Grants from donor-advised funds (DAFs) to charitable organizations totaled $52 billion in 2022 and contributions to DAFs reached $85 billion, an all-time high, according to the 2023 Donor-Advised Fund Report from the National Philanthropic Trust (NPT). Data for the NPT’s 2024 report is currently being collected.
Even with these astounding numbers, NPT data from 1,151 charities shows that DAFs actually grew at a slower pace than in previous years. Nevertheless, nonprofits should keep their eye on them. Here’s what your organization needs to know if it’s considering DAF funds.
What are the benefits to donors?
DAFs enable donors to contribute assets, including cash, securities and real estate, to an account controlled by a “sponsoring organization.” They receive an immediate tax deduction up to 60% of their adjusted gross income in exchange for their irrevocable gifts.
Most DAF organizations fall into one of two categories: 1) community foundations and 2) charitable wings of investment-service companies, such as Vanguard Charitable and Schwab Charitable. A smaller group of sponsors focuses on single issues or charitable grantees. All types of DAF organizations generally invest and manage DAF assets, screen charities that will receive grants, and make distributions. But policies vary widely by sponsor about issues such as the types of assets accepted, how funds are invested and how often donors must request distributions. And DAFs have been criticized for stockpiling funds indefinitely without making distributions.
Who are sponsors?
Donors make grant recommendations, and although sponsoring organizations aren’t legally required to honor them, they almost always do. But it’s worth noting that sponsors play a major role in determining which organizations ultimately receive grants. Sponsors often suggest charities to donors that match their charitable criteria.
Sponsors also may step in when donors fail to request distributions. For example, if Fidelity Charitable donors don’t name grantees after two years, Fidelity names charities for them. But not all sponsoring organizations have such policies. And some critics contend that both donors and sponsoring organizations have incentives to hold onto DAF money as long as possible.
How do you access DAFs?
To encourage sponsoring organizations to direct gifts to your charity, prioritize these relationships. Let community foundations know that you welcome such gifts and are equipped to handle them. And as your mission and programming evolve, keep sponsors up to date so they can accurately match your organization with donor interests.
Because some DAFs are anonymous, building relationships can be a little harder. But if you’ve already received a DAF grant, you likely found the name of the fund in the gift letter. Be sure to send the donor a thank-you note (via the sponsoring organization, if necessary) and indicate your interest in receiving future gifts or being named a beneficiary of a trust. Also put prominent notices on your website, including a link to DAF Direct (dafdirect.org) on social media pages and in emails to donors. And think about featuring DAF supporters in your publications.
What does the IRS think?
The IRS issued its first set of proposed DAF regulations in late 2023. Some of these regs may affect nonprofits. For more information, contact your legal and tax advisors.
Even with the proposed guidance, there are still some unanswered questions. For example, whether DAF funds can be used to fulfill pledges remains uncertain. The IRS has stated that DAF funds can be used for this purpose. But donors can’t take additional tax deductions for them, and sponsoring organizations aren’t allowed to tell grantees that a gift is being issued to fulfill a pledge.
Also, don’t accept DAF funds if the donor will receive something of value in return, such as dinner or entertainment. For this reason, you shouldn’t let donors use DAF gifts to buy event tickets.
Time to act
DAFs are here to stay and nonprofits should be aware of this additional source of funding. Be sure to consult with your advisors as you move forward with soliciting DAF-related grants.