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Donors, their advisors and charities sometimes have questions about how DAFs can—and cannot—be used. This quick reference guide provides a clearer understanding about how DAFs can be used to support charitable causes important to you.
Donor-advised funds (DAFs) are philanthropy’s fastest-growing charitable option for giving with more than 873,000 individual accounts in the United States, according to NPT’s most recent DAF Report.
Popular for their ease of use and efficiency, DAFs are used by donors to fund a wide variety of charitable organizations and projects around the world. With so many giving options available, new and prospective DAF holders or their advisors may wonder where to begin and what rules exist around DAF grantmaking.
The topics discussed below will provide a clearer understanding about how DAFs can—and cannot—be used to support charitable causes important to you or your clients.
Any active, qualified charitable organization with a 501(c)(3) designation and classified by the IRS as a public charity qualifies for grant support from donor-advised funds. DAF grants can support qualified nonprofits in arts and culture, the environment and animal welfare, food banks and hunger alleviation, educational and religious institutions, social service organizations and more. All grant recommendations to qualifying nonprofits are approved by the DAF sponsor.
Additional guidelines exist regarding grants to private operating foundations and supporting organizations, new or international charities and grants in support of scholarships, events or memberships, and other situations. DAFs sponsored by National Philanthropic Trust cannot make grants to political parties or candidates, or to private non-operating foundations or be used for any personal benefit.
DAFs donors can make grant recommendations to private operating foundations under certain circumstances. Approved private operating foundations must certify in connection with each DAF grant that the organization currently qualifies as a private operating foundation and that the grant will not disrupt the organization’s private operating foundation status. Private non-operating foundations are not eligible for DAF grants.
Please read our Giving Vehicle Comparison for more on the differences between DAFs and private foundations.
DAFs may be used to start a new scholarship fund at any eligible charitable organization or institution. Grants may also be recommended to support an existing scholarship fund.
In both cases, DAF holders and their family members may not control the selection of scholarship recipients or use DAF grants to pay tuition on behalf of a specific individual. DAF holders and their family members may participate in the selection process, but they may not have a majority or deciding vote on qualified applicants. Additionally, grants cannot support scholarships where family members may be eligible recipients.
DAF grants may be recommended to charities outside the U.S. that have been vetted by NPT’s legal and grants teams. NPT must either obtain a legal opinion that the organization is the equivalent of a U.S. public charity (known as an “equivalency determination) or ensure that the grant is spent only for the charitable purpose for which it was made (a process known as “expenditure responsibility”).
Because international grants require extra time and due diligence, DAF sponsors may assess a special processing fee to the DAF that is not associated with grants to U.S. nonprofits. International grants are not suited for time-sensitive needs.
You may recommend a grant that satisfies a personal pledge, but the DAF sponsor cannot make any reference to the existence of the pledge when it makes the grant (i.e., in the grant purpose section, check memo or cover letter.) In addition, no donor or advisor may receive, directly or indirectly, any benefit that is more than incidental on account of the grant, and no donor or advisor may attempt to claim a charitable contribution deduction for the grant.
DAFs cannot be used to benefit the donor or any family member of the donor and cannot be earmarked to benefit any specifically designated individual.
Please note that the definition of an “incidental” or “more than incidental” benefit may vary based on the situation. In general, items of financial value such as tuition payments or tickets to events are considered more than incidental. Smaller items of negligible value such as a coffee mug or keychain may be considered incidental.
For more information, Section 4 of IRS Notice 2017-73 addresses personal pledges.
If a grant is recommended to a charity that has been in existence for less than five years, additional due diligence of the organization may be required and could result in delayed processing.
DAFs cannot be used to pay for tickets to fundraising events, galas or auctions if the cost of the ticket is not fully tax deductible. Specifically, DAF grants cannot be used to pay the tax-deductible portion of a ticket if the full cost includes both a tax deductible and non-deductible portion. Additionally, grants may not be used to pay for items or services purchased or won at a charity auction.
DAFs cannot be used to cover membership costs except under specific circumstances. You may only recommend a grant to cover the cost of membership to a charitable organization if the organization confirms that its membership fee is 100% tax deductible. Alternatively, you may indicate in the “grant purpose” section of your recommendation that you have declined all benefits associated with the membership.
Any benefits valued greater than the lesser of 2% of the grant or $110 will be considered a more than incidental benefit to person who receives it. A “more than incidental” benefit generally includes items with financial value such as tickets to attend an event, raffle tickets, auction items or the provision of any other goods or services. A penalty excise tax of 125% of the benefit is assessed against a donor or advisor who receives a more than incidental benefit from a DAF.
Federal penalty excise taxes exist regarding the abuse or misuse of donor-advised funds. Visit the IRS website for more information.
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DAFs cannot be used for bifurcated donations, defined as grants where once part is tax-deductible and another part is not. Federal tax law prohibits DAF grants from conferring any benefits considered “more than incidental” to the donor, advisor or family relations of either.
A more than an incidental benefit can include any item with holding financial value. This includes (but is not limited to) event tickets, items won via live or silent auction, raffle tickets, or the provision of any goods or services.
Visit the IRS website for more on incidental benefits and bifurcated donations.
Rules regarding minimum payout requirements and grant amounts vary by DAF provider. There is no tax code requirement for DAF donors to meet a minimum payout requirement, but NPT encourages its donors to recommend grants actively and has adopted a minimum account activity to discourage inactive accounts. At NPT, less than 1% of DAF accounts fail to make at least one grant every three years.
Read more about DAF flexibility and the positive effect on payout rate here.
Giving with a donor-advised fund can be a tax efficient way to conduct your philanthropy. By donating appreciated stock held for more than one year directly to a DAF—rather than liquidating it and then donating the proceeds—you can reduce your tax liability and give more to the causes you care about.