Can I Use My DAF for That?

Author GIL NUSBAUM, GENERAL COUNSEL

March 27, 2019

Donor-advised funds (DAFs) are philanthropy’s fastest-growing vehicle. Donors, their advisors and charities sometimes have questions about how DAFs can-and cannot-be used. Below are two of the questions I answer most often regarding DAF best practices and specific regulations:

Can I use my donor-advised funds (DAFs) to pay personal pledges?

Yes, with qualifications. Section 4 of IRS Notice 2017-73 addresses personal pledges, which effectively allows DAFs to make grants that satisfy pledges so long as the DAF sponsor does not reference the pledge in the grant letter or check.

To get specific, in the Notice the IRS expressed its opinion that grants from a DAF should not be considered to result in a prohibited benefit to a donor/advisor (under Code Section 4967) merely because the donor/advisor has made a pledge to the same charity as long as:

-The DAF sponsor makes no reference to the existence of a charitable pledge when making the grant (i.e., in the grant purpose, check memo or cover letter);

-No donor/advisor will receive, directly or indirectly, any other benefit that is more than incidental on account of the grant (e.g., auction items, sporting tickets); and

-The donor/advisor does not attempt to claim a charitable contribution deduction for the grant (even if the grantee erroneously sends the donor/advisor a gift receipt in acknowledgment of the grant).

The notice expressly states that taxpayers may rely on the guidance related to pledges until further guidance is issued.

Can I use my DAF to make bifurcated donations (where one part is tax-deductible and the other is not)?

No. Section 3 of IRS Notice 2017-73 addresses bifurcated gifts.  Internal Revenue Code Section 4967 prohibits DAF grants from conferring any benefits that are “more than incidental” to the donor, donor advisor or anyone related to either of them.

In the Notice, the IRS expresses its opinion that DAF grants that enable attendance or participation in a charity-sponsored event are considered to provide a more than incidental benefit, even if the donor/advisor pays for the non-deductible portion of the ticket out of pocket — which would result in the assessment of a penalty excise tax on any donor/advisor who recommended the grant or who received the benefit. The same logic and penalty apply to membership fees that have deductible and non‑deductible portions.

For more tips for using your DAF, check out our Tips for Managing Your Charitable Giving. You can also view other frequently asked questions about NPT and our DAFs.