What’s a Donor-Advised Fund? Understanding the Essentials

Over the past decade, nonprofit fundraising has been rapidly transformed by new ways to give. In particular, donor-advised funds have soared as a popular way for generous donors to support nonprofits of all sizes, creating an opportunity for nonprofits to boost revenues.

Conceived by community foundations decades ago, today donor-advised funds (DAFs) are one of the fastest-growing giving vehicles in the U.S. In fact, the number of individual donor-advised fund accounts increased by more than 50% in 2018. That year alone, donors allocated $23.42 billion from donor-advised funds, 19% more than in the previous year. Grants made through donor-advised funds are expected to reach unprecedented levels in 2020 and beyond.

Like other nonprofit supporters, donor-advised fund account holders want to meaningfully impact the causes they care about. Often, these philanthropic individuals are high-net-worth donors with the propensity to make major gifts. In other words, nonprofits risk missing out on a major funding source if they don’t create a strategic plan for acquiring these donations and stewarding DAF donors.

To better understand donor-advised funds and their potential to increase revenues for your organization, let’s review some of the most commonly asked questions:

Donor-advised funds are a powerful giving vehicle that nonprofits shouldn’t overlook. By knowing the ins and outs, you can maximize your fundraising potential.

Ready to propel your fundraising strategy forward with donor-advised funds? Let’s get started!

Review the basics of donor-advised funds to make the most of them in your organization.

What is a Donor-Advised Fund?

A donor-advised fund is a philanthropic giving vehicle in which an individual deposits contributions without choosing a specific recipient right away. When the donor decides on a recipient, they can send the money from the account to the nonprofit organization as a grant.

Think of a donor-advised fund as a personal investment account. However, a donor can’t simply run down to a local bank and open one. Instead, the account must be created at and maintained by a sponsoring organization. Most of these sponsoring organizations are charitable arms of financial service firms (like Fidelity, Schwab, or Vanguard), and the remaining sponsoring organizations are community foundations (like The Cleveland Foundation or Greater Cincinnati Foundation). The sponsor organization actively invests and manages the funds.

Donors can contribute as frequently as they’d like. When they deposit assets into the account, they receive the charitable tax deduction immediately without the pressure of selecting a recipient organization right then.

Once the donor contributes assets into the DAF, the sponsoring organization has legal control of the funds. However, the donor (or the donor’s representative) holds the advisory privileges, so they advise the sponsor to direct grants to specific charities.

Overall, donor-advised funds represent a major revenue opportunity for nonprofits. In the last two years, the number of funds, the amount contributed to those funds, and the grants made from those funds have all increased substantially, according to Giving USA and other sources. In fact, Fidelity Charity reports that their donors made $7.3 billion in grants through DAFs in 2019 alone, representing a 39% increase over grants made the year before. Because of this, organizations need to create strategic plans for acquiring these gifts.

When creating your plan, remember that there’s no magic solution for securing these donations. The good news for development professionals is that the classic best practices of relationship-based grant seeking still apply. By taking the right steps and offering the same gratitude and respect that you would to any other donor, you will see your gifts from donor-advised funds start to grow.

Review the donor-advised fund process step-by-step to fully understand how they work.

How Do Donor-Advised Funds Work?

To ensure your organization is maximizing these gifts, it’s important to understand the donor’s experience. Let’s walk through the steps that donors must take to create their own donor-advised fund account and direct grants from it.

This is the step-by-step process for giving from a donor-advised fund.

Step 1: The donor selects a sponsor and makes an irrevocable contribution.

To open a donor-advised fund, a donor selects a sponsoring organization. Community foundations run a number of these funds and so do financial service companies such as Fidelity, Schwab, and Vanguard.

Once established, the donor makes an irrevocable, tax-deductible contribution into the fund. Depending on the sponsor, contributions can take the form of:

  • Cash
  • Publicly-traded securities
  • Stocks
  • Mutual funds
  • Non-publicly traded assets (such as private business interests)

Step 2: The donor receives the maximum tax deduction.

The growth of donor-advised fund accounts has been driven in part by Congressional tax reform, since the increase in the standard deduction has incentivized charitable giving through DAFs. When donors contribute assets into their accounts, they’re typically eligible to take the tax deduction right away, even though the money might not be dispersed to a charity until much later.

Keep in mind that the tax benefits of donor-advised funds may vary based on the type of contribution:

  • Cash donation – If a donor makes a gift via cash, check, or wire transfer, they’re eligible for a deduction of up to 60% of their adjusted gross income (AGI).
  • Appreciated assets – Donors receive a tax deduction of up to 30% of their AGI for gifts of appreciated securities, real estate, mutual funds, and other assets.

