Donor-Advised Funds (DAFs)
As you’re examining new ways to get funding pumping through the metaphorical veins of your nonprofit, the options are myriad. On the flip side, potential donors have many choices when it comes to methods of giving, and one increasingly popular selection, especially among older, high-income Americans, is a donor-advised fund (DAF).
Donor-advised funds are like charitable investment funds. Donors place their money in third party accounts with the intent of supporting charities on a specific timeline. These accounts, sometimes referred to as Giving Accounts, allow the donor to take an immediate tax deduction. Because the money within the account is technically an investment, it may grow with time, tax-free, allowing for larger charitable donations in the future. Additionally, donor-advised funds are not limited to cash; one can also donate stocks, private equity, publicly traded securities, or cryptocurrency. Most DAFs require a minimum donation of $,5000.
Setting up a DAF can enable a donor to make charitable gifts for a long amount of time with minimal effort and maximum tax benefits. A DAF can even be bequeathed to a successor in a donor’s will, which ensures charitable gifts can continue after death – and helps heirs with potentially pricey estate tax burdens.
This all seems mutually beneficial – tax benefits for the donor, steady donations for their charities of choice. However, there are some drawbacks. Generally, donors who create a DAF do so through larger financial institutions. Ultimately, the DAF managers choose which nonprofit organizations to support, which means the donor cannot control exactly who receives the donation. Smaller nonprofits can be overlooked in favor of more well-known ones, especially because the financial institutions charge fees to the nonprofits into which they funnel donations. A smaller or newer nonprofit may not be able to bear the burden of such charges. As DAF managers are not necessarily trained on the ins and outs of nonprofits, nor are they governed by any higher power, they may not be making the most informed choices about how to deliver large donations. Just as we educate nonprofit organizations in distribution of funding, it would be beneficial to educate those in charge of donor-advised funds.
Additionally, the donor receives the tax deduction when funds are placed in the DAF, not when they are actually donated to a nonprofit. Oftentimes, funds sit in a DAF for long periods of time without being donated, leading some to speculate that wealthy donors could simply be using them as tax shelters. It should also be noted that there are often hidden fees when dealing with DAFs.
While DAFs may be somewhat controversial, it’s important to look at them as a possible source of donations. Be sure to have your nonprofit listed with the IRS as a 501(c)(3) organization, as institutions that manage DAFs use these listings to create sponsor lists. Consider listing your nonprofit with https://www.charitynavigator.org as another avenue to informing donors about your services and catching the attention of DAF managers.
Navigating the complex world of fundraising can feel daunting, but you don’t have to do it alone. Contact us, and we can help walk you through it!