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To hard credit or soft credit - that is the question

Wanda Cockey

We have historically (40+ years) held the position that a gift is hard credited according to the check and soft credited to the individual listed in the paperwork that requested the disbursement. This is found in Donor Advised Funds a lot. Fidelity Charitable sends a check from Jane Smith as the foundation that holds her donor-advised fund or family trust/foundation. A new CEO has questioned this method and we are facing the possibility of flipping the system - hard credit Jane Smith and Soft Credit Fidelity Charitable, etc.

How many of you hard credit the fund and soft credit the donor? I would like to present a best practice according to industry standards and avoid the complex project of flipping these gifts. The complications arise in the EFT gifts where you get one check and don't have access to donor names until 30-60 days later in a report. Also, training new data entry staff is an obstacle when flipping it. But, we will do what the leadership asks, I just want a reasonable amount of information to present in either direction. whichever way you do it, please respond with that and why. Thank you!

Wanda Cockey, Development Manager, West Region

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Comments

Jeannie Goings

Hard credit goes to legal donor, the entity in possession of the funds before they were given to the organization. Soft credit goes to the individual responsible for directing the gift to the organization. For taxes, the IRS is only interested in legal donors.

Karen Diener

There is definitely a divide on this.

Many people refer to "The Bill Connors" method, which cracks me up and probably does Bill as well. That method hard credits the donor because that is who you steward, and soft credits the DAF.

I think Bill is pretty amazing, and have agreed with him for many years. I've often repeated some of his quotes that he probably doesn't even remember but I recall as pretty outstanding statements. But I do prefer the method of hard crediting the DAF and soft-crediting the donor. This is most likely due to the time I spent in a large and very rigorous organization where Finance followed the letter of the law. Once the donor puts their money in the DAF, it is legally no longer theirs. They request a grant and the DAF funds what they request. I'm sure there are rare cases where the DAF does not fill the request but I have no personal experience with that. So according to the Finance team's rules, the DAF turned over its own money and not the donor. Sidebar: Even if a check had a couple's name on it, it went on the record of whomever signed the check. It didn't matter if they were Head of Household or not - the signatory released the money to the organization.

None of the above mandates resulted in issues with any reporting, list pulls, membership levels, etc. The only issue was if a soft credit wasn't applied, which happens regardless of who gets hard credit and who gets soft credit.

Whatever you do, do it consistently!!! If you soft credit DAFs and hard credit donors, do you follow that same protocol for gifts from Family Foundations? Like I said, I have a preference for hard credit to DAF and soft credit to donor, but either way generally ends up being fine as long as you are consistent.

Karen

Carla WeilandZaleznak

This is what were doing as well.

JoAnn Strommen

As Karen Diener‍ said, most important is be consistent!

At previous org for over 20 years, procedure was HC the DAF, SC individual. Now, procedure here is to HC individual. Made me really second guess previous procedure (yes, read Bill's book too ?)I understand why they do it as they do so much more with giving levels and LTG. Makes those computations so much easier. I know RE is not the legal records for IRS records but I still cringe a little when DAF come through as like Karen said donor has relinquished control.

Summary, be consistent! If you decide to change, have a solid plan for reporting or gift adjustments.

Heather MacKenzie

There are so many threads here to read about this very same topic! There are reasons to go either way. The places I've worked for have always been consistent with hard crediting the DAF or Foundation, and soft-crediting the donor, as we've stuck to the legalities more. Stewarding the donors is still easy. Reporting is still easy. ?

Veronica Stubbs

This is how I've always done it in my 20+ career in fundraising.

Tom Klimchak

Hard credit is completely dependent upon control of the money immediately before it is given to you.

Whoever controls the money and willingly gives it to your organization is the hard credit donor.

Remember what DAF stands for: Donor Advised Fund. An individual donor gives money to a DAF (which is a nonprofit/charity) and gives the individual a tax receipt for the donation. The individual no longer controls the money. The money is controlled (owned) by the DAF at this point. The money is invested, but the DAF owns the money - NOT the individual. The DAF can hold the money for many years before distributing it to various charities.

The DAF should get hard credit and the individual should get soft credit. Here's an example:

Robert Hernandez gives his DAF $1,000 in 2010. He gets a tax receipt from the DAF in 2010. He lists it as a charitable donation when he files his annual taxes and his taxable income is probably reduced a bit. Nice!

The DAF invests the money and holds it for 11 years. It's now 2021 and the value of the investment has grown to $10,000. Nice!

