Strings on Donor-Advised Funds Are Making Charity Supporters Angry

Donor-advised funds are often promoted as “giving, simplified” or charitable checkbooks.

That is true in many ways.

Donor-advised funds allow donors to contribute stock shares in one fell swoop, for instance. The donors can then oversee the charitable distribution at their leisure, while sponsoring organizations like Fidelity Charitable or a community foundation keep the books. Yes, in some ways donor-advised funds are indeed simple.

But as the number of donor-advised funds has increased, so too have the challenges for nonprofits and the donors themselves.

That’s because there are some very real legal restrictions on how grants from donor-advised funds can be distributed. These restrictions are increasingly causing headaches and inefficiencies for nonprofits, while giving rise to misunderstanding and resentment between those organizations and their donors.

What’s behind the confusion?

Well, donor-advised funds are, technically, just that — funds whose use is advised, not directed, by donors. The final decision-making about grants is legally up to the sponsoring organization, whether a community foundation, a religious federation, or a commercial gift fund.

In practice, the donor-advisers pretty much have carte blanche to recommend grants to any charitable organization they want — fund sponsors make that very clear in their marketing materials — but there are two lines that cannot be crossed even by the most pliant of sponsors. First, grants from donor-advised funds cannot be used if the donor gets any sort of personal benefit. Second, a donor cannot use a donor-advised fund to redeem a personal pledge.

Those seem like modest restrictions, but as they play out, significant issues arise. Here are some examples, not ripped from the headlines (nonprofit leaders are far too discreet — or timid — to complain publicly), but taken from actual examples people have brought to my attention over the last few months.

Missing premium syndrome.

A national conservation group has traditionally offered premiums to people who make big gifts. Recently the organization tempted donors by letting them know that donors who gave at least $2,500 would receive a particularly attractive thank-you gift. The donors responded generously, but many of them did so through their donor-advised funds — the source they have come to rely on for charitable gifts of that size.

Many of these donors then grew livid with the organization when staff members explained that because the donors had given through their donor-advised funds, they were ineligible to receive the gift. If the organization had sent the premium to the members, they explained, it would have violated the rule against providing personal benefits for a donor-advised fund gift.

I asked the membership director how many upset members the organization has on its hands.

“About a dozen a week,” she answered. “Dealing with angry donors is pretty much my full-time job. And nearly all of the anger revolves around misunderstanding about giving through their donor-advised funds.”

Not-such-a-gala-event tension.

Nonprofits make the big money at gala dinners not from people paying $100 or even $250 a head to attend, but from sponsorship gifts of $5,000, $10,000, $50,000, or (in gala meccas like New York City or San Francisco) even more. Sponsorships provide the donors with perks, of course, the most common being a table or two of guests in exchange for, say, a $5,000 gift.

A few free meals in return for a $5,000 gift would seem like an incidental benefit, but the rules governing donor-advised funds make it clear that those plates of coq au vin constitute an inappropriate benefit for the donor-adviser. A staff member at a major cultural organization told me there are a growing number of donors who want to make sponsorship gifts through their donor-advised funds, but who are reluctant to give up any of the perks.

That’s creating a challenging dynamic. “People no longer want to write a big check,” the development director explained to me. “They like the simple, painless aspect of giving through their donor-advised funds. And when they find out the rules prohibit the DAFs from underwriting sponsorships with benefits, they’re either a) mad at me, b) unwilling to be a sponsor any longer, or c) both of the above.”

The pledge-that-isn’t accounting.

In the good old days (I’m talking about all of 20 years ago), donors to a capital campaign would sign a three-year pledge at $100,000 a year. Today, if that same donor is ready to commit to a three-year, $300,000 gift but wants to use her donor-advised fund — well, she can’t, because of the prohibition against using such funds to fulfill a personal pledge. A lot of organizations have the donor sign an “intent-to-donate” form that’s sort of a pledge form-lite — a moral obligation, but not a legally binding one, and it is not recorded as a pledge in the institution’s financial statements.

Along with the annoyance of essentially having to keep two sets of books (one for tracking the campaign progress, which would list this as a $300,000 gift or pledge and one for the official financial statements, which would only list the $100,000 portion of the gift that arrived in year one), the intent-to-donate-sort-of-pledge can create real financial challenges for the nonprofit.

Most notably, if the gift is for a building campaign and the organization needs to borrow funds to keep the project running on time and under budget, it can’t use the commitments from donor-advised funds as collateral because the intention to donate is not a legally binding pledge. And as more and more of the major gifts take this form, the project can get delayed and the costs can escalate.

When I mentioned these challenges to a friend who works for a donor-advised fund sponsor, he minimized the problem.

“None of these are big deals,” he said. “It’s all part of donor stewardship. Smart nonprofits can and should finesse this.”

But finessing takes time and money. And at a time when nonprofits are facing pressure from many sides (rising demand for services, reduced government funding, decreased corporate contributions, and increased reporting requirements), overworked staff members now need to spend extra time and energy stilling the waters with donors who increasingly want to give through their donor-advised funds.

All of this is the natural and unfortunate result of the commodification of donor-advised funds in recent years.

In the old days, when donors using donor-advised funds worked almost exclusively through community foundations, there was good communication about the limits on giving through this mechanism. I doubt that most of today’s purveyors of donor-advised funds, particularly individual financial advisers who personally get financial benefits when their clients contribute to commercial gift funds, take the time to explain the fine print of how giving from donor-advised funds actually works. As with so much of what happens on Wall Street, it’s all about making the sale. The consequences are somebody else’s problem.

Alan Cantor is a consultant to nonprofits on fundraising, strategy, and other matters.