I've attended many of your webinars and I think you've covered this question, but I can't seem to find the actual back-up to reassure me that I'm remembering correctly. Can a donor fulfill a legally binding pledge by making a payment through a United Way donor designation program? I'm pretty sure that he can't/shouldn't, but would like to have some back-up before I tell him no.
You probably remember my saying that a donor cannot fulfill a pledge by making a gift from a donor advised fund or a private foundation. With a donor advised fund, the donor who recommends a grant to fulfill a pledge is seeking to use the funds of the sponsoring public charity for the donor/advisor’s personal benefit, in violation of the DAF rules. With a private foundation, a disqualified person would be using foundation assets for direct personal benefit and would be engaging in a self-dealing transaction. Both situations involve using funds belonging to another organization for personal benefit and would impose an excise tax on the donor.
With a United Way donor-designation program, where the donor essentially makes an earmarked grant through the United Way to the ultimate recipient charity, I don’t think the rules would be the same. The donor is not using United Way funds to fulfill the pledge, but is making the gift to United Way only on the condition that some or all of it will be transferred directly to the beneficiary charity. The donor is directing the use of the donor’s own money for another charity. (FASB Accounting Guidelines for Contributions Received and Contributions Made make clear that contributions received by an intermediary entity are not treated for financial accounting reporting as contributions received by the intermediary.) I don’t think there is a legal impediment to using a true donor designation program, where the United Way has no discretion and is obligated to transfer funds to the ultimate recipient, to fulfill a pledge of the donor to the ultimate recipient.
It may not be the most efficient way to fulfill the pledge if the United Way imposes a significant administrative fee on the transaction or applies a type of bad debt discount for anticipated failure of other donors to meet their pledges to the United Way. But if there is no friction loss on the transaction, or if it allows the donor to meet an expectation for support of the United Way, it may be an appropriate gift to make.
Comments
Our organization has been the recipient of donations to fulfill a pledge via the United Way. For the donor, it essentially accomplishes two things at once: it fulfills a United Way commitment and fulfills the pledge to us. You are right,. United Way does impose a "significant" administrative fee. Therefore, the receiving charity has to be certain that the donation that comes to them truly fulfills the pledge in its entirety. If the donor pledges $5000 and sends $5400 to the United Way, the charity is NOT gong to get $5000. So, the donor either has to calculate what the charity will receive after administrative fees are applied and donate to the United Way accordingly or the donor can send a separate check to the charity to match the administrative fees that were withheld. ,
Thanks for the comment. Not all United Way programs are the same and not all donors will face a significant friction loss in using the program, but it is an important issue to consider for those intending to use the program to fulfill a pledge. --Don Kramer
I don't understand in what way the payment of a pledge creates a personal benefit to the donor. The pledge is not tax deductible; the fulfillment on behalf of the donor would not be either. What other personal benefit is involved in the fulfillment of a pledge?
The fulfillment of a legally binding pledge relieves the donor/advisor/disqualified person of the obligation to pay the obligation with his or her personal funds. The charity would have fulfilled the commitment with the charity's money, not the pledgor's. That is a direct personal benefit, which would be a taxable event for the donor/advisor/disqualified person. --Don Kramer
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