Donor-advised funds, explained for the charities that Receive Them.

A donor-advised fund is an account held by a public charity, called the sponsoring organization, on behalf of a donor. The donor contributes cash, stock, or other assets to the fund and takes a charitable deduction in that year. Afterward the donor recommends grants from the fund to other charities, usually over several years.

Many community foundations, national charities affiliated with investment firms, and some religious and university foundations sponsor these funds. For a small nonprofit, the practical effect is that a supporter's gift may arrive as a check or transfer from an organization you have never heard of, carrying the donor's name only in a memo line.

Who controls the money

Legally, the sponsoring organization owns the assets once the donor contributes them. The donor advises, and the sponsor decides. In practice sponsors approve most recommendations to charities in good standing, but they check the recipient's status before releasing a grant, which is one more reason to keep your IRS filings current.

Do not send a tax receipt to the donor

The donor already received the deduction when money went into the fund. Your acknowledgment of the grant should thank the donor for recommending it and thank the sponsor for making it, without stating that the gift is tax-deductible to the individual. Send the formal acknowledgment to the sponsoring organization if it requests one.

What a fund grant cannot pay for

Federal rules prohibit grants from a donor-advised fund that provide the donor with more than an incidental benefit. A fund grant should not be used to pay for a donor's gala dinner, event tickets, or membership benefits. If a donor wants to attend your event, the portion covering the ticket's value should come from the donor personally.

Anonymity

Donors can ask the sponsor to keep their name off a grant. When that happens you may receive a gift with no way to thank the person behind it. A short note to the sponsor, asking it to pass along your thanks, is the only route available and is usually honored.

How to ask

Add a line to your giving page and year-end appeal telling donors they can recommend a grant from their donor-advised fund, and give your legal name, address, and EIN so the sponsor can find you. Some donors will not think of their fund as a source for your organization until you mention it.