What Can A Nonprofit Entity Do With Designated Charitable Donations?
This article explores three similar, yet different types of “designated” donations a nonprofit charitable organization may receive and explains the rights and responsibilities of both the donor and the charitable organization with respect to each. The first is a contribution made for the purpose of benefiting a specific individual. The second is a contribution made to support a specific purpose. The third is a contribution made to a donor advised fund.
Gifts to Designated Individuals
If a donor comes to your charity and offers to make a contribution for the purpose of defraying the medical costs about to be incurred by a specific individual, can the charity accept that donation?
If the purpose of the charitable organization is totally unrelated to helping families in need, then it may not accept a donation so designated. The charity must use all of its assets to benefit the purposes for which it was organized. As an example, if the charity’s purpose is to provide residential care for developmentally disabled individuals, contributions designated to help a specific individual defray medical costs would not be consistent with that purpose. Therefore, the donation could not be accepted.
If, however, the charitable organization was formed for the purpose of assisting families in need, then the proposed donation would be at least consistent with that purpose. Although the donor could give money directly to the family to defer the medical costs, that gift would not be a charitable contribution. However, if the money is given to a charitable organization whose purpose is to assist families in need, a charitable deduction may be available. If the donation was given for the general purpose of assisting families in need, the donation could be accepted and the donor would be entitled to take a charitable deduction.
In this case, however, the donor has identified a specific individual who is to benefit from the donation. While donors can request how donated funds may be used, they may not require the funds to be used for the benefit of a specific person. To be a valid donation, the charity must be totally free to determine whether the designated family truly needs the type of assistance being offered and whether assisting the family is the best use of the donated funds. If there are several families in similar circumstances, the charity must have the ability to freely decide which family or families should benefit from the donation.
Gifts Designated for Specific Purposes
When a donor comes to your charitable organization and offers to give a donation for the specific purpose of covering the costs of developmentally disabled individuals in residential care, can the charity, whose purpose is to provide residential care for developmentally disabled individuals, use a portion of those funds to cover overhead and administrative expenses? The answer to that question depends upon what representations were made by the charity or what was directed by the donor at the time of the gift. If, at the time of the contribution, it was clearly understood that the donation was not to be used for overhead or administrative expenses, then none of the donated funds may be used for that purpose. Thus, it is important in making a solicitation for donations to make clear that the charity reserves the right to use the funds for whatever purposes it sees fit, consistent with its overall purpose.
If your charity has accepted funds for a specific purpose, you may be able to go back to the donor and ask the donor to authorize the donation to be used for overhead and administrative expenses. If the donor agrees, then the funds can be used for those purposes as well.
If your charity has received restricted donations, it is wise to establish a restricted fund account for those funds rather than to deposit them into the charity’s general account. If your charity has received restricted funds for more than one purpose, then it is wise to subdivide the restricted fund account for each such purpose. Once the restricted fund accounts have been established, the use of the funds from those accounts must be limited to the specific purpose for which they were originally donated.
Donor Advised Funds
Recently, more and more has been heard with respect to donor advised funds, but this still is an area that is not well understood. Generally, a donor advised fund is a charitable contribution given outright to a charity with the agreement that the wishes of the donor will be considered when the charity spends the contributed funds.
A donor who sets up a donor advised fund could use a private foundation to accomplish his or her charitable purpose. However, establishing a private foundation with a contribution of, say, $50,000, is not a practical way to handle those funds. In addition, the donor likely does not want the responsibility of operating a private foundation and making sure it complies with complex legal and tax requirements.
May a charity accept donor advised funds? The answer is generally yes, with qualifications.
The principle concern of the Internal Revenue Service is whether or not the donor has surrendered sufficient control over the funds to constitute an immediate charitable contribution. If not, the donor’s charitable deduction must wait until the funds are distributed from the fund to the final charitable recipient. In order for the contribution to be immediately deductible, the charitable organization must have actual ownership and control of the funds at the time they are contributed. Once the donor has given up control of the use of the funds, he or she may request, but not control, how the funds may be used. The test is whether the charity clearly has possession and control of the funds with the right to invest and use them as the charity sees fit. Of course, the funds must be used for charitable purposes and in a manner consistent with the general purpose for which the charitable organization was organized and operates.
Charitable organizations may wish to consider whether a minimum amount should be distributed each year from donor advised funds. Some organizations require at least five percent of the assets be spent annually, consistent with the requirements of private foundations. Other organizations consider whether to include a limit on the maximum amount distributed in a given year. This is done to maintain the organizations’ assets that have been increased by the donor advised fund contribution.
It is wise for a charity to consider placing a limit on how long the donor’s desires will be given consideration. Some charities provide that the donor advised funds will become part of and included within the general funds of the charity upon the occurrence of a specific event, such as on the donor’s death or upon both the death of the donor and the death of his or her designated successor.
Conclusion
Obtaining charitable donations is never an easy task. Every charity wants to accept a donation when it becomes available; however, be sure that the organization is in compliance with the applicable laws and regulations when acceptance occurs. To do otherwise could result in harm to the charity and provide a result that is both harmful to and unexpected by the donor.
If your nonprofit organization needs assistance or has questions regarding designated charitable donations, please contact a member of Berry Moorman’s Nonprofit Practice Group.
