Legal Q&A: Donor Advised Funds
Q. Can a Donor-Advised Fund satisfy a donor’s pledge?
No, a donor-advised fund should not satisfy a pledge made by a donor. If the pledge is a financial obligation of the donor (as many state courts have deemed pledges to be under a variety of circumstances), The Community Foundation’s satisfaction of the pledge is arguable the provision of a financial benefit to a private individual–a violation of the rule that charities such as community foundations be organized and operated exclusively for the benefit of the public. Should the IRS discover that The Community Foundation has engaged in this behavior and that the participants are “insiders” (persons with substantial influence over the operations of the organization), it may levy penalties on the individuals involved under the recently enacted intermediate sanctions rules. If the behavior is particularly abusive, the IRS could potentially revoke the exemption of the organization. Like distributions from donor-advised funds that result in the provision of tangible benefits to donor-advisors, distributions that satisfy pledges should be strictly avoided.
If you as a donor-advisor are asked to make a pledge to an organization such as an alumni association or other such group, The Community Foundation for the Ohio Valley has stickers to provide you to use for such donation forms that explain that your donation does not constitute a pledge, but that a request will be made of your donor-advised fund. To request a sheet of these stickers, please contact the CFOV office at 304-242-3144 or email firstname.lastname@example.org.
Q. Why can’t I deliver grant checks from my donor-advised fund directly to the non-profit organization?
According to Janne G. Gallagher, Vice President and General Counsel for the Council on Foundations, the IRS has concerns with this practice because it opens a door for donors to direct the grantee to apply the grant amount to something that benefits the donor personally–for example, paying a child’s tuition at a private school or university. Donors who do this face penalties under the Pension Protection Act of 2006, but managers (community foundation staff) who make grants that result in benefits to the donors can also be penalized if they did so “knowingly.” Allowing donors to carry the checks to the grantee could be used against the foundation in a penalty situation. The Community Foundation always includes a distribution letter that the donor can take to the grantee, but the check should come directly from The Community Foundation.
If you as a donor-advisor have concerns about the timeliness of your grant check being delivered or the wording of the distribution letter, please contact the office and we will send you confirmation of the grant distribution. The CFOV can even provide you with a certificate to present in lieu of the actual check, upon request.