Robert calls up the DAF and says "Support my alma mater!" and the DAF says "Okay" and sends you a check for $10,000. Nice!

1. The DAF gets the hard credit AND the tax receipt. They donated it to you. Robert already got his tax break back in 2010. He should DEFINITELY not be given a tax receipt because that means he'd be able to reduce his income taxes TWICE with the same money.

2. Robert should be given soft credit, thanked profusely and stewarded... but not given hard credit. Feel free to give soft credit to Robert's wife as well. And maybe give soft credit to Robert's children. You can even give soft credit Robert's dog, his two cats and his five tropical fish. But you can't give them hard credit unless they control the money immediately before giving it to your organization.

tldr: A donor advised fund (DAF) owns/controls the money before giving it to your organization so the DAF should get the hard credit.

Rose Dixon

We have converted to the "Bill Conors Method" and it makes our lives so much easier!

We put hard credit on the individual, give it a letter code of DAF (no tax wording and the letters mentions the gift is from their donor advised fund) and we have a gift attribute of Donor Advised Fund Source with a table of the DAFs. It is so much easier when pulling reports, adding notes, actions, etc.

Sharon Campbell

I'm sure this is easily answered but when you run a yearly gift statement for the individual, wouldn't the grant from the DAF show up as being from that individual? If the statement is used as a tax document, then the data is misleading; the individual could count the donation to the DAF twice. But maybe giving statements are not accepted for tax purposes, at least without the corresponding documentation such as a check.

Miki Martin

I am completely new to this entire fundraising thing and how to manage gifts. I know what I've been shown/taught the last several months in my position so this thread is really interesting and helpful for me. Thank you, Sharon Campbell‍, for posting!

Just as Rose Dixon‍ and Jeannie Goings‍, we have always hard credited the donor. I can completely see the reasoning behind doing the opposite, though, and Tom Klimchak‍ has a great explanation for it. I cannot tell you the number of foundations I see checks from now, these things I never knew existed a year ago. This is definitely something to "chew on" a bit and discuss with my Development Director. Thank you all!

Jeannie Goings

Miki Martin‍ here is a NYT article that explains the real-life loophole and why hard credit should be given to the legal donor. Reasons detailed by Tom Klimchak‍. Happy reading.

Damon Rosenthal

This is an awesome discussion!

I actually recently inquired with Bill Connors on DAFs and he directed me to his write up which I am digesting.

DAFs are becoming more popular due to tax laws so timing is usually short term, but I do like Tom Klimchak's scenario over time where the Donor's original funds grow with the DAF organization. Also consider I as the Donor put my $1,000 in my brokerage account in XYZ stock (no tax benefit at this point - key) and it grows to a market value of $10,000 (still in my name) and then I gift that stock, I do get credit for $10,000 tax wise even though I only "funded" $1,000 of my money. It's more of tax planning and current tax law for Donors, but our organizations are benefiting from their generosity and ultimately a win/win. The "control" statement is questionable to me because I still have the ability to direct or control where the DAF gives that money. I suspect legal "ownership" is a better reference, but I don't know DAF legality well enough yet. It is interesting how tax law seems to impact our Fundraising tracking yet we always qualify (as we should) on our statements to Donors to seek a tax professional for impact on taxes.

Our own policies should direct us on how we should record and it should be applied (as mentioned here several times) consistently.

It's tough when your policy decisions though appear driven by the technology you are using. That is not the way it should work. We are currently Hard Crediting the DAF and SC the Donor and Spouse/Partner (when applicable).

We are relatively new to RE and the challenge we have related to this is how to record/apply DAF (third party) payments to a Donor Pledge especially when you are not "hard crediting" the original Donor. Can you please chime in on how your organization does that within RE?

Thank you in advance for feedback on this!

Tom Klimchak

When in doubt about how to handle something I usually refer to the IRS when I can. The IRS has pretty clear language on the wording regarding who "owns" the money in DAFs:

https://www.irs.gov/charities-non-profits/charitable-organizations/donor-advised-funds

From that page: "Once the donor makes the contribution, the organization has legal control over it. However, the donor, or the donor's representative, retains advisory privileges with respect to the distribution of funds and the investment of assets in the account."

I think the key word in a Donor Advised Fund is advised. The donor can advise that a contribution should be given to an organization but legally the organization could ignore that advice if they advise the money be used in a way that isn't acceptable or legal.

Don't get me wrong: DAFs a pain from a purely stewardship/record-keeping standpoint, but they are the owners of the money and they are making the donation. I always try to remind myself that there ARE donation instruments that are even worse (*cough*Benevity*cough*).

