Understand the essentials of this rapidly growing form of philanthropic giving.
When it comes to maximizing your fundraising and expanding your revenue potential, it’s critical to always be aware of the most current and emerging trends.
There’s never been a shortage of creativity in nonprofit fundraising, and in the past decade alone we’ve seen a vibrant array of new ways to give for donors. One method that has seen its popularity soar recently is donor-advised funds (DAFs).
While DAFs have been around for decades, they’ve seen an undeniable surge among generous donors in recent years, and offer exciting opportunities for nonprofits of all sizes to boost their revenues.
In fact, according to the National Philanthropic Trust, grants made to charities through donor-advised funds amounted to $34.67 billion in 2020 – a 27 percent increase over the previous year – making DAFs one of the fastest-growing giving vehicles in the U.S.
Positioning your organization for even a fraction of this massive source of funding from high-net-worth donors with a propensity for making major gifts could be a game changer for your organization’s grant funding goals. And the best way to do just that is creating a strategic plan specifically for acquiring and stewarding DAF donors.
It starts by sharpening your understanding of DAFs and their potential for transforming revenues for your organization, such as:
- What is a Donor-Advised Fund?
- How Do Donor-Advised Funds Work?
- How Can My Nonprofit Maximize Donations from Donor-Advised Funds?
What is a Donor-Advised Fund?
Donor-advised funds are powerful philanthropic giving vehicles that offer a range of significant benefits to both donors and recipients.
Essentially, DAFs are like personal investment accounts. Donors create a DAF by donating funds to a sponsoring organization that will handle actively investing and maintaining the funds.
There are three major types of sponsoring organizations:
National Fund Providers: These are charitable arms of financial service firms like Fidelity, Schwab, and Vanguard.
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.
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 on when and where to direct funds.
One of the key benefits of DAFs for donors is, in a word, flexibility. They can contribute to their fund as frequently as they like and immediately receive the charitable tax deduction, without the pressure of having to choose a specific recipient for the funds right away.
When the donor decides on a recipient, they have the money sent from their account to the nonprofit organization as a grant.
Are Grants From Donor-Advised Funds Still on the Rise?
Yes, and there’s every indication that DAFs will keep growing. According to The 2023 DAF Report from the National Philanthropic Trust, grantmaking from DAFs has more than doubled—increasing 118.5 percent—in the past five years.
After seeing historic growth rates in 2019 and 2020, in 2022 grants from DAFs increased 9 percent to $52.16 billion, a new high for grant dollars. Contributions also grew by 9 percent in 2022.
Additionally, the total number of individual DAF accounts rose nearly 3 percent between 2021 and 2022, from 1.89 million to 1.95 million.
With the potential benefits of DAF grant funding this abundantly clear, it’s more important than ever that your organization create a strategic plan 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 make sure your organization is in the best possible position to maximize DAF gifts, you need to first put yourself in the shoes of donors and understand the experience from their perspective.
Step 1: The donor selects a sponsor and makes an irrevocable contribution.
To get the ball rolling on creating a donor-advised fund, the donor selects a sponsoring organization, typically choosing from the types of organizations listed above. Once that decision is made, 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 significant growth of DAFs has been driven in part by Congressional tax reform, with the increase in the standard deduction incentivizing 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, as well as its successors and beneficiaries in the event the donor passes away.
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.
From there, the contribution is placed in the account where it can be invested and grow tax-free.
Since there are no regulations on how long funds can sit in DAFs before being directed to a specific nonprofit organization, donors are under no pressure to choose a recipient before they’re ready. According to Fidelity, approximately 75 percent of contributions to DAFs are distributed as grants within five years.
Again, donors can still realize the tax benefits of contributing to their DAF immediately, and they can contribute to their account as frequently as they’d like in the form of liquid or illiquid assets, as long as they meet the minimum required contribution amount set forth by the sponsoring organization.
Step 5: The donor recommends grants to qualified charities.
Finally, the donor recommends grant funding from the DAF to the charities and nonprofits of their choice. While the sponsoring organization isn’t legally obligated to follow the donor’s recommendation, they do in almost all cases as long as the recipient is a qualifying tax-exempt organization.
Keep in mind that donors aren’t required by law to make annual disbursements from their DAF, so the nonprofits that are most likely to see benefits are those that show the most enthusiasm and success at influencing DAF donors to give.
How Do I Make My Organization More Attractive to Donors?
First of all, there’s no magic bullet here. Making your organization more attractive to donor-advised funds typically comes down to hard work, good old-fashioned relationship building, and being proactive about nurturing relationships at your local community foundation which, after all, are responsible for helping donors direct their funds.
Remember, there are an array of benefits that come with opening a DAF. So these are donors who want to meaningfully impact the causes they care about, and do it in a way that brings sensible advantages to them, some of which include:
- 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.
How Can My Nonprofit Maximize Donations From Donor-Advised Funds?
There’s no denying that the number of DAFs continues to rise each year, and in recent years DAF grant funding has accounted for up to 10 percent of all charitable giving nationwide. Positioning your organization to benefit from this growth is absolutely essential.
And, again, there are no shortcuts. While many fund development professionals feel confident pursuing traditional grants, donor-advised funds are less familiar and naturally cause some level of uncertainty in terms of how best to maximize grants from those funds.
This is why it’s so important to expand your knowledge and adopt new techniques for attracting these donors and 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.
Make it as easy as possible for DAF account holders to obtain your organization’s legal name, address, and federal tax ID number. This way, 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 no 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.
Tapping into these networks will enable you 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 continued popularity of donor-advised funds has in many ways changed the landscape of charitable gift giving and receiving. If you run into questions along the way, or curious to explore how to make the most of your opportunities from DAF giving, please don’t hesitate to contact us.
