By: Warren Averett
July 20th, 2015 |
By: Warren Averett
July 20th, 2015 |
Billions of dollars will pour into donor advised funds (DAFs) during 2015. Millions of those dollars will flow out to not-for-profits. Could any of that money flow to your organization? How should your organization handle donations from DAFs? Here’s a tale of an organization – a fictional public charity – that shows how DAFs work from the recipient charity’s perspective.
Doug’s dilemma Let’s meet Mr. Douglas Fir, the intrepid controller of CascadeKids. Doug is reviewing the month’s revenue records when he spots a check for $10,000. The check comes from the “Queenie Jones Donor Advised Fund” at NewTown Bank Charitable Fund (NTBCF). Doug knows Queenie – as she’s wonderful new donor; but Doug’s not familiar with the donor advised fund shown on the check. “Queenie made a personal pledge of $10,000 to us last month. Could this new donor advised fund check be related to Queenie’s pledge?” asks Doug. “What should I do before cashing the check?”
What’s a donor advised fund anyway? “First, let’s go over the basics on donor advised funds,” thinks Doug. His research reveals the following:
“Donor advised funds sound great,” muses our hero Doug. “But there’s got to be a catch here. What does the IRS say?” Pledges and penalties: What recipient charities should know. Doug is absolutely correct here. The IRS has important rules on donor advised funds that recipient charities need to know. Our hero reads on:
“Wowsers!” thinks Doug. “Queenie pledged to send us $10,000. Let’s make sure that this donor advised fund check isn’t related to her pledge. Not only could we lose the grant itself, but Queenie would need to pay $12,500 straight to the IRS.” Straightaway, Doug calls Queenie. “Hi Queenie – we’re really excited to receive this check from your donor advised fund. We just wanted to make sure it isn’t related to the pledge you made earlier this year.” Queenie clarifies that she originally meant for the check to be a fulfillment of her earlier pledge and asks if that is a problem. Doug explains the situation and the potential penalties that would arise if CascadeKids were to cash the check in satisfaction of a personal pledge. Queenie thanks Doug profusely for looking out for her interests and together Doug and Queenie work to properly handle Queenie’s pledge. First, Doug declines to accept the $10,000 check from Queenie’s donor advised fund; instead, he sends the check straight back to the fund. Then, Queenie takes out her own personal checkbook. She writes CascadeKids a $10,000 check to satisfy her earlier personal pledge. “Now that’s a check we can cash!” thinks Doug. With pledge and checks now in order, Doug and Queenie both breathe a sigh of relief. Doug thanks Queenie for her generosity and patience. Queenie, knowing that Doug and CascadeKids know how to look out for their donors as well as their mission, decides to advise many future distributions out of her donor advised fund to CascadeKids.
How to help donors with DAFs One year later, it’s time for CascadeKids’ annual fundraising gala. CascadeKids knows it might receive more grants from donor advised funds. So Doug creates new contribution envelopes to help clarify the situation for donors:
Yes! I’ll contribute to CascadeKids:
__ Enclosed $_______
__ Pledge of $_______ __ Please contact me about planned giving options
The next day, Doug opens up the envelopes. One of the envelopes contains a beautiful handwritten note from Queenie:
“You guys are great both in the work you do and the care with which you treat your donors. I can’t promise anything, of course, but I’ve recommended that my donor advised fund send CascadeKids $100,000.”
– Queenie Jones
“That’s awesome of Queenie. I’ll make a note that we won’t record this as a pledge,” says Doug to himself. “Thank goodness I read up on donor advised funds and I now know that Queenie cannot promise that the donor advised fund will follow her recommendation!” Note: If you are a donor with a DAF, or a charity that receives contributions from a DAF, or a charity that has been approached by a donor to sponsor his or her DAF, please consult with your tax advisor to make sure you understand the rules and how to handle the situation properly. The 5 Ws of DAFs Why do people donate to DAFs?
Who is most likely to make a DAF donation?
What is the difference between a DAF and a donor restricted fund?
When should I cash a check from a DAF?
Where do DAFs keep their application materials? My charity wants to apply for funds!