As stated in this IRS description, the DAF, not the donor, legally controls the fund. As such, the donor cannot commit the DAF to make an enforceable promise to give to a charity or make the assumption that the DAF will cover 100 percent of their commitment.
On December 4, 2017, the IRS released a notice of proposed regulations (2017-73) that addresses several aspects of a donor’s use of a DAF, including the fulfillment of donor pledges. The IRS proposed regulations state that the use of a DAF to fulfill a personal pledge payment would not be treated as a “more than incidental benefit” under section 4967 of the Internal Revenue Code (i.e., this would be allowable and not taxable to the donor) if the following requirements are satisfied:
- The DAF sponsoring organization makes no reference to the existence of a charitable pledge when making the distribution from the donor’s DAF;
- No donor/advisor receives, directly or indirectly, any other benefit that is more than incidental on account of the DAF distribution; and
- The donor/advisor does not claim a charitable contribution deduction for the DAF distribution, even if the charity receiving the distribution mistakenly sends the donor/advisor a tax acknowledgement.
While a donor still cannot bind the DAF to establish a promise to give/pledge, the donor can enter into a personal pledge agreement with a charity, and the charity can record as any other pledge assuming the requisite criteria in U.S. generally accepted accounting principles (GAAP) are met (unconditional promise, record at estimated fair value, etc.). Knowing that a donor has or will request a DAF to make a payment in settlement of a promise to give or pledge should not prevent a charity from recording a receivable. However, if the donor implies in any way that payment of a pledge is conditioned on the DAF making payment on their behalf or the pledge explicitly includes contingent wording such as “assuming my DAF honors my directions to make payments” or other similar wording that suggests the commitment resides with the DAF rather than with the individual, the pledge would not qualify for recording as it would be conditional on the DAF honoring the directive. As with any donor agreement, individual facts and circumstances will vary and should be taken into account by the charity when deciding whether a promise to give should be recorded consistent with GAAP.
Charities should consider their policies for recording pledges so that legally enforceable promises to give are appropriately recorded, which may include pledges from certain donors who regularly use a DAF to settle a pledge.
