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. According to the National Philanthropic Trust, grants made to charities through donor-advised funds amounted to $34.67 billion in 2020. This is an increase of 27% compared to 2019 and the highest increase in DAF grant making in a decade.
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:
- What is a Donor-Advised Fund?
- How Do Donor-Advised Funds Work?
- How Can My Nonprofit Maximize Donations from Donor-Advised Funds?
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!Get started with Grants Plus
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. A donor creates a DAF account by donating funds to a sponsoring organization that will actively invest and maintain the funds. There are three major types of sponsoring organizations:
Community Foundations: Foundations across the country offer donor-advised funds to individuals and families, including The Cleveland Foundation, Greater Cincinnati Foundation, and Silicon Valley Community Foundation.
Single-Issue Charities: These include Jewish Federations, many universities, and other organizations that manage DAF accounts for their constituents.
Donors can contribute to their DAF account 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.
Trends in Donor Advised Fund Grants
Grant making from DAFs reached unprecedented levels in 2020 and there is every expectation that this area of philanthropy will keep growing.
DAF grant making patterns shifted from 2019 to 2020 as a result of the COVID pandemic, the growing movement for racial justice, and economic changes. According to The Giving Institute, DAF grants to charities jumped by 39% in 2020 compared to 2019, and some nonprofits saw a greater share of DAF grants than others. In 2020 vs. 2019:
- DAF grants to human service agencies increased by 138%.
- DAF grants to arts and culture organizations outpaced other philanthropy to these organizations.
- DAF grants doubled to public-society benefit organizations, such as United Ways and legal aid organizations.
- DAF grants quadrupled to Historically Black Colleges and Universities (HBCUs) and racial justice organizations.
Because of this potential to benefit from DAF grants, nonprofit 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.
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.
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:
- Publicly-traded securities
- 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.
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.Get started with Grants Plus
How Can My Nonprofit Maximize Donations from Donor-Advised Funds?
More and more donors are choosing to contribute to donor-advised funds. In fact, the number of individual donor-advised funds grew to more than 1 million accounts in 2020. In that year alone, donors contributed $47.85 billion into their donor-advised funds, accounting for 10% of all charitable giving.
The rise in DAF giving means that nonprofit organizations must be ready to adopt new techniques to attract these contributions. While many fund development professionals feel confident pursuing traditional grants, they aren’t quite as sure how to maximize grants from 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.
The good news is that securing donations from donor-advised funds is rooted in familiar best practices for relationship building. To learn more about how your nonprofit can cultivate strong relationships with all types of funders, reach out to the Grants Plus team.
Let’s take a look at the effective tips for securing grants 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.
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.
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.
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:
- Go Beyond Grants: New Routes to Funding. Maximizing your organization’s funds requires multiple revenue sources. Consider the options in this post when adjusting your fundraising strategy.
- Boosting Donor and Funder Relationships. Forging relationships with funders can be an intimidating task. Our guide to Boosting Donor & Funder Relationships simplifies this complex process, and outlines your path to creating positive and fruitful funder relationships.
- Latest from the Grants Plus Blog. Explore our blog for the most up-to-date resources on traditional and new ways of getting grants.
Grant seeking can be challenging and highly competitive. To help guide your efforts, reach out to our team of grants professionals!