Step 3: The donor names the account, its successors, and its beneficiaries.

Next, the donor names the account, its successors, and its beneficiaries. The successors are those individuals who will take over the account in the event the donor passes away, while the beneficiaries are the charities that will receive the remaining funds.

If the donor doesn’t indicate any charitable beneficiaries or successor advisors, the sponsoring organization may distribute the remaining balance to the entities that the donor has previously selected to receive grants.

Step 4: The contribution is placed in the account.

The contribution is placed in the donor-advised fund account, where it can be invested and grow tax-free. Because there aren’t any regulations regarding the timeline of these funds, the donor may choose to take their time directing grants to charities. Fidelity has reported that three-quarters of contributions placed in a donor-advised fund account are distributed as grants within five years.

At any point, the donor can contribute to their account. These contributions can be either liquid or illiquid assets so long as they meet the minimum required contribution amount required by the sponsoring organization.

Step 5: The donor recommends grants to qualified charities.

Finally, donors recommend grants from those funds to other charities. However, it’s important to note that the sponsor isn’t legally obligated to follow that advice. In almost all cases, the sponsor does abide by the donor’s wishes, though, so long as the recommended recipient is a qualifying tax-exempt organization.

Note that annual disbursements from the fund aren’t required by law, so funds can sit until the donor decides otherwise. This means that the nonprofits that are most likely to benefit are the ones that show the most enthusiasm and success at influencing donor-advised fund donors to give.

To increase the grants your organization receives through donor-advised funds, you must take steps to attract these donors and make it easy for them to give. Also, be proactive to develop and nurture relationships with the donor services staff at your local community foundation. After all, they’re the ones responsible for helping donors direct their funds.

By taking these steps, you will put your organization in a position to form new relationships, attract grants from donor-advised funds, and grow your grant revenues over time.

Donor-advised funds offer several benefits for organizations and donors.

What Are the Benefits of Donor-Advised Funds?

More and more donors are choosing to contribute to donor-advised funds, rather than give directly to nonprofits or start a separate family foundation. That means nonprofit organizations must be ready to take new steps to attract and receive these contributions. With that in mind, let’s take a look at the advantages that have made donor-advised funds so popular.

Nonprofits can benefit from donor-advised funds.

Advantages of Donor-Advised Funds for Nonprofits

Nonprofits stand to benefit tremendously from donor-advised funds. In fact, grants to nonprofits from donor-advised funds reached an all-time high of $23.42 billion in 2018. But apart from the sheer number and value of these grants, there are other benefits to nonprofits when they receive grants through donor-advised funds. For example, these funds can:

  • Lead to consistent funding. Individuals with donor-advised funds can declare their intent to give to an organization over a multi-year period. This allows an organization to better forecast the revenue it will receive each year. Multi-year grants are most likely to come from individuals who feel a deep connection to an organization, so make sure you’re having personalized, intentional conversations with your donors about how they choose to give. The stronger the bond and trust between these donors and your organization, the more likely they may be to commit to multi-year giving. 
  • Grow donor retention. Donor-advised funds offer a powerful engagement opportunity, because they allow donors to give larger sums of money when it’s most convenient for them. To boost engagement and retention, make sure you thank and cultivate relationships with donors who direct grants to your organization. Treat the donors who give to your organization through donor-advised funds with as much care as you give to other major donors!
  • Open the door to new ways of giving. The availability of giving through donor-advised funds makes it more convenient for donors to contribute to the causes they care about. But the convenience of giving through a donor-advised fund means nothing if your organization does not help make the process easy for your donor!

Remember that securing donations from donor-advised funds is rooted in best practices and relationship building. To learn more about how your nonprofit can cultivate strong relationships with donor-advised fund account holders, reach out to the Grants Plus team.

Donors can benefit from giving from donor-advised funds.

Advantages of Donor-Advised Funds for Donors

Not only do nonprofits benefit from donor-advised funds, but donors do, too! For instance, by contributing to a donor-advised fund, they can expect the following:

  • Professional management of funds. Contributing assets to a donor-advised fund allows an individual to have their charitable assets professionally managed, but at a fraction of the cost of establishing and maintaining a private foundation.
  • Tax-deductible benefits. As previously mentioned, contributions made to donor-advised funds are tax-deductible in the same year they’re made. This enables donors to deposit money into the fund when their earnings permit a greater tax benefit. Also, assets in these accounts are allowed to grow tax-free.
  • Estate-planning opportunities. Assets contributed to a donor-advised fund permanently leave one’s estate, so they’re no longer subject to estate taxes. With the lifetime gift and estate exclusion amount over $11 million, individuals have greater flexibility in their financial planning.

