United States

Donor-advised funds: Accounting implications related to pledges

FINANCIAL REPORTING INSIGHTS  | 

According to the National Philanthropic Trust’s 2017 Donor-Advised Fund Report, there were approximately 285,000 individual donor-advised funds (DAFs) in 2016 with aggregate charitable assets of $85 billion. The year-over-year growth in DAF accounts for 2016 was 7.6 percent. As such, donors’ use of DAFs is becoming very common for contributions to nonprofit charitable organizations.

A question has been raised as to whether a donor’s use of a DAF to service a promise to give (pledge) precludes the receiving organization from recording the promise. For one-time gifts (not pledges in advance), the use of a DAF is no different than a donor writing a check. The charity records the unconditional gift when received (in the appropriate net asset class) and the process is complete. For promises to give, the use of DAFs has been viewed in the nonprofit industry as more problematic.

The IRS defines a DAF as:

Generally, a donor advised fund is a separately identified fund or account that is maintained and operated by a section 501(c)(3) organization, which is called a sponsoring organization. Each account is composed of contributions made by individual donors. Once the donor makes the contribution, the organization has legal control over it. However, the donor, or the donor's representative, retains advisory privileges with respect to the distribution of funds and the investment of assets in the account.

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. Thus, the typical approach taken by many charities (as advised in many cases by their accountants/auditors) is not to record a promise to give for a donor if they know a DAF will be involved in any manner.

That approach/guidance is now in question. On December 4, 2017, the IRS released a notice of proposed regulations (2017-73) (which can be relied upon immediately) 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.

If a charity previously did not record a promise, only because it concluded there was an implied condition, the charity may consider whether the issuance of the IRS proposed regulation removes that condition such that the promise could be recorded.

Charities should consider their policies for recording pledges so that legally enforceable promises to give are appropriately recorded. There would no longer appear to be a reason to assume the existence of a condition where a donor regularly uses a DAF to settle his pledges; however, statements that a DAF will be used would likely render the promise conditional. Charities that previously asked donors in pledge documents whether they intend to use a DAF may choose to amend any standard forms accordingly.