Donor-advised funds (DAFs) are one of the fastest growing charitable vehicles in the United States. National Philanthropic Trust gathered data from nearly 1,000 organizations and found that in 2019 alone, DAFs made over $25 billion worth of grants and saw additional contributions of $38.81 billion.[1] It is important for organizations sponsoring DAFs to have strong governance policies in place to manage the fiduciary responsibilities associated with this vehicle. A DAF program guide is key to managing donor expectations and communicating fiduciary duties. Specifically, it can help in two ways:
- Enables organizations sponsoring DAFs educate new and existing donors about the rules and parameters of their program.
- Provides any required disclosures and explains to donors how sponsoring organizations tailor their program to best fit their own capabilities and scope, assuming they satisfy legal obligations to their donors with regard to disclosures.
A well-drafted DAF program guide explains the program and provides a clear set of guidelines for donors to follow through each phase of their DAF account’s lifecycle. See Figure 1 for for key elements of a DAF program guide.
Figure 1: Key elements of a DAF Program Guide
| Establishing a DAF |
|
| Investment of DAF Assets |
| Grant Recommendations |
|
| Tax Considerations |
| Fees and Reporting |
| Other Terms and Conditions |
Source: PNC
In this document, we will discuss these common elements that can help organizations create a program guide to serve as a cornerstone of a successful DAF. At the beginning of the DAF program guide, showcase the good work your organization is doing. Highlight your group’s mission and accomplishments to help persuade potential donors to open their DAF gift account with your organization. Include details on its values, mission, projects and activities, and the important role your organization plays in the causes, constituents, and communities it serves.
Establishing a DAF
Clearly stated guidelines can help your donors easily open and manage their DAF. This section should focus on the types of donors who can establish a DAF with your organization, assets that can be used to fund the account, minimum account balances, guidelines for additional contributions, and succession planning.
1. Types of Donors
Sponsoring organizations typically consider funds opened by individuals, corporations, trusts, and/or estates, but each organization will make its own choice given the potential for additional work-sets required for certain donor types. This section should also explain how donors will establish funds, and can even include a sample application. Be sure to have a process and procedure around each item, including paperwork, in the program guide.
2. Assets to Establish a DAF
Establish the assets your organization will allow to fund a DAF account. Common ways to fund an account include checks, credit/debit cards, electronic transfers, wire transfers, and marketable securities. Some organizations may accept nontraditional assets, such as artwork and real estate; it is important to note that these assets require additional considerations. As a final note, this section may also include asset delivery instructions.
3. Minimum Account Balance
Know the advantages and drawbacks when deciding on a minimum account balance for your DAF program. In general terms, there is a balance between the potential for more administrative work (i.e., by allowing accounts with lower minimums) and opening the program to more potential donors (i.e., lower minimums might appeal to a larger pool of donors). If your organization chooses to require a minimum account balance, use this section to state the required amount and what will happen if the account falls under the minimum requirement.
4. Additional Contributions
Additional contribution options are usually the same choices donors had for their initial contribution, but often have a lower minimum contribution amount or no minimum at all. Like the consideration for minimum account balances, the threshold for additional contributions should be based on the balance between the administrative burden of accepting additional contributions and the volume of desired additional contributions.
5. Succession Plan
Have clear succession plan options in your DAF program guide to help prevent friction between successors if a donor passes away or becomes incapacitated and is unable to make grant or investment recommendations. Programs that do not allow succession plans may require the remaining DAF account assets to be transferred to its general fund, providing the organization with a potentially large cash infusion. Other programs may allow the donor or primary advisor to appoint a successor advisor who then assumes responsibility for the remaining account assets upon the death or incapacity of the donor or primary advisor. Again it is a balance between the potential for a large cash infusion and the potential to reduce the pool of potential donors by discouraging those that want to use their DAF account for generational giving.
If your organization allows succession planning, this section should indicate the available options. These may include:
- Naming a successor(s) as the primary advisor of the DAF
- Distributing the remainder of the account balance to charities previously recommended by the primary advisor
- Creating an endowment with the remaining funds for the benefit of a preapproved organization
If your organization chooses to not allow succession plans, this section can provide that in the event a donor passes away, the remaining assets will be transferred to the organization’s general fund. The program guide should also address whether these options apply when a donor or primary advisor becomes incapacitated.
Investment of DAF Assets
When writing this section, understand the sponsoring organization must maintain complete discretion over the investment of the DAF assets. Once a donor makes a contribution, the sponsoring organization has legal control over that contribution, while the donor retains advisory privileges with respect to distribution of funds and the investment of assets in the account.[2]
One advantage of DAFs for donors is that the sponsoring organization is responsible for handling the investment along with the administrative and compliance responsibilities for that investment, and its associated costs. With that said, the drawback is that while the donor retains advisory privileges and the sponsoring organization will generally follow donor requests, the donor gives up ultimate control of the assets. This is why we believe it is especially important that sponsoring charities demonstrate responsible stewardship of those assets.
