Last year, Giving USA’s Annual Report called donor-advised funds (DAFs) one of the “hottest topics in the philanthropic community.”1 Between 2007 and 2016, assets in donor-advised funds nationwide skyrocketed from $32 billion to $85 billion,2 and this trend continues today. Who uses DAFs? How can your nonprofit collaborate with DAF advisors to meet your goals? I explore these questions below.
What is a donor-advised fund?
A donor-advised fund is a giving tool that charitable individuals use to tax-effectively consolidate, accrue, and grant assets to public charities. You can think of it as an investment account dedicated solely to your charitable giving.
Donor-advised funds are managed by sponsoring organizations, which are themselves 501(c)(3) tax-exempt organizations. Sponsoring organizations generally fall into three categories: community foundations, single-issue organizations, or national organizations, such as Vanguard Charitable.
How does a donor-advised fund work?
- A donor contributes to a DAF and takes an immediate tax deduction. The charitable assets now legally belong to that DAF’s sponsoring organization. The donor, and other named individuals, often become a DAF advisor.
- The DAF advisor can recommend how the assets in the DAF are invested; proceeds grow tax-free.
- The DAF advisor can recommend grants to the nonprofits he or she wishes to support. The sponsoring organization will conduct due diligence and, if that research shows the organizations are eligible to receive tax-deductible contributions, issue the grants to the charities.
Note that specific policies vary by sponsoring organization—most donors weigh the different options before opening a DAF.
Why do donors use a donor-advised fund?
1. Convenience: Instead of having to personally track all their giving, advisors can use DAFs as a centralized hub to simplify their philanthropy. One contribution can fund multiple donations to an advisor’s favorite charity or charities.
2. Increased giving potential: Assets in a DAF are invested tax-free, enabling many advisors to grant much more to charity in the long run.
3. Flexibility: In the wake of crises such as last year’s hurricanes, DAF advisors can respond quickly. Charitable resources in a DAF are “primed” and ready for rapid disbursal.
4. New charitable assets: Most sponsoring organizations can accept donations of non-cash assets such as appreciated securities. These often-overlooked charitable assets pull additional resources into the philanthropic community.
Who gives through donor-advised funds?
With nearly 1,000 sponsoring organizations and more than 280,000 individual DAFs,3 some with multiple advisors, it is hard to generalize about this diverse philanthropic population. A DAF advisor may be a retiree who opened a DAF so that he or she could continue giving after leaving work. Or, a DAF advisor may have found a private foundation to be too costly and burdensome, and opted for a cheaper giving tool with more flexibility. Many DAFs are advised by families who have pooled their charitable resources and view philanthropy as a communal endeavor.
The average DAF advisor in the United States has roughly $300,000 in his or her account,4 and nonprofits report that gifts from DAFs tend to be larger than their typical contributions. The average gift from a Vanguard Charitable advisor, for example, is nearly $12,000.
In removing the administrative burdens of charitable giving, DAFs allow their advisors to pursue a comprehensive, long-term strategy. For nonprofits, this means your donors with DAFs may well be repeat givers. At Vanguard Charitable, the vast majority of our advisors are involved in philanthropy beyond financial contributions. Ninety percent of our advisors also volunteer, serve on a board, or otherwise lend expertise, time, or resources.5
Anonymity is a concern for some nonprofits working with DAF advisors. However, only 5 percent of Vanguard Charitable grants are anonymous.6 The remaining 95 percent allow nonprofits to engage in some form of stewardship.
What are DAF advisors looking for in nonprofits?
Vanguard Charitable advisors often discuss the best way to identify charities doing meaningful work in their area of interest.
One way that you can distinguish your organization from similar ones is to provide comprehensive and up-to-date information to GuideStar. Vanguard Charitable is one of more than 200 sites and programs that share GuideStar Nonprofit Profile information with their users. DAF advisors appreciate transparency, as additional information enables them to make more informed, strategic decisions. Maintaining an updated GuideStar profile can pay dividends: As they research charities to support, Vanguard Charitable advisors make more than 15,000 searches each month via the GuideStar National Nonprofit Directory.
How to maximize your relationship with donor-advised funds
Generally, nonprofits cannot solicit gifts directly from sponsoring organizations, but there are many ways you can strengthen your relationship with DAFs:7
- Actively promote your ability to accept grants from DAFs. Consider mentioning donor-advised funds on your website, in solicitation offers, and on promotional materials. You can also suggest that your donors with DAFs set up automatic recurring grants.
- Educate your entire organization about gifts from DAFs so that they can be processed smoothly. Remember: DAF advisors are interested in efficiency and convenience! For example, you should not send a tax receipt to DAF advisors, as they’ve already received one from the sponsoring organization, but you may send a thank-you letter to help stay connected.
- Steward sponsoring organizations. Don’t send them solicitation letters, but have a working knowledge of prominent sponsoring organizations. Feel free to send them an acknowledgment letter when you receive a gift.
- Be familiar with IRS rules concerning DAFs. Grants from a DAF cannot result in impermissible benefit to the DAF account advisors, their family members, or the donor to the DAF account. Grants must be made exclusively for charitable purposes. Vanguard Charitable includes language with each grant to help you understand how the funds can be used.
Our donors are your donors
I like to tell nonprofits to think of us as members of the same team. Our donors are your donors, and our mission is to increase philanthropy in the United States and maximize its impact over time. We cannot do this without you and your vital work. Together we can continue to help create a better world.
1. Giving USA 2017 Annual Report.
5. An Inside Look.
7. See the Chronicle of Philanthropy’s “How to Tap into Donor-Advised Funds” webinar for additional details.
Rebecca Moffett is Vanguard Charitable’s Chief Strategic Planning Officer. Rebecca is focused on building awareness of the benefits of strategic philanthropy and is committed to improving donors' giving experiences. In her charitable endeavors, Rebecca is an alumnus of Big Brothers Big Sisters of South Eastern Pennsylvania and is also active in her church community. She earned her bachelor's degree and MBA from Saint Joseph's University.