, Founder and CEO of Charitable Solutions LLC and nationally known expert on donations of illiquid assets, developed a sequence of 8 short videos to help explain some asset types, with a few case studies to make the situations come to life.

 

Cash is NOT King…

Dr. Russell James, Chair of the Dept of Personal Financial Planning at Texas Tech, speaks on his research into 1 million non-profit tax returns to determine what growing organizations do differently than others, and the powerful predictive nature of non-cash asset gifts to long term fund raising growth.

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