Donor Advised Funds

Take-Away: The IRS just published some rules, and it promises Regulations to follow, on taxpayers who used donor advised funds to satisfy charitable pledges. The Service is apparently concerned about a taxpayer who uses a donor advised fund distribution to satisfy the donor’s separate charitable pledge. Caution needs to be exercised if the charitable pledge to be satisfied is irrevocable.  Notice 2017-73

The Question:  Transfers to donor advised funds are tax deductible to the donor. If the donor later directs (advises) the sponsor of the donor advised fund to distribute assets from the fund to a charity to which the donor has made a charitable pledge, does the distribution to the charity ‘in satisfaction of’ the donor’s pledge constitute an impermissible benefit to the donor from the donor advised fund, thus threatening the initial tax deduction taken when the donor advised fund was created and funded?

The Answer (sort of:) If the pledge is an ordinary pledge made by the taxpayer to the charity, i.e. a non-binding promise to pay, then according to the IRS there is only an incidental benefit to the taxpayer if the donor advised fund makes a distribution to the charity, arguably ‘on behalf of’ the donor in satisfaction of the non-binding pledge.

The IRS suggests however, which it intends to flesh out in its promised Regulations, that a different result would be the case if the pledge was a binding, irrevocable, pledge to the charity by the taxpayer. The irrevocable pledge is instead a binding contract of the pledgor. In this later situation, it is a legal debt of the pledgor that would be satisfied by the donor advised fund, which thus results in a direct ‘more than incidental’ benefit to the donor  when the debt is paid by the donor advised fund, thus jeopardizing the initial charitable income tax deduction taken by the donor.

Hopefully the promised Regulations will provide more clarity  when a distribution from a donor advised fund in satisfaction of the donor’s charitable pledge jeopardizes the donor’s charitable income tax deduction taken on creating the donor advised fund. Until then, as you guide clients with regard to the use of their donor advised fund, it might be worthwhile to make sure that the pledge to be satisfied by a distribution from the donor advised fund is a non-binding, aka revocable, pledge.