DAF Giving Ethics: Resolving Complex Scenarios for Nonprofit Success

Donor-Advised Funds (DAFs) have become a popular giving vehicle for philanthropic individuals. However, when nonprofit organizations accept DAF donations, it's important to understand the compliance requirements associated with these funds. In this article, we'll explore the ethics of DAF giving, with a focus on transparency and compliance, and discuss how to respond when faced with potential issues.

Understanding the Risks

When someone contributes money to a Donor Advised Fund, their entire contribution qualifies for a charitable tax deduction in the same year. That is why there are strict regulations on what type of gifts can be made out of a DAF: only to 501(c)(3) organizations (with limited exceptions, i.e. houses of worship) when no “benefit” is received in exchange for that gift. Benefits include auction items, tickets, gala tables, and even reaching binding minimum requirements for a peer-to-peer fundraising event.**

While this article will focus on unintentional misuse of DAF donations, it’s important to note that donors sometimes do intentionally and explicitly encourage a nonprofit to violate these strict restrictions. A common approach is to ask for “comped” tickets or tables to an event because they made a large gift. Under pressure from a major donor, it’s hard to push back on these requests, but it’s critical to do so because of the risk involved.

While the donor is certainly at risk for making this kind of donation and encouraging this kind of benefit, the nonprofit also faces dire consequences for knowingly violating the restrictions around DAF gifts. If discovered in an audit, these actions can put a nonprofit’s standing with the IRS in jeopardy, which means going forward, they can’t receive any DAF gifts whatsoever.

Unintentional Misuse of DAF Donations

Beyond the clearly inappropriate use of DAF giving, a more challenging ethical dilemma is the possibility of unknowingly accepting funds that are being used for fundraising events, galas, or auctions. This can happen when the donation processing within your organization is not set up to capture critical information about the designation of DAF donations.

Read more and learn how to prepare for potential ethical dilemmas here.