Donor-advised funds

How they work and how to land them

Donor-advised funds (DAFs) have shown consistent growth over the last nine years, according to the 2019 Donor-Advised Fund Report from the National Philanthropic Trust (NPT). NPT data from nearly 1,000 charities shows that DAFs grew in all key areas, including in the number of individual funds and total grant dollars awarded to charitable organizations. Data for the NPT’s 2020 report is currently being collected.

Although they’re popular, DAFs aren’t without critics. Some don’t like the fact that many DAFs are allowed to stockpile funds indefinitely without making distributions. After all, most nonprofits need funds to help people now, during the COVID-19 pandemic and related recession. So, before your charity applies for DAF funds, it’s a good idea to learn about potential caveats.

Donors get an attractive deduction

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.

There are roughly 1,000 sponsoring DAF organizations in the nation. Most 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 focus on single issues or charitable grantees. All types 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.

Sponsors play a key role

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 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.

Communication is crucial

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 with potential donors 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 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.

There are dos and don’ts

The IRS hasn’t issued much guidance about DAFs, so tread carefully when accepting these gifts. For example, there’s some uncertainty about whether DAF funds can be used to fulfill pledges. 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, nonprofits shouldn’t accept DAF funds if the donor will receive something of value in return, such as dinner or entertainment. For this reason, don’t let donors use DAF gifts to buy event tickets.

Here to stay

The growth trend in DAFs indicates that this source of funding is likely to increase and your charity would be wise to access it. Sources such as the NPT report can help you.