Charitable donation accounts (CDAs) have been around for years, but what are they? And how can they benefit your organization?
A charitable donation account, also known as a CDA, is a tool that credit unions can use simultaneously to:
- Give to their communities
- Strengthen their bottom line
Let’s continue our discussion about charitable donation accounts; more specifically, why would your organization use one?
What is a Charitable Donation Account?
A charitable donation account (CDA), as defined by Title 12, Section 721.2(b)(2), “is a hybrid charitable and investment vehicle … that you may fund as a means to provide charitable contributions and donations to qualified charities.”
According to the Federal Register, between 1999 and 2012, federal credit union donations were limited to two categories of charities: “(1) Non-Profit organizations located or active in the community where the donor FCU had a place of business; and (2) tax-exempt organizations that ‘operated primarily to promote and develop credit unions.”
In 2012, however, the Board repealed these restrictions; thus introducing the CDA as we know it today.
What Does a Charitable Donation Account Do?
In short, a charitable donation account allows a credit union to invest in typically higher-earning assets to help finance charitable giving while preserving and/or improving the credit union’s bottom line.
In general, yields on vehicles used in CDAs, like securities, annuities, and life insurance contracts, provide a better return than traditional credit union investments.
How Does a Charitable Donation Account Work?
So, how does it work?
Federal guidelines state that a federally-chartered credit union can place up to 5% of its net worth into a CDA. This account can be invested in assets that are normally not allowed for a credit union*, which can result in a better return than those generated by traditional credit union assets.
If the account is terminated, your credit union can keep all but the 51% of earnings required to be contributed to the 501(c)3 charities you’ve selected.
*State-chartered credit unions may have similar or different guidelines.
Why Would Your Organization Use a Charitable Donation Account?
Credit unions are charitable organizations by nature!
In the current low-yield environment, however, credit unions need to be as efficient as possible. If your credit union already gives to a charity or charities, a CDA could help your credit union fund these charitable acts more efficiently.
Disclaimer: States may have similar or different guidelines depending on local regulations. Working with a competent provider who is well versed in local regulations can help you navigate this framework.