In prior blogs, I explained how a donor advised fund works in detail. Basically, you make a contribution to the fund now and take a deduction in the year you make the contribution. In future years, you, as the adviser, can direct distributions to the public charity of your choice. A donor advised fund may be useful to aggregate charitable gifts into one year to enable itemizing deductions while taking the standard deduction in other years.
A gray area has been the satisfaction of pledges made by the donor/advisor. For example: A donor/advisor has made a contribution to a donor advised fund and takes the deduction, as usual. The same donor also makes a pledge to their favorite charity. The donor/advisor of the donor advised fund wishes to make a distribution from their donor advised fund in satisfaction of their pledge. The reason this has been a gray area is that, depending upon local law, pledges to charity may or may not be legally enforceable.
In December 2017, the Treasury released Revenue Ruling 2017-73. That ruling provided that using a donor advised fund to satisfy the donor/advisor’s pledge to a charity is acceptable under certain circumstances. The requirements of the ruling are in part 4 and are:
- There must be no reference to the pledge in making the distribution from the donor advised fund to the charity;
- The donor/advisor must not receive more than incidental benefit; and
- The donor/advisor must not try to take a charitable deduction for the distribution from the donor advised fund to the charity, even if the charity sends the donor/advisor a written acknowledgement for the distribution. (The donor/advisor will have already received a charitable deduction for the contribution to the donor advised fund.)
These requirements are quite reasonable and this ruling is quite favorable to taxpayers. Treasury and the IRS agreed upon this result because it was too onerous for the IRS and the donor advised fund administrator to determine whether the taxpayer had made a legally binding pledge to a particular charity to which the donor advised fund might make a distribution.
Now, as long as the three requirements of the ruling are met, a donor advised fund may make distributions to a charity which satisfy a donor/advisor’s pledge to that charity. Part 7 of the ruling specifies that taxpayers may rely on this ruling until more specific rulings on the subject are released.
Stephen C. Hartnett, J.D., LL.M.
Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com
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- Double Your Gifting with Spousal Gift-Splitting - January 11, 2022
