Not So Simple

I often hear donor-advised funds marketed as “giving, simplified.” I appreciate the gist of this. Donor-advised funds allow donors to contribute appreciated securities in one fell swoop. The donors can then oversee the charitable distribution at their leisure, while DAF sponsoring organizations like Fidelity Charitable or a community foundation keep the books. Yes, in some ways donor-advised funds are indeed simple.

But as the number of donor-advised funds has increased, so too have the challenges for nonprofits and the donors themselves. That’s because there are some very real legal restrictions on how grants from donor-advised funds can be distributed. DAFs are often marketed by their purveyors as “charitable checkbooks,” but unlike actual checkbooks, they come with strings attached. These restrictions are increasingly causing headaches and inefficiencies for nonprofits, while giving rise to misunderstanding and resentment between those organizations and their donors.

What’s behind the confusion? Well, donor-advised funds are, technically, just that – funds whose use is advised, not directed, by the donors. The final decision-making about grants is legally up to the sponsoring organization, whether a community foundation, a religious federation, or a commercial gift fund. In practice the donor-advisors pretty much have carte blanche to recommend grants to any charitable organization they want – DAF sponsors make that very clear in their marketing materials – but there are two lines that cannot be crossed even by the most pliant of sponsors. First, grants from donor-advised funds cannot be used if any sort of personal benefit accrues to the donor-advisor. Second, a donor cannot use a donor-advised fund to redeem a personal pledge.

Those seem like modest restrictions, but as they play out significant issues arise. Here are some examples, not ripped from the headlines (nonprofit leaders are far too discreet – or timid – to complain publicly), but taken from actual examples people have brought to my attention over the last few months.

Missing premium syndrome. A national conservation group has traditionally offered premiums for membership gifts at higher levels. Recently the organization tempted donors by letting them know that donors at the $2,500 membership level would receive a particularly attractive thank-you gift. The donors responded generously, but many of them did so through their donor-advised funds – the source they have come to rely on for charitable gifts of that size.

Many of these members then grew livid with the organization when staff members explained that, because the donors had given through their donor-advised funds, they were ineligible to receive the gift. If the organization had sent the premium to the members, they explained, it would have violated the rule against personal benefit for a donor-advised fund gift. I asked the membership director how many upset members the organization has on its hands. “About a dozen a week,” she answered. “Dealing with angry donors is pretty much my full-time job. And nearly all of the anger revolves around misunderstanding about giving through their donor-advised funds.”

Not-such-a-gala-event tension. Nonprofits make the big money at gala dinners not from people paying $100 or even $250 a head to attend, but from sponsorship gifts of $5,000, $10,000, $50,000, or (in gala meccas like New York City or San Francisco) even more. Sponsorships provide the donors with perks, of course — the most common being a table or two of guests in exchange, say, for a $5,000 gift.

A few free meals in return for a $5,000 gifts would seem like an incidental benefit, but the rules governing donor-advised funds make it clear that those plates of coq au vin constitute an inappropriate benefit for the donor-advisor. A staff member at a major cultural organization told me there are a growing number of donors wanting to make sponsorship gifts through their donor-advised fund, but who are reluctant to give up any of the perks. That’s creating a challenging dynamic. “People no longer want to write a big check,” the development director explained to me. “They like the simple, painless aspect of giving through their donor-advised funds. And when they find out the rules prohibit the DAFs from underwriting sponsorships with benefits, they’re either a) mad at me, b) unwilling to be a sponsor any longer, or c) both of the above.”

The pledge-that-isn’t accounting. In the good old days (I’m talking about all of twenty years ago), donors to a capital campaign would sign a three-year pledge at $100,000 a year. Today, if that same donor is ready to commit to a three-year, $300,000 gift, but wants to use her donor-advised fund – well, she can’t, because of the prohibition against using DAFs to fulfill a personal pledge. A lot of organizations have that donor sign an “intent-to-donate” form that’s sort of a pledge form lite – a moral obligation, but not a legally binding one, and it is not recorded as a pledge in the institution’s financial statements.

Along with the annoyance of essentially having to keep two sets of books (one for tracking the campaign progress, which would list this as a $300,000 gift/pledge, and one for the official financial statements, which would only list the $100,000 portion of the gift that arrived in Year One), the intent-to-donate sort-of-pledge can create real financial challenges for the nonprofit. Most notably, if the gift is for a building campaign, and the organization needs to borrow funds to keep the project running on time and under budget, it can’t use the DAF-funded commitments as collateral, because the intention to donate is not a legally binding pledge. And as more and more of the major gifts take this form, the project can get delayed and the costs can escalate.

