Are donor-advised funds restricted?

Donor-Advised Funds (DAFs) offer a unique blend of flexibility and structure in charitable giving. While they provide donors with significant control over their philanthropic activities, DAFs do come with certain restrictions to ensure compliance with IRS regulations and maintain their charitable purpose. This article explores the limitations and freedoms associated with DAFs, with a particular focus on Endaoment.org’s approach for internet-native investors.

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What Are Donor-Advised Funds?

Donor-Advised Funds are philanthropic vehicles that allow donors to make charitable contributions, receive immediate tax benefits, and recommend grants from the fund over time. They offer a flexible way to manage charitable giving while providing tax advantages similar to private foundations, but with less administrative burden.

Endaoment.org tailors this concept for the digital age, allowing crypto and stock investors to easily create and manage DAFs using blockchain technology. However, like traditional DAFs, Endaoment’s funds come with specific guidelines to ensure proper use and compliance with IRS regulations.

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IRS Compliance and No Donor Benefit Clause

The primary restrictions on DAFs stem from IRS rules designed to prevent misuse of charitable funds. Endaoment, like all DAF sponsors, must adhere to these regulations:

1. No Personal Benefit: Donors, their families, or related parties cannot receive any personal benefits from grants made from their DAF. This includes:

   • Fulfilling personal pledges
   • Purchasing tickets to charity events
   • Paying membership fees

2. Irrevocable Donations: All contributions to a DAF are irrevocable. Once assets are donated, they belong to the sponsoring organization (in this case, Endaoment) and cannot be returned to the donor.

3. Advisory Privileges: While donors can recommend grants, the final decision rests with the sponsoring organization. Endaoment retains the right to approve or deny grant recommendations to ensure compliance with IRS rules and the fund’s charitable purpose.

Endaoment implements these restrictions through a “No Donor Benefit” clause that all donors must agree to when making grant recommendations. This clause states:

“The grant recommended does not represent the payment of any pledge or other financial obligation of any donor, donor advisor, or related person or 35% controlled entity (“Interested Parties”). No Interested Party will accept any benefits or privileges offered in connection with these grants, including goods and services (such as auction items), admission to charitable events, payment of dues or membership, or discounts to the foregoing.”

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Grant Recommendation Restrictions

While DAFs offer significant flexibility in charitable giving, there are limitations on where grants can be directed:

1. Eligible Recipients: Grants from Endaoment DAFs can only be made to IRS-recognized 501(c)(3) public charities. This excludes:

   • Individuals
   • For-profit entities
   • Political campaigns or parties

2. Due Diligence: Endaoment conducts thorough vetting of all grant recommendations to ensure compliance with IRS guidelines and the fund’s charitable purpose. This process may include:

   • Verifying the recipient’s 501(c)(3) status
   • Reviewing the organization’s financial records
   • Assessing the proposed use of funds

3. International Grants: While Endaoment primarily supports U.S.-based charities, it does facilitate international giving through partnerships with organizations like GlobalGiving, expanding the reach of donors’ philanthropic efforts.

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Investment and Fund Management Restrictions

Endaoment provides donors with some control over how their DAF assets are invested, but with certain limitations:

1. Investment Options: Donors can choose from a range of Endaoment-approved investment options, vetted for risk and compliance. However, they cannot directly manage the investments themselves.

2. No Self-Dealing: Transactions that may benefit the donor or related parties personally are strictly prohibited.

3. Emergency Actions: Endaoment reserves the right to force exit any investment position in accordance with their Crisis Response & Emergency Action guidelines, ensuring the overall safety and integrity of the platform’s assets.

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Inactivity and Fund Closure Policies

To maximize the effectiveness of donated funds, Endaoment monitors the activity of donor-advised funds. If a fund shows no outgoing grant activity for over one year, Endaoment initiates quarterly outreach to the primary advisor(s), other fund advisor(s), and any interested parties. Should the fund remain inactive for an additional year, totaling two years, Endaoment allocates 10% of the current fund balance, or the full fund balance if <$500, to the Universal Impact Pool each quarter until the fund is depleted. Upon depletion, Endaoment reserves the right to close any inactive fund. For more details, refer to our inactive fund policy.

While these restrictions exist, it’s important to note that DAFs, including those offered by Endaoment, still provide significant flexibility in charitable giving. Donors can contribute a wide range of assets, including cryptocurrency and stocks, recommend grants to multiple organizations over time, and potentially grow their charitable impact through tax-efficient giving and investment strategies.