Nonprofit Guide to Donor Advised Funds (DAFs)
By now, your organization has probably received a gift from a Donor Advised Fund (DAF) and you may be wondering what they are and how to get more of these gifts. Read on! This Nonprofit's Guide to Donor Advised Funds includes tips for receiving DAF gifts.
What is a Donor Advised Fund?
A DAF is a charitable giving account that allows individuals, families, or organizations to make contributions, receive an immediate tax deduction, and recommend grants to qualified charities over time.
DAFs are the fastest-growing charitable giving vehicle in the U.S. because they are simple to use and offer significant tax advantages. Donors can contribute both cash and non-cash assets, including stocks, mutual fund shares, publicly traded securities, private assets, and cryptocurrency.
Currently, there are about 2 million DAF accounts in the U.S., with an average balance of around $120,000, and an average payout rate of approximately 25% [1]. Collectively, DAFs hold more than $220 billion in assets [2].
Sponsoring organizations for DAFs include:
Companies that provide banking services such as Charles Schwab, Fidelity, or Vanguard,
Startups dedicated to DAFs such as Daffy, Groundwell, or Charityvest,
Local community and public foundations
DAF holders can enjoy a federal income tax deduction of up to 60% of adjusted gross income (AGI) for cash contributions and up to 30% for appreciated securities.
Anyone can open a DAF with as little as $50, making it much easier to establish than a family foundation. Donors receive an immediate tax deduction once funds are deposited into the DAF, regardless of when they recommend donations to nonprofits. Funds can remain in DAFs indefinitely.
Advantages to DAFs from a Nonprofit Perspective
While some nonprofits are concerned that donors may leave funds in DAFs indefinitely, DAFs typically grant at much higher rates—above 20% on average—compared to the 5% annual minimum payout rate required for foundations [3].
DAF funds are irrevocable, meaning once money is placed in a DAF, it cannot be returned to the donor. The intent is for these funds to be passed on to nonprofits.
Noncash giving drives nonprofit growth [4]. It’s more efficient for nonprofits when donors contribute complex assets (such as real estate, art, or cryptocurrency) to the DAF, with the nonprofit receiving cash. Handling non-cash assets directly can be more challenging for nonprofits.
DAF donors tend to be loyal, frequently making repeat contributions to their favorite organizations.
DAF holders often give over time, providing nonprofits with a consistent stream of grants. Even during economic fluctuations, donors may continue to recommend grants since the funds are already set aside in their DAF accounts.
Donors using DAFs often make larger, more strategic gifts. Since the tax benefits are already realized when funds are placed into the DAF, donors may feel more comfortable granting larger sums than they would through direct donations.
Disadvantages to DAFs from a Nonprofit Perspective
Once funds are transferred into a DAF, the sponsoring organization (e.g., Charles Schwab, Fidelity, Vanguard, or a local community foundation) owns the money. Even if the donor recommends a donation to a specific nonprofit, the sponsoring organization can decline the request, though this is rare [5].
If a donor dies before drawing up a succession agreement for the DAF, the sponsoring organization assumes control of the funds and can distribute them as it sees fit.
Sponsoring organizations have no strong incentive to encourage donors to recommend gifts to nonprofits. It's often more advantageous for them to keep the funds in the DAF, where they can accrue interest. The money can sit indefinitely.
DAFs can create distance between donors and nonprofits, as nonprofits may not know the identity of the donors and thus cannot build relationships with them.
DAF ownership is not publicly disclosed, making it difficult to identify which donors have DAFs.
Should Nonprofits Request DAF Gifts?
In short - yes! There is a significant difference in DAF giving between nonprofits who seek out DAF gifts and those who do not. The charts below provided by Freewill demonstrate that among the organizations they surveyed that asked for DAF gifts, only 2% received none and 28% received 100 or more. Of the organizations that did not ask for DAF gifts, 48% received five or fewer [6].
Tips for Seeking DAF Gifts
Make it easy for your giving partners to donate through their DAFs! Here's how:
Let your donors give on your website through their DAF. One way to do this is to set up Chariot to integrate with your giving page. It's easy!
If you have a community foundation in your city, build a relationship with them and consider co-branding events about DAFs for donors. Community foundations hold six times more assets in DAFs than national sponsoring organizations [7].
Identify potential DAF donors in your database and nurture relationships with them. If you don’t know who they are, you can incorporate the following wording into your regular major donor meetings: “Many of our giving partners give from their Donor Advised Fund. Would you be interested in ways that their DAF gifts are substantially impacting our mission?” Their response may inform you as to whether they have a DAF. Make a note of this in your database!
Highlight DAF giving as a donation option in newsletters, appeals, annual reports, planned giving mailings, even in your e-mail signature – the sky is the limit!
Feature DAF donor testimonials in your publications.
Ensure publicly available information about your organization – such as Guidestar and Charity Navigator – are up to date since national sponsoring organizations tend to rely on these tools.
On your web site, set up a page specifically for DAF donors, that includes your Tax ID and your nonprofit’s name, phone number, and mailing address. On the same page, ask the question: “Have you already made a gift to [nonprofit name] from your DAF? If so, thank you! To ensure we can acknowledge your generous gift, please complete the following form.” And then include a form that includes first and last name, mailing address, e-mail, phone number, sponsoring organization, gift date, gift amount, and any other necessary information.
Remember – the donor received the tax deduction when they moved assets into their DAF account, not when the donation arrived at your nonprofit. Ensure that the language in your thank you letter as well as year-end giving statement does not offer a second tax deduction. You want the donor to trust your nonprofit to steward their gift and all communication with excellence.
Inspiring Examples of DAF Web Pages
Do you need help preparing your nonprofit to receive more DAF gifts? We can help. Contact us today!