Donor-Advised Fund Used to Pay Pledge

There are potential ramifications to givers and donor-advised fund (DAF) managers who use (or “misuse,” as the case may be) a DAF to fulfill a giver’s “legally enforceable pledge.” This is not an issue that directly impacts the public charity that is the recipient of DAF funds, in terms of legal exposure to penalties with respect to any gifts received. Rather, it is one that ministries should understand in order to help givers (including possibly their own board members) who may have established DAFs by providing a “heads up” that may allow them to avoid unintended consequences.

The Problem: Using a DAF to Fulfill a Personal Pledge

A prohibited benefit scenario might go something like this.

Example:  Giver contributes $100,000 to a local private foundation under a DAF. The assets held in the DAF no longer belong to Giver, but are assets of the private foundation, subject to the DAF agreement. Separately, Giver makes a “legally enforceable pledge” of $100,000 to a third-party ministry. If assets from the DAF are used to fulfill Giver’s personal pledge to the third party charity, the prohibited benefit rules found in Internal Revenue Code Section 4967 are violated because charitable assets (those held by the foundation as part of the DAF) would have conferred a private benefit upon Giver (satisfaction of legal obligation; i.e., the debt). The penalty for such a violation would include an excise tax imposed on Giver that is equal to 125% of the amount of the benefit. The foundation managers would also be subject to a 10% excise tax if they knowingly approved the transaction. 

Identifying a Legally Enforceable Pledge

One of the key issues is whether a giver’s expression of intent to make a charitable contribution constitutes a “legally enforceable pledge.” The IRS is not in a position to determine what criteria should be used to define “legally enforceable pledge” because doing so is a matter of state law. In fact, the IRS has dealt with issues involving “legally binding pledges” or “legal obligations” with the implication that some other authority, presumably state courts, must make such a determination. This is significant because without a legally binding pledge the prohibited benefit rules relating to DAFs would not apply. The facts and circumstances in each situation, including the use of a standard pledge commitment form, communications, giving history, etc., would all need to be evaluated before determining whether a pledge is legally binding.

Several states have ruled on this issue, following various theories to determine the enforceability of pledges, including promissory estoppel. Some states follow the traditional common law view that some form of consideration is necessary for a charitable subscription or pledge to be enforced against the giver, pledger, or that person’s legal representative, even though such consideration might not meet the standards applicable to an ordinary business contract.

Some states have embraced the idea of enforcing charitable pledges solely on public policy grounds.

One way of stating this concept is as follows: a promise which the promisor should reasonably expect to induce action or forbearance on the part of the promise or a third person is binding if injustice can be avoided only by enforcement of the promise.[1]

There are accounting guidelines that instruct ministries on the recording and reporting of various kinds of pledges. It is important to remember, however, that those guidelines do not have the force of law, especially when determining if a giver has made a legally binding pledge under the law in a particular jurisdiction.[2] Therefore, a ministry receiving a gift should not express an opinion that is based on accounting guidelines to determine whether a giver has made a legally enforceable pledge.


Givers should work closely with their legal and tax advisors, and, if applicable, with foundation managers administering their DAF, in relation to any gift and/or pledge they plan to make. Failure to understand the prohibitions against DAFs fulfilling personal pledges may have significant adverse consequences.

This notice may be suitable to send to certain givers on this topic. In some instances, telephone conversations with givers whom a ministry believes may have established a DAF may be preferable.

[1] “Pledges to Nonprofit Organizations: Are They Enforceable and Must They Be Enforced”, by Mary Frances Budig, Gordon T. Butler and Lynne E. Murphy, University of San Francisco Law Review, Fall, 1992, at 67, paraphrasing Second Restatement of Contracts, section 90(2).

[2] E.g., AICPA Audit and Accounting Guide, section 5.50, states, in pertinent part, “a communication that does not indicate clearly whether it is a promise is considered an unconditional promise to give if it indicates an unconditional intention to give that is legally enforceable.” Again, the need to identify “legally enforceable” is paramount. What may be satisfactory in that regard for accounting standards may not be consistent with the law in a specific jurisdiction.


This text is provided with the understanding that ECFA is not rendering legal, accounting, or other professional advice or service. Professional advice on specific issues should be sought from an accountant, lawyer, or other professional.