Crypto-Philanthropy and Donor-Advised Funds Are Not Immune to Problems. Here Are Some Red Flags.

Donor-advised funds are wildly popular, with total DAF assets standing at $250 billion, according to the latest analysis from the National Philanthropic Trust. And by one count, gifts in cryptocurrency exceeded $1 billion last year.

But many don’t know that when a donor places money — or any kind of asset, like stock or crypto — in a DAF and gets an immediate tax break, they also relinquish control of those assets. Though in most cases, DAFs parcel grants to charities at the donor’s request.

While legally controlled by the sponsoring organization, the billions of dollars in grants each year made from donor-advised funds are based on trust, specifically the donor’s trust that the sponsoring organization will do their bidding.

Robbie Heeger, president of Endaoment, a blockchain-based philanthropy platform and donor-advised fund, warns donors to take great care when entrusting cash — or crypto — to any third party and to do regular due diligence.

“There’s a whole laundry list of good philanthropic hygiene that we have come to think of as a given, but is really important to analyze with new asset classes,” he said. “Philanthropy in the digital asset space is quite similar to philanthropy in the traditional asset space.”

Below are some tips from donor-advised fund and crypto-philanthropy experts about how to ensure your philanthropy goes as planned.

Giving it up. Remember, when donating through a DAF, you are legally ceding control over the funds. So if things go sideways with the fund, it can be difficult, if not impossible, to get the money back, as the donor does not own the donation anymore.

Fees matter. Be wary of a donor-advised fund that asks for a relatively large commission up front, but then doesn’t have annually recurring management fees. Those annual management fees may seem onerous or unnecessary, but they help ensure that the fund will make good on your grant requests, said Melodie Gatz, president of Legacy Global, a donor-advised fund sponsor.

Remember, it’s charity. Watch out for solicitations that are framed as investment opportunities. While it is a common practice for donors to be asked to make matching gifts, it is unusual for a DAF to request that a donor front money with the assurance that it will grow by a specified amount. And while it is permissible to make a loan from a donor-advised fund, the goal of the loan must be charitable, said Gene Takagi, a principal at the NEO Law Group, which specializes in issues related to nonprofits. “Promising an investment return would be highly problematic.”

Investment policies are the norm. Make sure that a donor-advised fund or crypto-philanthropy has an investment policy agreed to by its board that spells out the risks the fund is willing to take and the types of investment vehicles it will use. Sometimes investments go sour, but if they do, clear guidelines let donors know how the money will be invested. Elieen Heisman, the former long-time president of the National Philanthropic Trust, a large donor-advised fund sponsor, said she frequently received pitches from investors looking to pool money from the Trust’s DAF account for an investment scheme. Those pitches sent up red flags, she said, when the focus was on generating a big return rather than putting the money to charitable use. “Money sitting in donor-advised fund accounts are sacred funds,” Heisman said.

Lawyer up. For all big transactions, consult a lawyer. IRS rules are complicated, and every situation is different. Having a lawyer look for potential problems is a must.

Paper trail. Consider carefully whether you want to make a donation to a group that has not filed a 990 in several consecutive years. Not filling the required IRS paperwork can happen, said Brian Mittendorf, a nonprofit tax professor at the Ohio State University. But if a donor-advised fund skips several years, beware.

Tracking crypto. Many nonprofits are building the staff knowledge to determine whether potential crypto partners are legitimate. Unlike cash scams, some crypto scams use a charity’s name on a digital platform to fraudulently solicit funds. To prevent internal fraud and external attacks, grantees need to be skilled in assessing a fund’s digital credentials. “You want to make sure you are partnering with legitimate organizations that you want to associate your brand with,” said Ilan Wallentin, senior manager of Philanthropy Special Projects at GiveDirectly, a nonprofit that allows donors to give cash and crypto to recipients directly, rather than to a nonprofit that provides goods and services to beneficiaries.

Do research. Due diligence doesn’t just mean googling the organization and looking at their financials, Wallentin said. If there’s an intended charity or cause that you’re looking to support, you can also reach out to that charity to ask if they’ve worked with the DAF in question.

Get a full view. When dealing with crypto investments, see how transparent the funds are beyond what is required in the IRS 990 form. You should know where your assets are sitting, what their current value is, how they are liquidated. Crypto-philanthropy can afford donors a complete, accurate view into the management of their funds through an auditable, transparent, immutable record of the transactions made through the blockchain, Heeger said.