Understanding the Changes in Bifurcated Gifts
As a donor, your ability to navigate tax regulations is essential for ensuring that your charitable contributions maximize impact. One of the most significant aspects stems from the IRS’s stance on bifurcated gifts, defined as a grant where one part is tax-deductible, and another part is not. In this blog, we’ll explore bifurcated gifts, the changes in IRS regulations, and why these changes matter for Greater Houston Community Foundation and our donors.
Key Insights
- The IRS prohibits bifurcated donations from donor advised funds (DAFs), meaning grants cannot be split between tax-deductible and non-deductible portions.
- DAF donors cannot receive more than incidental benefits (such as event tickets or auction items) in exchange for their charitable grants.
- Nonprofit organizations must adapt their fundraising and donor communication strategies to address the complexities of the new bifurcated gift regulations.
- Donor advised funds still offer significant tax advantages, including immediate deductions and the ability to donate appreciated assets.
- Partnering with a dedicated charitable organization can help simplify the giving process, deepen your impact, and make sure you’re maximizing the benefits.
Table of Contents
- What is a bifurcated gift?
- New IRS bifurcation guidelines
- Implications for fundholders
- Implications for nonprofits
- What is DAF and how does it work?
- Is a DAF better than a direct donation?
- Common DAF requirements
- IRS rules for donor advised funds
- How can I support my donor advised fund?
- Partner with the Foundation
What is a bifurcated gift?
According to IRS guidelines, Donor Advised Funds (DAFs) are prohibited from facilitating bifurcated donations — grant distributions that involve a portion being tax-deductible and another portion being non-deductible. This restriction is in place because the IRS explicitly prohibits DAF grants from conferring any benefits that exceed incidental benefits to the donor, advisor, or related persons.
Examples of benefits deemed more than incidental include event tickets, raffle tickets, items won at auctions, and any goods or services received in exchange for the donation. These limitations are designed to ensure that the charitable intent of DAF contributions is preserved, and that the integrity of the tax deduction remains intact.
Continue reading: What is a donor advised fund?
New IRS bifurcation guidelines
The IRS has clarified its guidelines on bifurcated gifts, altering the landscape for how the Foundation, and other charitable organizations, can accept and process these donations. Key changes to keep in mind on this type of gift are:
- Limitations on designations: Donors can no longer specify separate purposes for different parts of their gifts as they once could. This effectively consolidates the gift into a single contribution, eliminating the bifurcation aspect.
- Additional review procedure: The Foundation must adhere to enhanced documentation protocols for any contributions that could be viewed as split gifts. This means additional groundwork to ensure compliance.
What does this mean for fundholders?
To ensure compliance with the IRS guidance and to prevent potential tax penalties, Greater Houston Community Foundation will not approve distributions from a DAF that aim to cover any portion of a gift resulting in more than an incidental benefit for the donor, such as gala table sponsorships, event tickets, 5K race registrations, items at a charitable auction, museum memberships, and the like. In simpler terms, DAFs cannot be used to pay for parts of a gift that provide the donor or advisor with benefits they wouldn’t have received otherwise.
If attendance at an event or any other benefit is dependent on a grant from a donor advised fund account, the Foundation cannot approve the grant recommendation. If a Donor/Advisor wants to receive goods or services (like event tickets) from a charity in exchange for a specific contribution, they should make the contribution directly without involving their donor advised fund.
The following are some examples of how this might play out.
| Example 1 | Some charitable organizations promote giving levels. A $2,000 level (for instance, “Platinum Sponsor”) allows the donor to enjoy about $600 worth of benefits, and $1,400 goes to support the charity’s mission. The donor cannot recommend a $1,400 grant from Greater Houston Community Foundation and fulfill the rest with a $600 personal check. |
| Example 2 | A donor would like to recommend a grant of $5,000 from their donor advised fund to support a charitable organization’s annual gala. In return for the grant, the charitable organization gives the donor ten tickets to attend the gala. While the donor can recommend the $5,000 grant at the Foundation, they must decline the tickets to use their donor advised fund for the gift, as the tickets would be deemed more than an incidental benefit.The charitable organization can acknowledge the donor advised fund in its advertising materials to recognize the donor for the general support and recognition of the event. |
What does this mean for nonprofit organizations?
In the rapidly changing world of funding, nonprofit organizations encounter fresh challenges that demand thoughtful navigation and strategic planning. Like the Foundation, these organizations must adeptly address the complexities associated with bifurcated gifts. To successfully manage the intricacies of bifurcated funding, nonprofits should consider the following
- Compliance and reporting. Nonprofit organizations may face increased administrative burdens as they must track and report on how bifurcated funds are used.
- Donor relationships. The regulations might affect how nonprofits interact with donors, especially if donors have specific expectations tied to bifurcated gifts. Nonprofits may need to engage in more careful communication with donors to ensure alignment on use of funds.
- Strategic focus. Nonprofit organizations might have to reevaluate their priorities and strategies based on the types of funding they receive. If a significant portion of a nonprofit’s funding is based on the receipt of bifurcated gifts, it may be a good time to reevaluate this strategy.
Giving with DAFs — FAQs
What is a DAF and how does it work?
