Donor-advised funds (DAFs) present a promising opportunity for nonprofits to not only expand their revenue and diversify their giving streams but also to bring a sense of stability and growth to their organization. Discover more about DAFs and how your organization can tap into these billion-dollar entities to secure donations.
What is a Donor-Advised Fund (DAF)?
A DAF is an investment account where the sole beneficiaries are nonprofit organizations. Donors contribute to the account, and those contributions are invested. The assets grow tax-free, and the DAF manager grants funds to chosen nonprofit organizations from the fund.
DAFs are funded by individuals, families, trusts, estates, and groups such as associations and workplace giving programs.
Funding to a DAF can come in various forms, including cash, wire transfers, checks, stocks, securities, mutual funds, real estate, cryptocurrency, and more. For any investment to which it applies, capital gains taxes don’t apply because the sole beneficiaries are nonprofits, which, by design, don’t pay taxes.
There are benefits and other considerations for donors and nonprofits when working with DAFs.
Pros and Cons of Donor-Advised Funds (DAFs)
DAFs offer significant potential for nonprofits to grow, stabilize, and diversify their revenue. Donors get immediate tax benefits and bypass capital gains taxes. However, some parameters surrounding DAFs may price out potential donors and limit their control over how and when grants are given.
Additionally, DAFs’ funding is exponentially outpacing DAFs’ grant-making. They are investment accounts designed to grow over time. Therefore, donors’ contributions are granted over time, which might feel inauspicious to nonprofits.
Pros
DAFs empower donors with immediate tax benefits and the freedom to request how and when funds are distributed. They can give anonymously, name successors, and use a DAF to establish a lasting legacy, giving them a sense of control and flexibility in their giving.
While the gifting may be delayed, the total contribution to a DAF is likely to be higher than if a donor gave directly to a nonprofit. Most DAF gifts are unrestricted, giving nonprofit organizations greater discretion in their use. This potential for increased giving over time should instill confidence in nonprofits about the benefits of DAFs.
DAF Pros for Donors
- Immediate tax benefit
- Money grows tax-free
- Varied ways to give (stock, cash, cryptocurrency, etc.)
- Can give anonymously
- Avenue for legacy planning
DAF Pros for Nonprofits
- Unrestricted gifts
- No transaction fees
- No formal reporting and limited administrative burden
- Higher giving total over time
Cons
While donors can contribute as often as they wish, most DAFs require a substantial initial contribution, typically starting at around $25,000. All donations to a DAF are irrevocable, meaning they cannot be returned to the donor, unlike other investment accounts.
Grants from a DAF cannot be used for anything that benefits the donor, such as tickets, tuition, memberships, or auction items, so using DAF grants for sponsorships is not possible in most instances. Most DAF grants are unrestricted, which could limit interest from donors. Furthermore, if a charity is less than five years old, DAFs scrutinize its validity before making any gifts.
For nonprofits, DAF grants can be made anonymously, and personal information is more closely guarded, making donor retention difficult to measure and stewardship perhaps impossible. As previously mentioned, DAFs have no required distribution requirements, so the intended money is ultimately at the discretion of DAF managers. While donors can advise on grant-making, the ultimate decision lies with the DAF manager or sponsor, so donor control is likely limited.
DAF Cons for Donors
- High start-up cost
- Funds cannot be used for donor benefits (such as tickets, scholarships, etc.).
- Limited control over grant-making
DAF Cons for Nonprofits
- Limited access to donor information
- Delayed gifting
How Can a Donor-Advised Fund (DAF) Impact Your Organization?
Although there are some limitations on DAFs, nonprofit organizations should certainly solicit grants from DAFs and inquire with donors who use DAFs as a means of giving.
The money grows over time, so in periods of economic instability or after a donor retires or transfers control to their family, DAF giving can remain consistent and stable because the irrevocable fund is already established.
3 Ways to Secure Donations or Grants from DAFs
1. Educate donors on how a DAF can have an immediate impact on your organization. A great way to explore DAFs with your donors is to educate them on how a DAF can have an immediate impact on your organization. This involves targeted storytelling and relationship-building through donor segmentation. Ask them if they have a DAF, plan to establish one, or if they are familiar with a DAF; this will help you identify areas for education and growth, as well as opportunities to nurture relationships with donors who have established DAFs. Nurturing relationships with these donors involves regular communication, acknowledging their contributions, and keeping them updated on the impact of their donations.
You should also incorporate language about DAFs into your existing marketing tactics, such as emails, social media, and direct snail mail.
2. Provide easy opportunities for DAFs to give to your organization. Include a page on your organization’s website to promote DAFs and how you can work together with donors who have DAFs. Create a DAF-specific giving form that makes it easy for donors to pledge from a DAF to your organization. Be sure to include a question asking donors if they have a DAF fund, so you can better identify potential opportunities for them. If you have received a grant from a DAF tied to a known donor who has already, separately paid for a ticketed event, consider allowing them to participate in the paddle raise for recognition of the gift that has already been confirmed and received. While donors cannot derive any tangible benefits associated with costs, such as a sponsor advertisement, ticket, or VIP access, opportunities like unrestricted giving, such as a paddle raise, are excellent stewardship opportunities. Don’t forget to reach out to and build relationships with DAF managers or sponsors. Some DAFs have an online portal for donors to recommend contributions, so you’ll want to ensure your organization can be easily found and that your information is up-to-date and accurate. Some DAFs utilize charity research platforms like GuideStar to research nonprofits, so ensure those are up to date as well.
Top 10 DAFs by Assets
- Fidelity Charitable Gift Fund
- National Philanthropic Trust
- Schwab Charitable Fund
- Vanguard Charitable Endowment Program
- Silicon Valley Community Foundation
- National Christian Foundation
- American Online Giving Foundation
- Goldman Sachs Philanthropy Fund
- Chicago Community Trust
- American Endowment Foundation
- Source: As of 2022
3. Thank DAFs and Donors
Make sure to send thank-you notes to both the DAF donor (if the gift was not made anonymously) and the DAF manager, separately. While the check or contribution comes directly from the DAF, the contribution itself was recommended by the donor.
Enjoy one contract, one payment, and one vendor partner for year-round fundraising and donor management success, including recording DAF contributions. Request a personalized demo or contact us today to learn more about our plans and pricing. This blog serves as an informational resource, so make sure to consult financial professionals to verify any plans and strategies you have for soliciting and accounting for DAFs.
