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Compliance Insights

How Donor-Advised Funds Make Compliance a Breeze for Law Firms

Amar Shah
November 5, 2024
Amar Shah

In today’s complex legal landscape, donor-advised funds (DAFs) offer a powerful, efficient solution for law firms advising nonprofits and corporations on charitable campaigns. Law firms are often tasked with guiding these clients through compliance, partnership structuring, and regulatory filings, especially when it comes to managing charitable giving platforms and related agreements. Suggesting a DAF-based model can help firms (and their clients) streamline contracts, ensure legal compliance, and simplify fund distribution for clients, whether they're advising on commercial co-ventures (CCVs) or professional fundraisers. This approach can significantly reduce regulatory complexity while safeguarding client and donor interests.

The Role of Donor-Advised Funds in Charitable Fundraising

DAFs have become integral to modern philanthropy, functioning as a centralized entity that collects donations and then redistributes them to designated nonprofits. 

For example, when a donation processing platform like Change is used, all donations are directed to Our Change Foundation (the DAF), which then regrants the funds to the chosen beneficiaries. By channeling donations through a DAF, companies and nonprofits benefit from a structured, compliant system that minimizes administrative and regulatory burdens. 

This approach is increasingly popular. According to the latest Giving USA 2024 Report, DAFs now account for a growing portion of U.S. charitable giving, reflecting donors' and organizations’ desire for both flexibility and compliance in charitable campaigns. And, according to the National Philanthropic Trust’s 2023 DAF Report, donors gave $52.16 billion in DAF grants to nonprofits last year—a 9% increase from the previous year. The total amount of donor contributions to DAFs also grew by 9%, meaning that the rising popularity of donor-advised funds is not slowing down.

How does a DAF work?

For corporate partners, nonprofits, and law firms, the DAF model ensures streamlined, effective management of donations. It allows both parties to focus more on their philanthropic goals, knowing that regulatory and financial compliance is handled in a structured, reliable way.

The Value of Using a DAF

Law firms advising charity clients have much to gain from recommending a DAF structure. Whether supporting corporate or nonprofit clients, this model provides a clear, compliance-driven pathway for structuring partnerships and ensuring transparent fund management. Here’s why it makes sense:

1. Streamlined Contracts

With a DAF, donations are routed through a single entity, meaning law firms need only manage one primary agreement rather than multiple contracts for each nonprofit-corporate relationship. This minimizes administrative overhead and reduces the potential for oversight errors, especially for firms that handle charity registrations across multiple states. Both corporate and nonprofit clients benefit from this simplified contract structure, making it a popular choice for commercial agreements. 

2. Enhanced Compliance and Reporting

DAFs alleviate the compliance complexities that arise with charitable campaigns. Commercial co-ventures (CCVs) and partnerships with professional fundraisers, for instance, often involve detailed, state-specific requirements that can be time-intensive to manage. A DAF consolidates these compliance obligations into a single, well-documented campaign entity, reducing the need for repetitive filings and simplifying audit trails.

3. Efficient Fund Distribution

Instead of separately tracking and disbursing funds to multiple nonprofits, a DAF collects donations in one place and redistributes them as needed. This arrangement mitigates risks associated with misallocation and allows law firms to advise clients on a straightforward donation process that aligns with industry regulations. 

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Sample Language for Compliance

Clear disclosures help mitigate regulatory scrutiny, and attorneys can advise clients to use language that transparently explains the donation flow. Here’s an example of compliant language for DAF-based campaigns:

"Funds raised through this campaign are managed by [DAF Name] and will be distributed to [Nonprofit Name] at the close of the campaign. Donations are processed through [Platform Name], ensuring secure, compliant contributions that reach the designated cause."

Such language provides transparency for donors, clarifying how their funds will be allocated and why the DAF model is employed.

Simplifying Commercial Co-Ventures and Partnerships with DAFs

Commercial co-ventures offer a unique opportunity for companies to support charitable causes, but they also present regulatory challenges. Traditionally, both the nonprofit and the corporate partner must handle separate registrations and filings for each campaign. When a DAF is used, however, it acts as a single CCV on record, serving as an intermediary between the corporate donor and the charitable recipient. This approach significantly reduces the administrative load on law firms, allowing attorneys to focus on providing strategic advice rather than navigating state-specific filing requirements.

Final Thoughts

For law firms, recommending donation platforms that leverage a DAF, like Change, provides clients with a compliant, efficient solution for charitable giving campaigns. By minimizing contracts, easing regulatory burdens, and ensuring smooth fund distribution, law firms can deliver streamlined, high-value service to their clients. As DAFs continue to shape the philanthropic landscape, this structured model emerges as an ideal tool for legal advisors looking to maximize impact while protecting client interests.

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