A donor advised fund is a popular philanthropic vehicle established at a public charity that allows donors to make charitable contributions, receive immediate tax deductions, and then recommend grants from the fund over time. Their popularity is largely based on their ease of use and flexibility; DAFs are administered by public charities that manage your assets and handle all administrative details, including due diligence, grant disbursement, and tax receipts.
When you contribute to a DAF, you make an irrevocable gift to the sponsoring organization, which then creates an account in your name. As the donor to the DAF, you retain advisory privileges over how the funds are invested and distributed. This gives you the flexibility to support multiple charitable causes while streamlining your giving through a single tax-advantaged account.
Continue reading: How does a donor advised fund work?
Is a DAF better than a direct donation?
While both DAFs and direct donations have their advantages, people often choose to structure their giving with donor advised funds for the following reasons:
- Tax efficiency. Receive an immediate tax deduction when you contribute to your DAF, even before grants are distributed to charities.
- Simplified giving. Consolidate your charitable giving through a single vehicle, reducing paperwork and administrative burden.
- Asset flexibility. Donate a wide variety of assets, including cash, stocks, real estate, and other noncash assets.
- Investment growth. Potential for tax-free growth of your charitable dollars before distribution.
- Strategic timing.Bunching charitable donations can allow you to make contributions in high-income years for tax advantages while spreading out your charitable impact over time.
- Anonymity. Choose whether to reveal your identity or give anonymously to recipient organizations.
- Expert support. Access professional guidance and due diligence services from the DAF sponsor.
Read more about charitable donations and tax deductions
Common DAF requirements
To establish and maintain a donor advised fund, you should be aware of some common requirements:
| Minimum initial contributions | Some DAF sponsors require a minimum initial donation, which varies by organization. |
| Irrevocable donations | All contributions to a DAF are irrevocable and become the legal property of the sponsoring organization. |
| Qualified charitable distributions | Grants from DAFs must be made to IRS-qualified 501(c)(3) public charities. |
| Prohibited benefits | DAF grants cannot provide more than incidental benefits to donors, advisors, or related parties. |
| Ongoing minimum balance | Some DAF sponsors require maintaining a minimum balance in your fund. |
| Minimum grant activity | While there is no overarching rule about minimum DAF activity, sponsoring organizations often have requirements for minimum disbursements to ensure the charitable purpose of the fund. |
IRS rules for donor advised funds
The IRS rules for DAFs primarily focus on ensuring that all funds maintain their charitable intent. While DAFs are a very flexible and advantageous giving vehicle, the IRS stipulates the following regulations:
- No material benefits. DAF grants cannot result in more than incidental benefits to donors, advisors, or related parties.
- No pledge fulfillment. A DAF cannot be used to fulfill a donor’s legally binding pledge to a charity.
- No bifurcated gifts. As previously discussed, donors cannot split a contribution between their DAF and personal funds to circumvent the “no material benefit” rule.
- No individual grants. DAF funds cannot be used to make grants to individuals, including scholarships directed to specific recipients—they can, however, support organizations that offer scholarship programs.
- Taxable distributions. Grants to non-charitable organizations may result in excise taxes.
- Investment limitations. The IRS prohibits “excess business holdings” in DAFs to prevent donors from using funds to maintain control of business interests.
- Donor control vs. advisory rights. Donors have advisory privileges only, while the sponsoring organization holds the legal authority over all funds.
How can I support my donor advised fund?
You can contribute a number of charitable gift types to your donor advised fund, which can provide significant flexibility for your overall charitable giving financial planning strategy. Some gift types that can fund DAFs Greater Houston Community Foundation include:
- Cash
- Publicly traded stocks, bonds, and securities
- Business interests
- Closely traded stock
- Coins, jewelry, and art
- Life insurance
- Real estate
- Privately held assets
- Retirement assets
Greater Houston Community Foundation can steer your decisions (and your assets) in the right direction
While the changes to bifurcated gifts may feel restrictive at first glance, they ultimately reflect the IRS’s commitment to transparency and effective use of charitable donations. As a donor, adapting to these changes will enhance your ability to make a lasting impact on our community. Greater Houston Community Foundation is here to support you every step of the way, and we value your partnership in making a difference.
At Greater Houston Community Foundation, we offer personalized service and deep local knowledge to maximize your philanthropic impact. Our team provides expert guidance on navigating complex tax regulations, including the recent changes to bifurcated gift rules. By partnering with us, you become part of a community of passionate donors dedicated to creating a positive impact in Houston. We simplify your giving process while amplifying your impact through our extensive nonprofit network and collaborative initiatives.
If you’d like to learn more about effectively giving under the new IRS guidelines, or if you want to discuss your giving goals and charitable gift types, call us at 713-333-2210 or reach out directly today to get started. The Foundation is here as your philanthropic partner, and we are committed to helping you create a legacy. Contact Kevin Pickett to learn more about how we can help you achieve your philanthropic goals.
More Helpful Articles by Greater Houston Community Foundation:
- How to Donate Business Interests Strategically
- What Is the Great Wealth Transfer?
- How To Get Started with Legacy Giving
- Supporting Education: A Guide to Scholarships for Donors
- What’s the Difference Between a Designated Fund vs. a Field-of-Interest Fund?
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