Booking Multi year pledges to be paid by Donor Advised Funds

We have gone the way of adjusting down a pledge in the past. 

However. We have been advised that it is not permissible under IRS rules for a donor to use a DAF to pay a personal pledge, or for them to receive benefits, (other than "incidental benefits,") for gifts made on their behalf via DAF. I don't know enough about it to offer specific advice, but you may want to look into it to make sure your bases are covered. It sounds to me like there's some gray area.

There was some discussion about during the Tessitura Conference at Pledge Tracking, Collections, and Reporting and at the Creditee/Creditor Tracking and Reporting peer-to-peer presentation.

We do things the "bad" way at City Center—any check from anywhere can pay off a donor's pledge.  This means that our database does not accurately link payments to people/funds/companies that cut the checks.

We only did this after discussion with our Finance office—and our Finance office verifying with our auditors that we could still provide them with the information they needed.  We are also very careful in our acknowledgement letter tax language.

So speak with your Finance department and discuss their reporting requirements—and your own!

Hi Daniela,

As the other Michael said, the short answer is, it's whatever your auditors want. And your finance team should be able to provide direction in that regard. That said, the common interpretation of the IRS regulations is that it is illegal for donors to pay off personal pledges through their donor-advised fund (as is true of private foundation gifts.) As such, Seattle Opera does not book pledges in the scenario you put forth. Instead, we have created a separate fund called 'Intent to Give' which is tied to a liability GL account which is just a suspense account that will eventually net to zero. When the cash comes in from the donor-advised fund, we book it as a new gift and decrease the intent-to-give. We report on the intents-to-give to our board but we do not record it as revenue or as an asset in our accounting system until the cash is in the door.

In those cases where someone tries to pay off a pledge in a closed fiscal year with a DAF, we accept the funds, zero out the pledge, and book it as a new gift hard-credited to the sponsoring organization. We use the original contribution date of the pledge and also soft credit the advising donor. (From the accounting side, this is effectively the same as applying a payment to an existing pledge. The adjustment and gift are posted in the current fiscal year not the closed one.) The justification for our being able to do this is that we, as the charity, didn't know the donor's intent to pay via DAF initially, which is why we recorded a pledge rather than an intent. From that point forward we either book intents-to-give for the remaining years on the "pledge" or have the donor agree to pay subsequent installments directly from their own funds.

This is a very thorny issue on several levels, particularly at this point in time because of a) the skyrocketing popularity of donor-advised funds due to financial services companies like Fidelity and Schwab, b) the lack of established best practices among nonprofits on how to handle DAF-related issues, and c) the apparent lack of enforcement by the IRS. Everything boils down to the fact that once a donor puts their money into a donor-advised fund account, they have already received the tax benefit and those funds are no longer theirs from a legal standpoint. While they nominally have the power to recommend where the sponsoring org directs those funds, it is at the sponsoring org's discretion whether to adhere to such recommendations. Hypothetically, it could decline to adhere if a charity was shown to not fulfill its stated mission or to not manage its finances responsibly towards that mission's end. Furthermore, the redemption of a personal pledge is considered among the more-than-incidental benefits that are disallowed by the IRS for gifts made through private foundations and donor-advised funds.

Ultimately, I'd go back to the point that it's up to your auditors. Having heard what I heard at the Tess conference, it's apparent there's little uniformity or agreement on how to handle the many administrative difficulties created by DAF gifts, so it's possible that some of the input you get from other organizations may be more confusing than anything else. We at Seattle Opera feel we are doing what is appropriate to be in compliance with the IRS and what we anticipate all nonprofits will need to do eventually as this particular giving vehicle increases in popularity.

Here are some links I've found helpful on the topic of donor-advised funds. There's endless amounts of information out there, but here's where I'd start:

• Challenges from the fundraiser's perspective: https://philanthropy.com/article/Opinion-Strings-on/232197#
• DAF giving's effects on philanthropy in general: http://www.prospectresearchinstitute.org/dafs-goodbadugly/
• ...and: http://www.cnbc.com/2014/12/15/the-pros-and-cons-of-donor-advised-funds.html
• Proposal to the IRS, written by members of the State Bar of California in 2014, that illustrates why there needs to be greater clarification in the law: http://www.nonprofitlawmatters.com/files/2015/08/00693563.pdf

Best of luck!

Michael

Hello Michael,

This is an issue we are working on right now at the Oregon Shakespeare Festival. Your reply above is incredibly helpful - we have been passing it around the staff here in Development, Finance and IT. Would it be possible for us to give you a call sometime to ask some more questions about how you set this up and the decision making process that led you to this solution?

We would truly appreciate your help - Dawn Elsbree