What You Need to Know About Donor-Advised Funds

Most nonprofits miss an excellent opportunity when it comes to planned giving — and that’s soliciting donor-advised funds from individual donors. The reality is that it’s become a top way for major donors to support their favorite causes.

However, nonprofit leaders — and even fundraisers — have confusion about donor-advised funds, also called DAFs.

What Is a Donor-Advised Fund?

According to the National Philanthropic Trust, “A donor-advised fund is a giving vehicle established at a public charity. It allows donors to make a charitable contribution, receive an immediate tax deduction and then recommend grants from the fund over time.”

With a DAF, a donor opens a fund at one of the top donor-advised sponsoring organizations. Those include Fidelity Charitable, Schwab Charitable, Vanguard or others. Typically to open a fund, a donor has to contribute between $5,000 and $25,000. As you can see, this is a tool that major donors enjoy, but it’s not only within reach for the wealthy.

Essential Facts About These Types of Gifts

In recent reporting by the National Philanthropic Trust, DAFs have “experienced tremendous growth.” As a result, in the past five years, donors almost doubled their giving to charity through this type of vehicle. And many understand that it also makes an excellent vehicle for planned giving.

For example, donors understand that if they give through a DAF for estate planning, they can continue to support a good cause (after death) with ease and little, if any, complication.

In 2018, $23.42 billion went to charities through DAFs. In the same year, donors contributed $37.12 billion to DAFs. These giving vehicles are attractive to donors for the following reasons:

• Donors receive an immediate tax deduction when opening a DAF.
• Invested DAF funds grow tax-free.
• The costs of opening a DAF are much less than creating a private foundation.
• Fidelity, Schwab, Vanguard and community trusts aid donors with the legal and regulatory filings. Meaning, DAFs make administration much easier for donors.

DAFs are dominant in philanthropy with Fidelity Charitable serving as the top player.

What Nonprofits Should Know in Approaching Donor-Advised Funds

• Because of the popularity of DAFs, savvy nonprofits have to focus on attracting them. One of the ways to do this is to create a strategic planned giving effort that is separate from your major gift work. In other words, start educating donors about how DAFs are an excellent tool for estate planning.
• Remember, donors who open DAFs care about philanthropy. In fact, many of them want to develop a legacy of giving that extends beyond themselves to their family members. That means that nonprofits should cultivate and prospect these individuals for planned gifts.
• Nonprofits need to know that DAFs cannot be used to pay off pledges. Meaning, by law, donors can’t receive a personal benefit (e.g. the discharge of a debt or obligation). But sponsoring DAF organizations — such as Vanguard and others — can assist in creating an agreement that adheres to legal requirements.
• Because of the potential growth of assets in DAFs, charitable gifts to nonprofits can be higher. Therefore, developing strong bonds with donor prospects and educating them on DAFs goes a long way for charities to surface these kinds of gifts.

In sum, while there are challenges with DAFs, they continue to grow in popularity.

As a result, DAFs allow even people with more modest means, but who have a favorite cause, to get involved in a much more cost-effective, efficient and strategic way. And, of course, DAFs are becoming a preferred vehicle for planned and legacy giving because of their ease of administration.

Editor's Note: This "Rethink: Social Good" column was originally published in the 2020 January/February print edition of NonProfit PRO. Click here to read the article.