October 8, 2019
The popularity of donor-advised funds (DAFs) has surged in recent years, and DAFs increasingly are considered vital to the success of not-for-profit organizations. If you haven’t already, you should learn about how DAFs work so that you can position your nonprofit to benefit from these charitable-giving vehicles.
How DAFs are Managed
Generally, DAF accounts are controlled by a 501(c)(3) organization known as the “sponsoring organization.” Sponsoring organizations, such as community foundations and not-for-profit arms of financial services companies such as Vanguard, Fidelity and Charles Schwab, invest assets and manage the accounts of participating donors.
Once a DAF is established, its donors transfer funds and tell the sponsoring organization which charities they’d like to support. The supporting organization then distributes the money to the selected charities. When they transfer funds to the DAF (even if a grant isn’t immediately made to a nonprofit), donors are entitled to a current charitable deduction, assuming they itemize on their federal tax returns. Typically, funds that haven’t been distributed are invested in mutual funds or other investments that allow the value of the DAF to grow over time.
The amount of funds shifted to DAFs in recent years has been staggering. According to the National Philanthropic Trust’s (NPT’s) 2018 annual report on DAFs, the total assets of sponsoring organizations, including commercial funds, community foundations and common funds, grew by approximately 27.3%. At the end of 2017, DAF assets earmarked for charitable donations totaled $110 billion. The NPT also reported that contributions to DAFs rose by 16.5%.
The only DAF stat that showed a decrease was in the average size of the funds — down 20.5%. This trend has been attributed to the Tax Cuts and Jobs Act, which has discouraged charitable donations in many cases.
If your organization would like to attract DAF grants, consider the following tips:
- Save marketing resources. Sponsors don’t decide who receives grants from DAFs. So you’re wasting time and money sending them solicitations.
- Solicit grants. Although grants from DAFs can’t be used to fulfill a pledge, you can still ask a donor with a DAF to commit to a grant recommendation.
- Reward benefactors. Similarly, grants from DAFs can’t be used to purchase tickets to events or provide benefits to a donor. But that doesn’t prohibit you from giving donor tickets to one of your nonprofit’s special events as a thank you for a grant recommendation.
- Encourage property gifts. DAFs can be the easiest and least expensive way for donors to make a charitable gift of appreciated property such as real estate, securities or artwork because the sponsor handles any necessary sales of assets. And your nonprofit doesn’t have to manage the property or handle accounts.
- Communicate. Donors may employ DAFs in different ways, so you may need to adjust your communication strategy for each individual. For example, some donors use their DAF as a philanthropic savings account, while others make grant recommendations immediately after transferring funds to the account. Some donors recommend the dispersal of funds to many organizations, and others concentrate on just one charity. Start conversations with major donors to determine how their charitable intentions can best be achieved.
- Set up annual gift-giving. Frequently, DAFs allow donors to recommend recurring grants, which eliminates the need for the donor to initiate the disbursal process each time. If you ask donors to make recurring grants, you’ll improve the chances for continuous support.
- Give proper credit. Any DAF gifts your nonprofit receives should be officially credited both to the sponsoring organization and the donor. The sponsor is the “official donor,” so you should record the grant under the name of that entity (for example, “Vanguard Charitable” ). But you should also “soft credit” the donor recommending the grant, noting that some donors choose to remain anonymous.
- Double up on thank-yous. Because both the sponsor and donor are credited, your organization should send thank-you notices to both. If the donor is anonymous, you might ask the sponsor to forward your thank-you note to that person.
Although your nonprofit should do everything it can to obtain DAF grants, keep in mind that changing regulations could affect these charitable giving vehicles. Legislation proposed in California would impose new restrictions on DAFs that might dampen donor enthusiasm for them. Other states potentially could follow California’s example and propose their own legislation.