Understanding the Changes in Bifurcated Gifts
As a donor, your ability to navigate changes in tax regulations is essential for ensuring that your charitable contributions maximize impact. One of the most significant recent developments 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.
What are Bifurcated Gifts?
According to IRS guidance, 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?
IRS Updated 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.
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 for $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 from Greater Houston Community Foundation, the donor must decline the tickets in order to make the gift using the donor advised fund, as the tickets would be considered more than an incidental benefit. The charitable organization can acknowledge the donor-advised fund in its advertising materials in an effort 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 upon receipt of bifurcated gifts, it may be a good time to reevaluate this strategy.
Your Philanthropic Partner
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.
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, contact us today. 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:
- Tips for Year-End Giving
- Why Donating Appreciated Stock Makes Financial Sense
- The Importance of Charitable Giving in Financial and Estate Planning
- How to Start a Scholarship Fund
- The Balance Between Recognition and Anonymity in Philanthropy: Which one’s for you?
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