Donor-Advised Funds (DAFs) have become increasingly popular in recent years as a tax-efficient and flexible way for many donors to support their favorite nonprofits and charitable causes. In fact, according to the Nonprofit Philanthropic Trust’s 2022 DAF Report, grants from DAFs to qualified charities totaled an estimated $45.74 billion, representing a 28.2 percent increase compared to 2020. There are more than 1.2 million DAF accounts. And payouts from DAFs have consistently been 20% or more. In 2022, it was 27.3% – the highest on record.
DAFs are here to stay.
So, what exactly are Donor-Advised Funds?
Donor-Advised Funds are giving accounts that are managed by sponsoring organizations such as community foundations, public charities, or investment firms. Donors make contributions, like stocks, real estate, cryptocurrency, or retirement assets, and receive an immediate tax deduction for their gift. The sponsoring organization then invests the funds, and the donor can recommend grants to their choice of cause or initiatives that they’d like to support. At the point of transfer of funds from the donor to the financial institution to set up the DAF, the contribution is technically no longer owned by the donor. It becomes the financial institution’s because it is being contributed to the 501(c)3 that the financial institutions set up (or in the case of community foundations, already is). This is why donors who have DAFs “recommend” a contribution to be made from their account. It is always up to the financial institution or community foundation to deny the recommendation. Instances of that are rare, but it shows you how the fund accounts are managed.
The DAF system is designed to provide donors with flexibility and convenience in their charitable giving, allowing them to support multiple charities through a single transaction and avoid the administrative burdens of managing multiple accounts. DAFs can also provide donors with the ability to make large charitable contributions while still retaining control over the timing and distribution of those funds. In short, sometimes donors aren’t sure about which organizations they want to support at the moment and prefer the option to have funds set aside so they can easily make gifts throughout the year.
Many DAF gifts are unrestricted – which is a huge bonus for many organizations. The freedom and flexibility that this can offer nonprofits can be transformative, with the Center for Effective Philanthropy calling it “dramatically and profoundly positive.”
Is there a catch?
Well, the recent growth in popularity of DAFs has raised concerns about the lack of transparency about how the funds are ultimately used, with some arguing that it can result in less or no money being donated to charities in the long run. Others are frustrated that DAFs are not subject to the same level of regulation as private foundations, which are required to distribute a minimum of 5% of their assets each year. This lack of regulation can result in DAFs holding onto large amounts of funds without distributing them to charities in a timely manner.
But overall, the pros of DAFs outweigh the cons.
Why do donors create DAFs in the first place?
Well, the obvious benefit is for tax reasons. Contributing to a donor-advised fund results in an immediate tax-deduction, the same as it would if you were to make a one time gift to any other nonprofit organization. And certain types of donations have even further advantages, like donating cash assets can be eligible for an income tax deduction of up to 60% of adjusted gross income.
Another motivation for DAFs includes recordkeeping because donors can streamline their contributions to the DAF and the logistics of grant distribution will be handled from there. It will also result in a consolidated statement for taxes.
Lastly, another benefit is that impact can be seen pretty quickly. National Philanthropic Trust reports that not only have the grant payout rates from DAFs been consistent for more than a decade through economic and social ups and downs, in 2021 the payout rate was 27.3% – the highest payout grant rate on record.
What do you do when your organization receives a DAF gift?
Once you do receive a DAF gift, here are a few ideas you should have in your toolbox:
After a donor makes a recommendation to give to your nonprofit, the sponsoring organization usually sends the donation by check. Some sponsors even offer electronic funds transfer (EFT) that can deposit your grants directly into your organization’s bank account. For database entry purposes, the donor is NOT the financial institution that sent the funds. The donor is the person, couple, or family who recommended the gift. Sometimes they will prefer anonymity. But, in most cases, the name of the fund holders will be listed on the correspondence that accompanies the gift. The fund holder’s name should be entered as the donor as a soft credit while the financial institution is also the donor because they remitted the check. The point here is that you can’t lose sight of the people behind the DAF contribution. So be sure to soft credit and steward them!
Thank the donor, not the sponsor
There will always be some communication that states who the donor is, what the fund is called, and whether the donor would like to receive information. If you are unsure, you should reach out to the financial institution that remitted the gift.
Acknowledge this donor in the same way as if they had made a cash donation. Note that no tax-deductible language should be included here, as that benefit came when the contribution was made initially to the DAF, and not when it’s paid out. Unless it is stated that the donor does not want to be contacted, feel free to send thank you letters, impact reports, and other correspondence to the financial institution that issued the DAF contribution. They will forward the materials on to their clients. d solicitation letters as a way to show you care about their giving preferences.
Promote DAFs to your audience
Make sure to include DAFs in any and all “ways to give” on your website, donation forms, and anywhere else it makes sense in online or offline communication. You may even consider adding to your website a DAF widget such as this one to streamline even further the giving process. It also serves as a gentle reminder to donors who have DAFs they can use their fund to contribute to your organization.
Finally, since there is no way for research to identify which donors have donor-advised funds, consider sending a survey to your audience that asks if they have a DAF. Surveys are generally a good way to stay connected with your donors anyway. Adding a question about DAFs in the next survey you send out to your supporters can help you better understand their interest in giving through this channel. Be prepared to provide some educational materials, in case your donors want to learn more.
Donor-Advised Funds offer a tax-efficient and adaptable way for donors to support charitable causes. Despite concerns regarding their intricacy and the lack of openness and accountability in distributing funds, they are a powerful giving vehicle that is accessible to all types of donors and serve their purpose of making a greater philanthropic impact.