What are the important limitations and restrictions on using a donor-advised fund?

Donors give up control…

Assets, once gifted, belong to the sponsor organization. As with any charitable gift, donors no longer own the gifted assets or retain any control over them. Donors do have advisory privileges to grant assets in their DAF, but the sponsor has the final authority to say yay or nay.

DAFs are irrevocable. This means donors can’t change their mind once they contribute to a DAF. For example, if a donor establishes a DAF and then has a down year financially, he or she cannot regain, recoup, or otherwise take back the assets that were placed in the DAF. The donor may be able to grant the funds to a DAF at another sponsor.

Rules on grantmaking…

Donors must recommend grants to non-profits solely for charitable purpose or to houses of worship and educational institutions (see section #1, above).

Grants must go to a public non-profit organization that is recognized by the IRS. No grants to individuals are allowed. The organization must have its IRS 501 (c) (3) designation.

Donors may fund scholarships with a DAF, however, in most cases, donors cannot give direct individual scholarships, or recommend that grants pay tuition to private schools or colleges. DAF funds may be used to create a separate scholarship fund if a donor wishes to create a scholarship program for a specific type of student. For example, to fund “first-generation college students from Birmingham, Alabama.” DAF donors may serve on a scholarship committee; however, they and their relatives cannot make up 50% or more of the committee that makes the decisions.

Donors may not receive personal benefit (including goods and services) from grants. For example, donors cannot recommend a grant to an organization’s gala event, and then receive tickets to attend. Those tickets are a benefit, and therefore, are against the rules. Donors also cannot recommend grants from DAFs for membership fees.^[1]

Donors may not use DAF funds to fulfill a personal pledge. No payments from a donor advised fund can be used to satisfy a legally binding pledge.^[2] DAF sponsors can, however, help donors make multi-year commitments that are not treated as a legally-binding pledge.

Some sponsors place additional rules on grantmaking, such as a minimum grant amount, based on the size of the fund. Donor-advised funds currently have no annual distribution requirement. Some sponsors require donors to use their fund at least once in a year or once in a three-year period. For instance, the Community Foundation for Greater Atlanta has instituted the following addendum to its fund agreement: “If there are no gifts to a donor-advised fund for 36 consecutive months and the foundation has not received a grant recommendation from the advisor during the same 36-month period, the Foundation will attempt to contact the advisor… the funds shall be used to support the Foundation’s charitable activities based on the Foundation’s spending policy at the time…. If the advisor chooses to become engaged in advising the fund, such privilege will revert back to such advisor.

Varying rules on perpetuity…

Many sponsors place limits on the number of successor generations to the DAF. For example, a DAF may only last the duration of the donor’s lifetime, or may be passed on once to the next generation, before the assets become part of the general endowment of the sponsor organization—meaning, the donor’s successors will no longer have advisory privileges. Other DAFs may last longer, even in perpetuity, if donors set it up that way. It’s important to get clear on what the sponsor organization offers and restricts.

Next in the DAF Guide: What are sponsor organizations and what are the different types of sponsor organizations for DAFs?

[1] IRS Notice 2017-73, released in December 2017, proposed new regulations for DAF grants that may affect this bullet. As of the release of this guide, the regulations had not been finalized. If you have questions, please consult with your DAF sponsor.

[2] See Footnote 1.