I'm sure this has been covered in the forum before, but I can't seem to find any threads on it. So please forgive the re-posting!

My question is: how do you handle third party payments on pledges? Example: Mr. Smith makes a pledge of $500. The Smith Foundation sends in the payment for $500. The hard credit goes on the Foundation record, Mr. Smith gets softed - but what happens to the pledge balance? Do you delete the pledge? Write it off? We want to avoid any kind of "self-dealing" problems for the donor, so applying the payment directly to the pledge doesn't seem like the best idea.

Thanks!

-Ryan

We would do as you said with the payment on the Foundation record, individual SC.  We generally apply the payment to the pledge.  Not sure what you mean by 'self-dealing problems for the donor' if you do this. 

If you don't apply payment toward pledge, your org should probably set a procedure as to when you delete a pledge, write it off or adjust amount to $0.00.  Some provide an audit trail that is easier to follow than others.

By law, a donor advised fund/foundatin cannot pay a pledge of the individual.  Therefore you should adjust the pledge to $0 with a note explaining why.  Hard credit the gift to the foundation and soft credit the donor.

Nina, good point.

I was aware that DAF can not pay pledges but not about foundations.  I have not seen any documentation with the payments we receive from foundations to that effect.  Do you know where I could find that documentation?  We have several individuals with their own foundations.  I guess I'm fortunate that based on their giving history/personal knowledge we've recorded the pledge as coming from the foundation to start with.  (I'm racking my brain trying to think of any others - will have to get in RE and query.)

Thanks for any help you can provide.

We get a handful of these every year, where a donor sends in his/her pledge, we book the pledge, and then receive payment a few months later from the community foundation or other donor-advised fund.  We always put the payment on the foundation's record and soft-credit the donor, paying off the pledge that way.

The thing you have to be careful about is that once you book a pledge, you have created a receivable on the financial office's books, so you cannot simply adjust the pledge to $0 and enter a straight cash gift without affecting their system.  I just asked my Controller about the possibility of doing it that way (adjusting the original pledge to $0 and entering a cash gift), and he wasn't a fan.

Also, the legality of it is between the donor and the donor-advised fund.  As the charitable institution receiving the funds, we're not legally tied to that rule.  We steward the gifts and keep the records as we receive them.

Most Donor Advised Funds will send you legal paperwork that you have to sign stating that the gift was not used to pay off a pledge, etc. I would think twice about saying it's between the DAF and the Donor if you or your boss's name is going on that legal paperwork.

The reason finance is not a fan of writing off the pledge and entering a cash gift (beyond the DAF legality) is because any write off or pledge adjust that lowers your receiables without paying it goes against your organizations bad debt. The bad debt ratio affects your organizations crdit rating and it's ability to get loans or the rates on your company credit cards, etc.

Interesting Article I have in my files 

 

What are the Legal Responsibilities of Family Foundation Board Members? As a board member or trustee of a family foundation, you must be willing to take legal responsibility for your foundation as a separate legal entity.  While some of the rules may seem onerous, proper procedures and board member education can minimize the risk to you and your foundation.  As with all legal issues, a qualified attorney should always be consulted. What are the rules against self-dealing? The main prohibition for family foundations is "self-dealing." Simply stated, a family foundation can not enter into any financial transaction with certain related parties, defined in the law as "disqualified persons."  A disqualified person is any officer, director, trustee or employee with the authority to act on behalf of the foundation and substantial contributors. The list of prohibited transactions between a private foundation and a disqualified person includes: ·         Satisfying the enforceable pledge (such as a donation) of a disqualified person ·         Sale, exchange or leasing of property (such as purchasing stationery, supplies, printing, graphic design or insurance) from a disqualified person ·         Lending of money or extensions of credit ·         Furnishing of goods, services or facilities ·         Transfer to, or use by or for the benefit of, a disqualified person of the income or assets of the family foundation ·         Payment of money or property to a government official Some specific examples of self-dealing are: ·         Personal family pledges- A legally binding pledge (personal pledge to charity, etc) is a personal debt, and if a disqualified person makes such a pledge, its an act of self-dealing for a foundation to pay that debt. ·         Attending fundraisers - If the foundation buys a ticket to a fundraising event, and the ticket price includes payment for goods and services (dinner and entertainment) the ticket cannot be used by a disqualified person. For additional information, consult: 

·         Council on Foundations: http://www.cof.org/

 

·         Family Foundations and the Law: What You Need to Know, by John Edie

 

Julie Hiland:

Also, the legality of it is between the donor and the donor-advised fund.  As the charitable institution receiving the funds, we're not legally tied to that rule.  We steward the gifts and keep the records as we receive them.

I agree with Laurel.  Even though we didn't have to sign anything with the last DAF gift we recieved, this is what their letter with the gift stated:

By accepting this check, your organization certifies to XXXXXX, Inc that (i) no tangible benefit, goods, or services are received....

...and (ii) this donation will not be used by you to satisfy the payment of any pledge or other persnoal financial obligation on behalf of the named donors...

...Your organization further warrants that your organization is in compliance with our policies as currently set forth on our website, www.XXXX.com

As I read that,  by accepting the money we're "tied to that rule."   

Aside from the issue of a foundation paying an individual's pledge, you can apply a payment by one person to another person's pledge by opening the gift record of the payment, clicking on "gift" at the top of the toolbar, then "apply to", then "pledge" then "load pledge(s) from." 

Concerning this statement:

  The list of prohibited transactions between a private foundation and a disqualified person includes: ·         Satisfying the "enforceable pledge (such as a donation)" of a disqualified person · 

What  constitutes an "enforceable pledge"?  We have donors make pledges all the time, and we send 'reminders' if asked, but we do not "enforce" payment of pledges in any way.  We never seek legal recourse for non-payment of pledges.

 would this exempt us from not applying DAF gifts to third-party pledges?

 Thanks!

PS: sorry for the tiny type - gotta work on that

Hi,

In response to pledge by indivudual pd by third party.  Sometimes we have a pledge that was pd partially by Personal Fnd and part by the individual themselves.  I post the complete pledge to the individual record and than link gifts pd by the Fnd. This keeps the complete pledge on the individual record and will .00 bal when it is pd. 

 

 

Elizabeth Shafer:

Concerning this statement:

  The list of prohibited transactions between a private foundation and a disqualified person includes: ·         Satisfying the "enforceable pledge (such as a donation)" of a disqualified person · 

What  constitutes an "enforceable pledge"?  We have donors make pledges all the time, and we send 'reminders' if asked, but we do not "enforce" payment of pledges in any way.  We never seek legal recourse for non-payment of pledges.

 would this exempt us from not applying DAF gifts to third-party pledges?

 Thanks!

PS: sorry for the tiny type - gotta work on that

We don't 'enforce' our pledges, but I'm guessing they would be considered 'enforceable'.  You may wish to check with your accountants or lawyers to verify if they are considered enforceable.  Generally you have a written, signed agreement to pay.  I think that's "enforceable" so that would be no DAF payments.

Kathy Estabrook:

Hi,

In response to pledge by indivudual pd by third party.  Sometimes we have a pledge that was pd partially by Personal Fnd and part by the individual themselves.  I post the complete pledge to the individual record and than link gifts pd by the Fnd. This keeps the complete pledge on the individual record and will .00 bal when it is pd. 

 

 

Pledge payments from two sources happens frequently.  However, don't miss what I learned from the above posts: Personal foundations gifts are not/should not be recorded as pledge payments.  You may need to adjust your pledge amount to what was paid by individual minus what was paid by foundation.  Then SC the foundation payment.