What Fundraisers Need to Know About Donor-Advised Funds

Fundraisers know that to continue acquiring new donors, they must offer various giving opportunities. Traditional methods of gifting through direct mail appeals or events may not be suitable for all donors.

Some donors will choose to give through vehicles such as gifts of stock or grants made from donor-advised funds.

Donor-advised funds, commonly called DAFs, can create uncertainty in fundraisers. While donor-advised funds hold many potential benefits for donors, such as tax advantages, fundraisers may shy away from promoting this form of giving due to uncertainty about things such as collecting donor information.

Promoting giving from donor-advised funds is becoming more important as they gain popularity among donors. According to the National Philanthropic Trust Donor-Advised Fund Report 2023, “ Grants from DAFs increased 9 percent to $52.16 billion, a new high for grant dollars. Grantmaking has increased every year since 2009 and has more than doubled in the past five years. DAF donors have consistently demonstrated their commitment to supporting nonprofits operating in challenging environments.”

Schwab Charitable calls donor-advised funds “a simple, tax-smart investment solution for charitable giving.” DAFs allow donors to receive a tax deduction in the current year and help them strategically distribute charitable donations over time.

Savvy fundraisers know that promoting donor-advised funds works for certain donors because of the benefits to the donor. Nonprofit organizations must have a plan for promoting their eligibility to receive these gifts from these special funds, which can only be used for charitable purposes.

The bottom line is that promoting donor-advised funds (DAFs) can be as easy as including messages in nonprofit fundraising materials stating that your nonprofit is eligible to receive grants from these funds. Add a recommended grant from a donor-advised fund to the list of giving opportunities on your website, or consider adding a DAF widget to your nonprofit website.

How donor-advised funds work

1. A donor-advised fund begins when a donor opens an account with a sponsoring organization, such as Schwab Charitable, Fidelity Charitable, or Vanguard, and contributes cash, appreciated assets, or investments.
2. Once the account is opened, the funds are invested and may be managed by the chosen sponsoring organization’s investment management.
3. Lastly, donors recommend grants to their favorite charities.

Charitable organizations that receive donations from DAFs should consider how they will record information so they can update the donor on how the funds were used and grow the relationship. Nonprofits should also plan communication steps to steward DAF donors uniquely.

Tax benefits of Donor-Advised Funds

When promoting donor-advised funds, nonprofit organizations must understand the wide range of tax savings to the donor. Donors can contribute to the DAF and receive an immediate tax benefit while waiting to gift these dollars to their favorite charities.

These donations must be given to a qualifying charity, as described in Internal Revenue Code section 501. More information is available on the IRS.gov website.

While donations to DAFs are irrevocable, they can continue to grow tax-free within the account. Contributions to donor-advised funds may also lower a donor’s capital gains tax burden. According to NerdWallet, “You won’t pay capital gains taxes on assets you put in a donor-advised fund, and if you donate assets that are worth more than what you paid for them, you typically can deduct the current market value of the asset rather than what you originally paid for the asset.”

Always recommend donors contact their tax advisor or financial advisor for current tax information. The sponsoring organization can also help the donor understand the benefits and prospective tax breaks of contributing to a donor-advised fund and which assets can be contributed to a donor-advised fund.

Savvy donors seek ways to receive income tax deductions, and gifting to a public charity can be one way to do this. Sponsoring organizations can provide information on how to give assets to a donor-advised fund. Nonprofit organizations must help prospective donors understand their ability to accept donations from donor-advised funds.

How Do Donor Advised Funds Differ From Private Foundation

The National Philanthropic Trust states, “A private foundation is a distinct, legal entity that files its own taxes, whereas a DAF works more like a charitable investment account held by a sponsoring charity, such as a community foundation or a national grantmaker like NPT. With a foundation, your clients retain complete control over how and where the assets are managed and spent.”

More information can be found on The National Philanthropic Trust website.

How to Promote DAFs to donors

To begin promoting donor-advised fund gifts to your nonprofit prospective donors, consider these strategies:

1. Update your nonprofit giving promotional materials to include a section on donor-advised funds and promote this giving opportunity.
2. Add a DAF Widget to your website.
3. Add a message to your e-mail signature that your nonprofit is eligible to receive grants from donor-advised funds. Consider segmenting donors and using this strategy with those you know hold DAFs.
4. Build a relationship with tax, wealth, and philanthropy advisors in your area.
5. Update your nonprofit’s profile on Guidestar, Charity Navigator, and other sites your donors may be using to verify information on your nonprofit. Help ensure donors know that your organization is a nonprofit or 501(c)3 organization.

Nonprofits can use donor segmentation to promote donor-advised funds to a specific segment of donors. These donors may not give through other traditional methods of gifting, such as direct mail appeals, so a special communication plan may be needed for this donor segment.

While not every gifting opportunity will suit every donor, nonprofits should stay nimble and adapt to the changing philanthropic landscape. By offering a variety of giving methods, your nonprofit can retain current donors and acquire new donors.

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