Charitable Donation Accounts: Why Would Your Organization Use One?
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In 2012, however, the Board repealed these restrictions; thus introducing the CDA as we know it today.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.
Our team is here to discuss with you the additional ways your unique organization can benefit from investing in CDAs. Read on to learn more about how to give back smarter using a CDA.
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.