Nonprofits have come to know donor-advised funds (DAFs) as a disruptor in charitable giving. The popularity of these funds has grown exponentially in recent years, fueled by the pandemic and tax reforms that have reduced incentives for traditional charitable giving.
But this growth has created a double-edged sword for charities, which rely on foundations for the lion’s share of their funding, as some donors set up donor-advised funds instead of foundations that come with strict tax laws and a 5% minimum payout requirement.
DAF donors receive immediate tax deductions for their contributions, and they can park their money in a DAF account indefinitely without actually disbursing the money to a charity.
As this trend evolves, nonprofits must respond accordingly to the rapidly shifting giving landscape and seek opportunities to leverage donor-advised funds.
How Donor-advised Funds Work
Donor-advised funds are an attractive giving vehicle because they function as tax-free investment accounts and make giving more approachable for individual donors.
Public charities manage these funds, which allow donors to deposit money as charitable contributions over time, and donors may recommend grants from the fund to any public charity of their choice.
Donors like these funds for a few reasons:
- Upfront tax deductions: Donations become eligible for an immediate tax deduction. Donors may deduct up to 60% of their adjusted gross income if they give to a donor-advised fund. By comparison, foundations allow a deduction of only 30%.
- Growth potential: Since the funds are market-based, they rely on stocks, bonds, and other interest-bearing accounts that can yield growth while the fund is active.
- Easy to use: Donors can set up donor-advised funds for as little as $50. They’re also easier to establish and maintain than foundations, which may have steep startup and maintenance costs and require larger investments.
- Alternative to tax reforms: The Tax Cuts and Jobs Act of 2017 lowered individual income tax rates, which reduced the value of all tax deductions and lowered the tax incentives for traditional forms of charitable giving.
- Long-term planning: Since donors have no deadline to disburse their DAF assets, donors have more time to plan for future giving. These funds may also help streamline estate planning by allowing donors to name charitable beneficiaries of the fund.
The COVID-19 pandemic, coupled with racial justice movements and economic crises, fueled growth for donor-advised funds in 2020.
DAF contributions grew 20.6% to $47.85 billion, charitable assets increased 9.9% to $159.83 billion, and the number of DAF accounts surpassed one million for the first time, according to the National Philanthropic Trust’s 2021 Donor Advised Funds Report, which came out in November.
But the metric that nonprofits have been closely monitoring is the payout rate for donor-advised funds. And in 2020, grantmaking skyrocketed in response to the global health, economic and social crises of that year, according to the NPT report.
The report measured the highest grantmaking increase in a decade, with 2020 becoming the first year grantmaking exceeded $30 billion. The value of charitable grants from donor-advised funds accounts totaled $34.67 billion in 2020, a 27% increase from the previous year. Although it was unclear in 2020 whether that level of giving was sustainable, 2021 data on the organization level suggests that growth has continued, albeit at a slower rate.
Fidelity Charitable, an independent public charity that sponsors the largest donor-advised fund program in the U.S., reported its donor-recommended grants in 2021 surpassed $10 billion for the first time, a 41% increase over pre-pandemic levels.
What Makes DAF Donors Different?
It’s important to recognize someone who contributes to a donor-advised fund is different from a traditional donor.
DAF donors are:
- Serious philanthropists: They prioritize giving, as evidenced by the fact they took the time to set up their own giving fund.
- Generous givers: Donor gifts from DAFs generally are larger than the average charitable contribution.
- Quick to donate: Data from Fidelity Charitable suggests 38% of the money donated to DAFs is disbursed within a year, and 74% is gifted within five years.
- Planners: DAF donors put a lot of thought into their philanthropic strategy and are often interested in their donations’ long-term effectiveness.
Strategies to Leverage DAFs
- To make the most of DAFs, nonprofits can employ these strategies:
- Promote the fact you accept donor-advised fund gifts.
- Include DAFs as a dropdown option on your website’s donations menu.
- Ask your current donors if they have their own donor-advised fund.
- Share your nonprofit’s narrative through success stories and testimonials.
- Follow up with DAF donors to let them know how their donation dollars were used.
- Play up the tax benefits of DAFs, but make sure not to confuse donors by sending them a tax receipt, as DAF contributions receive tax deductions upfront.
If you’re interested in accepting or leveraging donor-advised fund gifts, our team of trusted advisors can help your organization better understand the tax rules and benefits of this growing giving vehicle.