As for making payments on pledges, in Raiser's Edge you can have a third party (DAF in this case) make a payment on a personal pledge. That used to be frowned upon, but there have been some recent changes that seem to allow DAFs to pay off an individual pledge. The donor technically shouldn't MAKE the pledge and stipulate that the DAF will pay it off (remember, the donor can't speak for money that isn't theirs)... but in practice that's a little harder to nail down. We inevitably have donors (and gift officers) who don't quite "get" the idea that they can't pledge away someone else's money.

Dariel Dixon

In regards to Donor Advised Funds, I always make sure to read the verbiage with the check. Usually they will put in there NOT to send the donor any tax acknowledgements. I have had to completely change the way we handled these gifts to hard crediting the DAF, and soft crediting the advisor.

I had to completely re-educate our team on the correct way to do this. Now is a perfect time to make that correction if you are doing it incorrectly, before the FY turns over. Once you know the correct way to do it, you should make the adjustment and make sure your processes are accurate going forth.

Veronica Stubbs

I agree with Dariel. I've always read the information thoroughly. Also, you have to make sure you note the both accounts with thorough notes regarding the donation for future reference.

Lisa Theurer

Thanks JoAnn,

When you HC the donor, do you change the receipt amount to $0 so you don't send them a receipt in error?

I am considering this change as well, for ease of reporting.

JoAnn Strommen

No, we do not change receipt amount. I would caution on doing that if you are pulling any donor category, life time giving lists or last gift info. You will likely want to use receipt amount for those reports. The gift amount field would include benefit value.

We have a conditional merge for receipting so for those gifts a letter code of 'charitable org' is entered and appropriate letter generated. Includes text: "thank you for gift of $X given through DAF name...We understand you have already received your receipt...gift has been directed to ABC Fund...

No tax statement or the like.

Martha Lauria

Please share responses. We are currently in the same position. We have historical records using both methods and are going back to hard crediting the individual recommending the grant and soft crediting the DAF. Would love to hear what other organizations are doing about reporting prior year revenue in that case. Thank you.

Damon Rosenthal

I can see how soft crediting is more ideal, however I am focused on the fact that Constituents make significant pledges and then used DAFs to route pledge payments so if you are Hard Crediting the DAF organization and SC the Constituent how are you systematically/logically (in RE) dealing with payments towards to the pledge to reduce the pledge balance. Our organization is using Write-Offs for DAF payments and I feel there has to be a better way that retains the data more accurately. If I missed something in this chain that addresses that, please direct me.

JoAnn Strommen

In some cases, you can apply the DAF payment to the pledge on the constituent record. In the past this was generally not the best option due to the criteria of the DAF - not benefit individual, not paying a non-revokeable pledge, etc. Those guidelines have loosened up a bit.

Yes, otherwise reducing the individual's pledge by adjustment or write-off is an option used by many. Makes analysis tricky.

Darlene Wolf

We hard credit the organization (whoever holds the DAF) and soft credit the DAF and/or the donor advisor. We mark the gift ‘Do Not Receipt’ and send an acknowledgement to the donor advisor unless the accompanying documentation says not to.

Sandra BradfordJennings MHA

I used to hard credit the donor who recommended the gift and soft credit the DAF, but once I read more of the regulations, I switched to giving the hard credit to the DAF. Regarding TY letters, if the DAF says it is ok to send the acknowledgment to the person who recommended the gift, we do. However, as I read the comments, I need to go back and look at our TY letter template. I probably should create a TY letter for soft credits so the statement at the bottom is correct.

Pattie Schmidt

Thank you for your feedback here. I am trying to find the Bill Connors recent article on this topic, can you share a link? We are having a similar question in our non-profit organization - my prior experience is to HC donor, remove tax receipt language in the thank you - DAFs all say to not thank them, so we do not…TIA!

JoAnn Strommen

@Pattie Schmidt, have you checked his website?

Pattie Schmidt

Thank you for sharing JoAnn Strommen, I will check it out. Prior org was with RE, when I moved to a new org, had to learn a new CRM & fundraising process. I am just now bringing them up to the 21st century with RENXT - really do like Bill Connors' approach.

Madeleine Holdsworth

We definitely hard credit the DAF and soft credit the donor advisee. We send a thank you to the donor advisee. Switching would muck up things. I see the point of flipping it, but we feel keeping our data consistent for reporting and historical purposes is more important.