Accessing Donor-Advised Funds
In 2009, donor-advised funds (DAFs) represented a sharply growing share of a diminishing giving pie. While the amount of total giving went down by 8%, the amount of giving to donor-advised funds went up by 9%. In recent years, we’ve seen giving increase especially to DAFs.
More recently, National Philanthropic Trust conducted a study (2011) and concluded that the nation’s 162,000 DAF accounts held $30 billion in assets, of which $6.2 billion (more than 20%) was distributed in annual giving. That study has set aside many of the criticisms initially made against DAFs. A 20% level of giving is 4 times higher than 5-year average required by the IRS of private foundations. It is a tremendous amount of giving.
Through a tempting set of tax benefits and social advantages, community foundations and large investment firms have incentivized their donor-advised funds. We need to understand the world of DAFs, what makes them so attractive to benefactors, and how a nonprofit organization can tap into those funds.
What is a DAF and how does it work?
In 1931, a New York community foundation created the first donor-advised funds (DAFs). Although the term was widely used for 75 years, the phrase “donor advised fund” was not codified until 2006 when Congress passed pension and charity reform legislation.
Most donor-advised funds are held at two types of institutions:
- Community foundations, where donor-advised funds are typically the large majority of assets held and grants made. The largest “community” foundation in the U.S. is the National Christian Foundation (NCF).
- Large financial institutions that handle stock-trading, mutual funds and other for-profit investments, such as Fidelity, Vanguard and Schwab.
The IRS describes the features of a donor-advised fund:
- Donors contribute to an administering 501(c)(3) to establish — fund — a DAF. The charity keeps accounting track of each DAF separately.
- Contributions to the DAF cannot be taken back by the donor. Contributions qualify for an income tax deduction at the time of the donation, governed by the usual deduction rules and rates.
- The donor has the right to recommend grants from the DAF to qualified charitable recipients. The sponsoring organization may not be legally required to accept the recommendation (although implementing the donor’s recommendation is the basis of the business model).
Whether deposited with a community foundation or a for-profit firm, the administering organization typically provides the legal, administrative, investment management, and accounting work for DAFs. Compared to creating a private foundation, DAFs are often lower cost to administer for a donor. In addition, the ability to direct the DAF passes to the benefactor’s heirs or designee.
Why are donor-advised funds so appealing to donors?
Benefactors are increasingly unwinding their private foundations into donor-advised funds, which invest assets and make grants to charities from individual accounts based largely on donors’ recommendations. Some have been spurred by tough economic times. DAFs can cost thousands of dollars less to maintain than foundations — a factor that has taken on increased significance as many foundations’ assets have plunged.
The funds, which operate as independent charities, have other advantages besides allowing donors to take an immediate tax deduction after making contributions. Donors advise the fund on where the grants should go, but the funds don’t have to make distributions as often as a foundation would. Donors can also give many types of assets — including cash, securities and even art — depending on the fund’s specific rules.
- Taxpayers can deduct in the year of their choice without a working nonprofit actually receiving any money.
- Unlike donating to a “regular” nonprofit, DAF-fers get deductions for the full fair market value of real estate and illiquid assets (such as art work).
- A higher percentage of total personal income can be given and deducted if it’s given to a DAF rather than a private foundation.
- The freedom to transfer money, deductibly, to foreign charities.
- More money to give. The money saved in administrative and other costs can go toward the causes they support. In some cases, such funds can cut donors’ costs by as much as 50%.
- No imposed payout requirement.
- Donations may be made anonymously.
While the last benefit — anonymity — is not unique to the DAF product, it is an extra perq that is highly valued by some. All DAF donations from assets held by the administering organization are bundled into a comprehensive report, shielding the benefactor from being bothered by charities that might want to make petitions. Keep this in mind when approaching a family that supports ministries through a DAF.
Socially responsible investing and social recognition
There are two other benefits that have arisen in recent years. As the number of families establishing DAFs has greatly increased, competition among investment firms has increased. All of the for-profit firms offering DAFs now market socially-responsible funds in which the benefactor can place his/her funds. That is, while some of the funds are donated to charitable work, the assets that remain in the DAF are invested in the types of ventures approved of by the benefactor.
Community foundation officers have also become more aggressive in selling the concept of donor advised funds to wealthy families in their area. Increasingly, they highlight the social recognition that local donors gain by depositing funds and other assets with the local community foundation. Literally, it is sold as a way to join the cool people who get to do cool things together.
How does one tap into a DAF?
Administering organizations offer several ways ministries can reach the donors who have set aside money for charity. Among them:
Look carefully at donors’ checks. Keep a record of all checks that are mailed to the organization from a donor-advised fund, whether it’s from a for-profit firm like Scwab, from NCF, or from a community foundation. This is the best way to identify people with money who care about a particular organization. Even if the amount of the check is small, the donor probably has more to give. This type of connection can serve a strategic purpose during capital campaigns or building projects.
Learn more about the families who are investing with NCF and its network of regional Christian foundations. Their stories are inspiring, and their giving habits are generous (www.nationalchristian.com/givers). Terry Parker founded NCF in 1982 and introduced the first Christian-focused donor-advised funds called the Giving Fund. Over the past three decades, NCF has helped found a network of affiliates across the country, encouraged an environment of philanthropic giving among major Christian donors, and assembled a team of over 200 experts in charitable giving. In 2010, donors supported more than 10,000 ministries with $395 million in giving through DAF accounts at NCF.
In addition to learning which families have deposited funds with NCF and its family of regional Christian foundations, ministries should also take a look at the donor-advised funds at community foundations. At most community foundations, the bulk of incoming dollars arrive via DAFs and go out from DAFs. For instance, the Orange County Community Foundation (in California) made $26 million in grants in 2010, but $24.5 million of this was distributed from donor-advised funds. In other words, only $1.5 million was granted as discretionary funding through an application process.
Read the annual reports of community foundations. Many such organizations list the names of their donors, or of donor-advised funds that are often named for the donors, in their reports.
Make sure your local community foundation is aware of you. Most community foundations tell donors about the charities the foundation supports, and many holders of donor-advised funds then decide to make grants to those charities. Get to know the program officers. “We’re trying to serve less as a gatekeeper and more as a connector,” says Chris Andersen, executive director of the Lutheran Community Foundation, in Minneapolis. “Rather than trying to protect donors, we’re trying to offer them more opportunities.”
Charities also should make sure they are listed in databases for donors, such as the one created by Excellence in Giving in Colorado. Other databases include the ones monitored by UrbanMinistry.org, NonProfitList.org, Guidestar, Charity Navigator, Charity Watch, and Charity Guide. Some community foundations have similar projects, including the Kansas City Community Foundation (600 nonprofits listed) and the Greater Houston Community Foundation (400 nonprofits listed).
Tell the charity’s story well online. Commercial funds refer their donors to web sites like GuideStar or Charity Navigator for information on charities, so it’s important for groups to burnish their image on these sites as well as on your own website.
Although many nonprofits bemoan donor-advised funds as foundations that are tantalizingly just beyond reach, the funding world’s overall view of DAFs is accepting, even enthusiastic about this increasingly important mechanism for giving. There are a growing number of channels to connect with DAFs; don’t miss out.