As charitable organizations continue to struggle to raise funds in support of their mission, some of which still haven’t recovered from the 2008 recession, knowledge concerning additional potential fundraising resources is essential. Earlier this month the Nonprofit Advisor issue, The Future of Charitable Giving: A pulse check on tax reform proposals focused on the impact of the Trump administration’s proposed tax reform on charitable giving. In this issue, we continue with Part II of “The Future of Charitable Giving” series, and take a closer look at charitable giving opportunities that go beyond grants and outright cash gifts. Specifically, how you can incorporate donor-advised funds (DAF) and other giving vehicles in your fundraising toolkit.
WHAT’S A DAF AND WHAT MAKES IT SO ATTRACTIVE TO DONORS:
As defined by the Internal Revenue Service (“IRS”), a donor-advised fund (“DAF”) is a separately identified fund or account that is maintained and operated by a section 501(c)(3) organization. Each account is composed of contributions made by individual donors. Once the donor makes the contribution, the organization has legal control over it. However, the donor retains advisory privileges with respect to the distribution of funds and the investment of assets in the account.
Here are a few reasons why donor-advised funds appeal to donors:
- Donors get a charitable contribution deduction for the full amount of the donation in the year that the donation is made, while the funds may be distributed to charitable recipients at a future date.
- Donors’ contributions to DAFs are subject to the same 50% adjusted gross income (“AGI”) limitation as contributions to other publicly supported charities, whereas contributions made to private foundations are subject to a 30% AGI limitation.
- Distributions from DAFs to publicly supported charities are treated as public support rather than from a major donor for purposes of meeting the public support test.
- Donors can time contributions to coincide with income transactions in high-earning years to minimize income taxes and can then postpone distributions from DAFs to later years.
- Compliance with IRS regulations is provided by DAF administrators for a low cost versus the significantly higher cost associated with private foundation compliance.
DAFs can accept gifts of many different types of illiquid assets, which require knowledge and expertise that most publicly supported charities don’t possess, including:
- Real estate
- Interest in closely held businesses
- Restricted stock
- Alternative investments including hedge funds and private equity funds
- Pass-through entities including limited partnership interests
Contributions to DAFs more than doubled over a five-year period, from $9.4 billion in 2010 to $22.3 billion in 2015. Assets under management increased accordingly, growing from $33.6 billion in 2010 to $78.7 billion in 2015. In December 2016, DAFs reported double-digit percentage increases in contributions year-over-year, a result of taxpayers/donors hedging the value of the charitable tax deduction against the Trump administration’s proposal to decrease the top marginal tax rate, which could result in a less tax-advantaged deduction in 2017.
SUGGESTIONS ON ADDING DAFS TO YOUR FUNDRAISING TOOLKIT:
Many organizations recognize the opportunity and the growing popularity of DAFs and have implemented strategies to target local community and national funds. Based on a recent report published by The Chronicle of Philanthropy, What Donors Want, charities experienced with fund-raising from DAFs offer the following suggestions:
- Understand the process for making donations to DAFs;
- Promote the option of giving through a DAF in fundraising appeals and marketing materials;
- Prepare forms to initiate gifts to a DAF;
- Network with program officers at local community foundations;
- Network with professional advisors, including accountants, attorneys and wealth advisors (many charities have advisory boards comprised of allied professionals);
- Retain outsourced professionals to advise donors on making illiquid gifts;
- Ensure that your donor database tracks gifts from DAFs accurately so you don’t lose track of the underlying donor (see regulatory compliance below);
- Implement a letter of intent, replacing pledge agreements, to track donor gift commitments that will be fulfilled by a DAF (see regulatory compliance below);
- Know what motivates your donors;
- Cultivate relationships with your donors;
- Promote projects that have a high likelihood of success. Many donors want to see how their donation has made an impact.
HOW-TO’S FOR LAUNCHING YOUR OWN PRIVATE LABEL DAF:
Private label DAFs are similar in every way to public DAFs except that accounts are established for your donors, effectively creating a future stream of contributions to your organization.
There are several full-service providers that allow a participating charity to offer its own DAF with a number of options:
- All grants for DAF accounts are paid to a program associated with the participating charity;
- Grants may be made to any qualifying publicly supported charity;
- Grants to any qualifying publicly supported charity trigger an automatic grant in the same amount to the participating charity.
The service provider includes the following services:
- Online access that enables donors to recommend grants and plan contributions;
- A marketing team that provides assistance for continuity in branding across platforms;
- Current accounting for assets under management;
- Due diligence to ensure eligibility;
- Support for illiquid gifts.
TIPS FOR MEETING REGULATORY COMPLIANCE ISSUES:
Cultivating contributions from DAFs is a tremendous opportunity for any publicly supported charity. Keeping in mind these few regulatory compliance issues will increase the success of your fundraising:
- Implement a donation received control sheet that includes the name of the donor and source of donation. Donations should never be entered into the accounting system or donor data base directly from a check or other payment source. The development department should ensure the integrity of data entered into systems so contribution sources are consistent and acknowledgments are accurate.
- DAF donors are prohibited from receiving any personal benefit from contributions made from the DAF to publicly supported charities. That means charities cannot accept contributions from DAFs for galas, unless the donor or the donor’s family members do not attend. Gala invitations should include an option for donors to decline the RSVP.
- Acknowledgements for contributions to galas should be consistent. They should disclose that the full amount of the contribution is deductible to the DAF.
- DAFs should be acknowledged, not the donor. Even though you want to track the donor in your database, the donor already received a tax deduction and it is the DAF that receives the acknowledgement.
- DAFs are prohibited from satisfying personal donor pledges. Alternatively, supply a Letter of Intent (not legally enforceable) that a donor can use to advise the charity of future contribution plans.
In addition to exploring DAFs as a funding source for your nonprofit, it is also important to consider alternatives that may best serve the needs of your organization. Such alternatives include the required minimum distributions (“RMDs”).
DEFINING QUALIFIED CHARITABLE DISTRIBUTIONS:
For a number of years the qualified charitable distribution (“QCD”) expired annually and was renewed late in the year. This foiled tax planning opportunities for many eligible taxpayers. However, at the end of 2015, the provision was made permanent. It is another giving vehicle that charities should consider incorporating in their fundraising toolkit.
Donors with individual retirement accounts (“IRAs”) who are 70½ years or older are subject to required minimum distributions (“RMDs”) and can make a donation directly from their IRA to a publicly supported charity. DAFs and private foundations are not eligible to receive QCDs. While the donor does not get a tax deduction for the donation, the RMD, up to $100,000 annually, is excluded from income taxes and lowers the donor’s AGI, which can trigger additional tax savings.
Similar to the DAF, the donor is prohibited from receiving any personal benefit and should not use the RMD to attend a gala or similar charity sponsored event.
To learn more about the opportunities DAFs and other giving vehicles can offer, contact Sarah Avery, CPA, Director at Friedman LLP: 973.929.3506 or firstname.lastname@example.org.