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donor-advised fund processing

Best Practices for Processing Donor-Advised Funds

In our last client advisory, we explored donor-advised funds (DAFs)—why donors choose them, how organizations can take advantage of them, and how donor-advised funds donors are different from traditional donors. Donor-advised funds represent an important and growing fundraising opportunity. But what happens once a donor-advised fund transaction comes through a nonprofit organization’s door? How do recording, receipting, and acknowledging, and these transactions differ from traditional donations? Below are some best practices for processing donor-advised funds.

5 Best Practices for Processing DAFs

5 Best Practices for Processing DAFs

Establish Credit

The organization will want to establish both the legal donor (the donor-advised fund) and the person who established the donor-advised fund. However, determining this person is not always possible because he or she may request that their contact information be withheld from the receiving organization. In these cases, there is little the organization can do. The good news is that most donors disclose their information to the organization.

Process

As a best practice, Bentz Whaley Flessner recommends recording the DAF transaction on the record of the donor-advised fund (e.g., Fidelity). Soft credit may be given to the individual who advised the distribution, so that credit is reflected on the donor’s record. Recording distribution in this manner prevents receipts from being issued—in error—directly to the individual donor who created the donor-advised fund.

Additionally, donor-advised transactions may never be used to establish or pay down a donor’s pledge. This establishes a prohibited benefit in the eyes of the IRS. An organization must establish a methodology for dealing with these types of transactions when they are received, which may vary depending on business rules and the database in use.

Receipt

The impulse for organizations is to send a tax receipt for each and every transaction. However, receipts are not necessary for funds received via donor-advised funds because the DAF is charged with issuing a tax receipt to the original donor. If an organization insists on issuing a tax receipt, the receipt should be sent directly to the donor-advised fund, not to DAF owner. Some donor-advised funds will explicitly request no receipts.

Acknowledge

Because the donor is not receiving a tax receipt for the donor-advised fund distribution, the acknowledgement letter is pivotal. Should you send an acknowledgement letter to the person who established the donor-advised fund? Absolutely. This is your chance to thank and steward the donor. However, IRS language should be omitted from this letter. Additionally, instead of saying “thank you for your donation,” consider saying “thank you for recommending that <donor-advised fund> make a distribution from your donor-advised fund to <organization name>.”

Publicize

With the growing popularity of donor-advised funds, we want to make recording and acknowledging distributions as simple and as effective as possible. Consider having information on your website that directly markets to donor-advised funds and instructs donors how they can contribute—via requesting distributions from the fund of their choice—and to your organization.

For more on best practices for processing donor-advised funds or other complex gift processing situations, contact the systems and operations professionals at Bentz Whaley Flessner. Together, we transform philanthropy.

Originally published October 5, 2016

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