These are only a handful of the benefits donors can expect. By understanding what motivates supporters to choose to give via donor-advised funds, you’ll be better able to create and cultivate stronger relationships with these donors.

When developing your strategy, implement these tips to maximize donations from donor-advised funds.

How Can My Nonprofit Maximize Donations from Donor-Advised Funds?

Fund development professionals feel confident pursuing grants but aren’t quite sure how to maximize contributions through donor-advised funds. As grants from donor-advised funds continue to grow, it’s important that nonprofit professionals expand their knowledge and adopt new techniques for attracting these funds. 

Remember, the classic best practices and relationship-building principles still apply to donor-advised funds. Let’s take a look at the following effective tips for securing these donations.

Take the time to recognize your supporters who give from donor-advised funds.

Tip #1: Recognize your current DAF donors.

Don’t overlook donors who already give to your organization through donor-advised funds. To locate these donations, make sure your gift processing team knows how to spot them.

Note that checks won’t come directly from a donor. Rather, they come from a sponsoring organization. Most likely, the sponsor will be a financial firm or a community foundation. Typically, the letter that accompanies the check will include the donor’s name and address.

When you receive a donation from a donor-advised fund, soft credit the gift to the donor in your database. This way, you’ll keep your records up-to-date and can complete the appropriate follow-up. Once you’ve updated your records, send a thank you letter (not just a tax receipt) and consider including them in your major gift process.

Development officers sometimes hesitate to contact DAF donors directly and skip the follow-up process altogether. They assume that because the donor made a gift from a donor-advised fund, that must mean they want to keep their distance. This is often not the case. Take the opportunity to cultivate and steward a relationship as you would with any other type of donor.

Simplify the process for supporters to give from their donor-advised funds.

Tip #2: Make it easy for donors to give through donor-advised funds.

Start by making it easy for donor-advised fund account holders to obtain your organization’s legal name, address, and federal tax ID number. When they know this information, they’ll be able to recommend a check be mailed through their DAF account.

To spread awareness, encourage donors to give through their donor-advised funds by promoting the opportunity in your fundraising and marketing materials. For instance, you can:

  • Include donor-advised funds on your website’s ‘Ways to Give’ page.
  • Devote a webpage to information about donor-advised fund giving.
  • Feature a story about a DAF donor in your newsletter.
  • Promote them as a giving option in your fundraising appeals.

To expand your efforts, consider upping your digital strategy by installing the DAF Direct widget to your website. Take UNICEF USA for example. This nonprofit has DAF Direct, which allows donors to log into their Fidelity, Schwab, or BNY Mellon charitable accounts directly on the organization’s website. This way, donors can quickly and easily designate funds to the organization without even leaving UNICEF’s website.

It’s important to note that if you do solicit donations from donor-advised funds, they cannot be used to satisfy a pledge or purchase tickets to a fundraising event. Keep this in mind when soliciting donations, so donors aren’t misinformed about their giving opportunities.

Create connections within donor-advised fund networks.

Tip #3: Tap into donor-advised fund networks.

There’s not a central database to search for funding from donor-advised funds like there is for researching grant opportunities. Rather, there are networks of people who help individuals establish and administer donor-advised funds. These networks include wealth, tax, and legal advisors as well as the fundraising and donor services staff at community foundations.

As previously touched on, you’ll need to tap into these networks. To do this, attempt to make connections and form relationships with donor services staff at local community foundations. Remember, these are the people responsible for helping donors fulfill their philanthropic aspirations, so this may be your best bet for getting in front of DAF donors.

When you reach out to these individuals, they may accept your invitation for an introductory meeting or a site visit. By cultivating these relationships, they’ll be much more likely to take information back to donors.

Continue learning about donor-advised funds with these additional research.

Additional Fundraising Resources

The rise in philanthropy through donor-advised funds has changed traditional methods of charitable gift giving and receiving. The nonprofit organizations that stand to gain the most from this DAF giving are those that are open to learning and trying new things to attract these donations. Make the most of your organization’s potential to receive grants from donor-advised funds by staying up-to-date on the best practices for cultivating relationships with donor-advised fund account holders. Grants Plus can help!

To continue your research, explore these fundraising resources written by the Grants Plus team:

Grant seeking can be challenging and highly competitive. To help guide your efforts, reach out to our team of grants professionals!

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