Sponsoring organizations will typically offer a handful of pre-set investment portfolios that the donor can choose to allocate their funds to. The portfolios offered should be invested in different asset allocations designed to meet the risk and return objectives of a broad range of potential donors.
Grant Recommendations
Grants are the fundamental purpose of DAFs. When writing your program guide, explain how grant recommendations work in order to avoid potential conflict between the sponsor and donor. This section should address how a primary advisor can make a grant recommendation, eligible and ineligible use of grants, the minimum grant amount, and expectations for the timing of grant delivery.
1. The Grant Recommendation Process
There are usually two ways sponsoring organizations allow primary advisors to make grant recommendations — through an online donor portal or a downloadable form. After the recommendation is submitted, the sponsoring organization must conduct a due diligence review of the grant to ensure the grant’s purpose meets all requirements. The program guide should clearly state that all grant recommendations made by a primary advisor are only advisory and in no way binding.
2. Eligible and Ineligible Uses
Distributions from a DAF can be made to any 501(c)(3) charitable organization. Additionally, the 2008 IRS publication, Donor-Advised Funds Guide Sheet Explanation, explains grants must be used exclusively for charitable purposes and cannot result in an impermissible private benefit. A program guide should clearly explain to the donor any restrictions on the use of grant funds that are imposed by either applicable law or the sponsoring organization.
Examples of private benefit or ineligible use of grant funds include:
- Payment of membership fees
- Purchase of tickets to a fundraising event
- Purchase of goods at a charitable auction
- Political contributions or lobbying activity
- Payment that benefits the primary advisor, donor, or related person
- Payments to individuals
- Payment to an organization that is deemed to conflict with the mission of your organization*
Additionally, IRS Notice 2017-73 adds further clarification to eligible/ineligible uses, specifically around donors receiving more than an incidental benefit from a DAF distribution, DAF distributions being used to settle charitable pledges, and DAFs being used to circumvent public support limitations.
For a thorough understanding of the legal restrictions on use of DAF grants and any applicable exceptions to those restrictions, sponsoring organizations should consult their legal counsel.
3. Minimum Grant Amounts
When determining the minimum grant disbursement amount, consider your organization’s administrative capacity. Lower minimums will generally lead to a larger volume of grant disbursements, potentially increasing the administrative burden. After stating your chosen minimum disbursement amount, you should address how the minimum amount applies when the remaining balance of the account falls below the minimum disbursement amount.
It is common for a sponsoring organization to set a required minimum disbursement, typically a small amount, over a defined time period. If your organization has a required minimum disbursement, this section should outline what happens when an account does not meet this requirement. This might include:
- Notifying the primary advisor that the minimum disbursement requirement has not been met and the timeframe for when this should be remedied
- Providing the primary advisor with the consequences of not meeting this requirement
- Finally, if the problem is not corrected in the given timeframe, transferring the remaining account balance to your organization’s general fund or distributing it according to the succession plan
As the sponsoring organization, you may also require a certain percentage of total grants distributed by an account to go to a specific cause, usually a cause your organization supports.
4. Timing of Grant Delivery
You should use this subsection to set donor expectations for how long it should take for a grant disbursement to be made after receiving a recommendation. Will your organization review grant requests daily, weekly, in monthly batches, or ad hoc as they come in? Specifying this in the program guide can help to manage donor expectations. Finally, it is also worth including the time from grant approval to the target charity receiving the grant dollars (e.g., “Once the request is approved, the grant should be processed in 3-5 business days.”)
Tax Considerations
While the driving factor for donor contributions is supporting a mission they believe in, donors are also motivated by the potential tax benefits. The Tax Consideration section should not make any promises to potential donors about tax deductions. In this section, you should acknowledge that donors who open a DAF may be eligible for a tax deduction, but recommend that each donor consult with a tax professional about their eligibility.
Fees and Reporting
If your organization decides to charge DAF accounts administrative and/or other operating fees, use this section to disclose all costs. Be sure to specify that these costs will come out of the account balance and are not incurred by the primary advisor.
Finally, provide details on how primary advisors can view information related to their accounts.
Other Terms and Conditions
Use this final section to add any legal disclosures and other terms and conditions the donor should be aware of. Disclosures that may be needed include information on other parties involved such as the investment provider or technology provider, what happens if there is a conflict in agreements, and state specific, among others. Consult with a legal professional to identify all disclosures needed for your program guide.
Conclusion
Every DAF program guide should address the preceding points in some detail. With limited governmental regulations allowing each sponsoring organization to tailor their program, it is important that each organization determines which options best fits their capabilities and goals.
