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November 6, 2023 - Lights are going up on Main Street near the HighGround office, downtown department stores are installing festive window displays, and local coffee shops are unveiling their seasonal drink offerings. Perhaps you are booking travel arrangements or drawing up a Thanksgiving menu. The holiday season is upon us.

For donors, this season’s arrival signals another season: year-end giving. Just as families and businesses are planning for the holidays, the charitably minded are considering the most strategic ways they can support their favorite causes before the end of the tax year. And for many, the best way to maximize their charitable impact will be by giving through a donor-advised fund (DAF).

As we’ve shared elsewhere, the DAF is an increasingly popular, tax-smart, flexible charitable giving tool. Its flexibility is owing, in some part, to the fact that it is not a highly regulated giving strategy. Although they have existed since the 1930s, DAFs were not clearly defined by the IRS until the Pension Protection Act of 2006, which sought to improve the accountability of donor-advised funds. The IRS further clarified the rules governing DAFs in their Notice 2017-73.

As donors consider whether a DAF could strengthen the power of their philanthropy, HighGround is often asked, “Can I use a DAF for this?” What does the IRS allow? What rules govern the use of this vehicle? In this series, we answer the most frequently asked questions about DAF grants so you can determine if a DAF can help you reach your charitable goals this giving season.

Can I specify how I want a DAF grant to be used?

Yes, DAF donors may designate a purpose for their grants by indicating particular programs or initiatives they’d like to support. This designation is typically communicated to the charity in the grant letter that accompanies the grant. A DAF donor may not, however, designate that their grant be used for a purpose restricted by the IRS.

Can I recommend a DAF grant to an individual?

DAF funds must be granted to IRS-qualified public charities and cannot be made to individuals. In addition, DAF grants to charity should not be designated to or earmarked for specific individuals. For example, a DAF donor should not make a grant to a church and specify that the grant is to send a particular church member on a mission trip. However, if the charity receiving the grant is a missionary-sending organization, then a DAF donor could express their preference to support a particular missionary with their DAF grant, though that preference would not be binding.

Finally, a DAF donor may make a grant to a public charity in honor of an individual.

Can I make a DAF grant to a private foundation?

DAF donors may recommend a grant to private operating foundations, such as zoos, museums, and libraries, if the grant does not disrupt the foundation’s charitable status and the grant is not used to compensate the donor or donor’s family. DAF donors may not recommend grants to private non-operating foundations, which exist to make grants to charity.

Can I use a DAF to support political campaigns?

While DAF donors may recommend grants to government entities for public purposes, DAFs may not be used for lobbying or to support political campaigns.

Can I use a DAF to support an international charity?

DAF donors who wish to support international philanthropy may make grants: (1) to U.S.-based charities that do global work, (2) to U.S.-based charities that support overseas charities, (3) to international charities that have been vetted by the sponsoring organization. Because the vetting process requires significant time and due diligence, many sponsoring organizations do not allow grants to international charities.

Can I use a DAF to fulfill my pledge?

DAF donors may use grants to fulfill non-legally binding commitments to a public charity, but the IRS prohibits the use of the term “pledge” on grant checks and letters.

Can I use a DAF to provide scholarships?

Yes, DAF donors may make a grant to an existing scholarship fund or use a grant to establish a new scholarship fund at an eligible institution. Donors and their family members may not be scholarship recipients, nor may they have a majority vote in determining scholarship recipients.

Can I use a DAF to pay for memberships?

DAF grants may not provide benefits to DAF donors and family members that are “more than incidental.” A benefit is “more than incidental” if it provides a service or has financial value (generally, a value that exceeds 2% of the grant amount or is more than $110).

The IRS does not allow DAF grants to pay any portion of a bifurcated gift, or a gift that is split into tax deductible and non-tax deductible portions. Therefore, a DAF grant may only be used to pay for a membership when the full cost of the membership is tax deductible or when the donor waives the “more than incidental” benefits associated with the membership. Permissible, incidental membership benefits include discounted parking, free admission to events, invitations to members-only events, and small gift items like coffee mugs, calendars, and key chains.

Can I use a DAF to sponsor charitable events?

In keeping with the IRS regulations described above, DAF donors may only make grants to sponsor charitable events if the sponsorship is fully tax deductible or the donor waives all nonincidental benefits. Logo or name recognition is considered an incidental benefit.

For example, a DAF donor is considering sponsoring a fundraising gala. Sponsorship includes a dinner table for 10 at the gala for the donor and guests of his choosing. If the donor wishes to attend the gala and fill the table, he should not pay for the sponsorship with his DAF.

Another example, a DAF donor is considering sponsoring a charity golf tournament. Sponsorship includes a round of golf, a golf shirt, golf balls, and name recognition on an event banner. The donor does not want to play in the tournament and is willing to forego the golf shirt and golf balls. In this case, the DAF donor could use his DAF to pay for this sponsorship.

In addition to understanding these IRS regulations concerning DAF grants, donors who wish to open a fund should consider any grant restrictions the DAF sponsoring organization may have. To learn more about how a DAF might help you maximize your charitable impact before year end, contact our Client Partner Communications Specialist today at 214-978-3303.