Getting to Know Donor-Advised Funds
Donor-advised funds are vital tools for donors. That’s especially true of those who are mid-range or major donors. Of course, that depends on the size and budget of the charity where they donate. It can take as little as $5,000 to open a donor-advised fund at Fidelity Charitable. Other companies, like Vanguard, open one for $25,000.
According to the National Philanthropic Trust, in 2017:
• 463,622 existed in donor-advised funds.
• Donors contributed $29.23 billion into donor-advised funds (DAFs).
• $19.08 billion went to charities in the form of grants.
• Assets in DAFs exceeded more than $110.01 billion.
Benefits to Contributors
A donor-advised fund provides people with the ability to make charitable contributions. That is, they can have the concept of a foundation without the administrative burden. Instead, the sponsoring organization does the regulatory and compliance work. That’s an excellent benefit to donors.
When a donor opens a DAF, they get another benefit, which is an immediate tax deduction. It doesn’t matter if they decide to make charitable donations at a later point.
Creating a DAF is also a much less expensive way to support donors’ favorite causes. In other words, it takes a lot less money to get started. By comparison, a private foundation makes sense if you have at least $1 million to contribute.
A final benefit of a donor-advised fund is that donors don’t have to contribute 5% of their assets to charity each year. What that means is that money invested can grow tax-free. Because of it, there’s debate about donors “parking” money in DAFs. Meaning, that money makes money, but it doesn’t go to charities in need. Still, DAFs are a popular tool for giving.
Essentials for Nonprofits on Donor-Advised Funds
Nonprofits should seek to pursue individual donors who have DAFs. The fact is that there is a lot of money for groups who focus on DAFs. But, there are specific issues that fundraisers and executives should know about DAFs:
• By law, donors can contribute to any 501(c)(3) public charity.
• Donors cannot provide pledges using DAFs. The reason is that regulations prohibit any donor from discharging a debt or obligation. In other words, each donation has to be a single gift and not toward any pledge.
• When accepting a gift from a DAF, nonprofits should “hard” credit the sponsor. The reason for that is because the sponsor is making the actual
financial contribution, but the charity should also “soft” credit the donor who designates the DAF gift.
• DAFs cannot pay for event tickets.
Nonprofits Can Promote Themselves to Donor-Advised Funds
The social good sector continues to evolve. DAFs and other tools, such as impact investing, are allowing donors to be strategic.
These tools are also changing the equation for nonprofits. In other words, charities are now expected to show significant results. That said, fundraisers can keep donors who give through DAFs top of mind. All they have to do is to think about the following tips:
• Make it a point to network with donors, but also build relationships with wealth professionals. Consider people such as tax, legal and wealth advisors. Also, develop connections with the community foundation in your area.
• Let donors know they can give to your organization through DAFs. Feature DAF donors in your fundraising materials. Write stories about them on your blog. You can also speak of them in regular social media posts. Doing so helps other people who have DAFs see themselves involved in your charity.
• Take a look at your database. See who you’re soft crediting for gifts through DAFs. Remember, these people are major donors. That means you should seek to build strong relationships with them. Create a group of special donors who can get involved with your charity and others like them.
Although DAFs are not new, they continue to grow in popularity. Savvy nonprofit leaders should develop a consistent plan to build relationships with key people. Don’t forget you want to grow relationships with donors and their advisors; but you also want to become familiar to the sponsoring organizations of DAFs.
Editor's Note: This article was originally published in the "Rethink: Social Good" column of the 2019 July/August Edition of NonProfit PRO.
Wayne Elsey is the founder and CEO of Elsey Enterprises. Among his various independent brands, he is also the founder and CEO of Funds2Orgs, a social enterprise that helps nonprofits, schools, churches, civic groups, individuals and others raise funds, while helping to support micro-enterprise (small business) opportunities in developing nations and the environment.
You can learn more about Wayne and obtain free resources, including his books on his blog, Not Your Father’s Charity.