When I mentioned these challenges to a friend who works for a donor-advised fund sponsor, he minimized the problem. “None of these are big deals,” he said. “It’s all part of donor stewardship. Smart nonprofits can and should finesse this.” But finessing takes time and money. And at a time when the nonprofit community is facing pressure from many sides (rising demand for services, reduced government funding, decreased corporate contributions, and increased reporting requirements), overworked staff members now need to spend extra time and energy stilling the waters with donors who are increasingly reliant on giving through their donor-advised funds.

All of this is the natural and unfortunate result of the commodification of donor-advised funds in recent years. In the old days, when DAF donors worked almost exclusively through community foundations, I have the sense that there was good communication about the limitations on giving through donor-advised funds. I tend to doubt that most of today’s purveyors of donor-advised funds, particularly individual financial advisors who personally benefit when their clients contribute to commercial gift funds, take the time to explain the fine print of how giving from donor-advised funds actually works. As with so much of what happens on Wall Street, it’s all about making the sale. The consequences are somebody else’s problem.

Copyright Alan Cantor 2015. All rights reserved.

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6 thoughts on “Not So Simple”

  1. Alan. This is news to me. I had no idea that a donor using a DAF to sponsor an event could not receive the sponsorship benefits. Think I’ll call you to chat about this, so I can leave that information behind for our event folks. We don’t have many donors who do this, but we do have a few and they have received their concert tickets, ads in programs, etc.

  2. Alan: It’s become a very sad time when donors are induced…and also expect…to get something of “value” in return for their donation…an engraved bowl, Red Sox tickets (ouch!), tee shirt, lapel pin or whatever turns them on. And then they become incensed when they can’t take possession of this wondrous item? Very disappointing…

  3. Good Morning Al,
    I was directed to your blog by a mutual friend and I enjoyed reading your thoughts. I do completely agree that there is confusion with regard to Donor Advised Funds, especially with regard to the issues you have so clearly stated, issues that do not need to be there. The simple answer is really that it is incumbent upon the Foundation who administers the fund to make these things entirely clear to people who open a Donor Advised Fund. I can tell you that in our case, the New Hampshire Charitable Foundation was explicitly and repeatedly emphatic about these laws. That simple thing has, in our case and I suspect in the case of others who have DAFs with them, made it easy for us to be sure we are acting in a lawful manner when we make donations. I suspect that, even with that, there will be some who ignore those advisories. But overall, these kinds of funds have done great good for the benefit of non-profits by creating an efficient and attractive means for people of good intent to give.

    1. Thanks, Dan.

      You’re right: New Hampshire Charitable Foundation and most community foundations are very clear on what you can and can’t do with donor-advised funds. My sense is that the commercial gift funds such as Fidelity, Schwab, and the dozens that are run out of brokerage firms are much less explicit, and that leads to misunderstandings. In many cases, the only human interface the donor has is with his or her financial advisor, who arranges the transfer of assets into a commercial donor-advised fund. I don’t think those financial advisors know all the rules, and (because they receive compensation for these contributions to the commercial donor-advised funds) they are probably not inclined to describe the complications. Then, when the nonprofits tell them that a rule has been violated, the donors are surprised.

  4. Alan:

    I have a question regarding your “Pledge that Isn’t” example. Are you saying that if I agree to make a 300,000 dollar pledge over a 3 year period outside of a DAF, the charity would ask me to sign a legally binding agreement? I’ll probably never have the resources to make such an agreement but if a charity did request that, I would refuse and probably rethink my original pledge.

    If such pledges are never legally binding, then how is this a criticism of the DAF’s?

    1. Thanks, Roy.

      A formal pledge is indeed legally binding. Would a nonprofit go to court to enforce it? Perhaps — it depends on the circumstances. My sense is that these pledges come into play most often when the donor dies, and the nonprofit asks the estate to honor the pledge.

      This is not so much a criticism of DAFs, as pointing out the awkwardness that DAFs present in a situation like this. Because the donor cannot sign a genuine pledge form, it can complicate the accounting for a capital campaign. The vast majority of donors fulfill their pledges, whether formal or one of the “intent to donate” forms inspired by the DAF situation. But in the case of the latter, it would be impossible for the nonprofit to get financing to complete the project using pledges as collateral. This can be a problem.

      I think what this amounts to is that the rules presume that DAFs are being used as they once were, with the control resting with the DAF sponsor (the community foundation or commercial gift fund). But in fact they function as entities that the donors control. There’s not an alignment of the reality and the rules that govern them.

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