The first part of this series answered some common questions about Donor Advised Funds and how they impact nonprofits. This segment will discuss some tactics that your nonprofit should be employing to optimize contributions from this channel and to ensure that you do not lose track of donors as the DAF conduit continues to grow. Nonprofits should have a formal strategy for this important funding source. This article will provide some of the critical building blocks to get you started.
In case you missed it, follow this link to view the first part of this series, Nonprofit Guide to Donor Advised Funds: The Basics
The new tax reform law includes changes that are expected to impact charitable contributions. Changes may include decreased contributions or clumping of contributions in certain years. Clumping may provide a tax benefit for some donors and DAF are very efficient vehicles for contributions of this type.
Have conversations with significant donors to determine if they consider DAF as a good alternative to direct contributions. There are ways to mimic the tax benefits of clumping without going through a DAF, more on that later. Some donors may already be using a DAF and that is important information you need to know.
Seek to learn the benefits your donors expect from using a DAF, as well as, which ones they are contributing to and why they chose those DAF. These data points will help you determine how best to engage those donors and others like them.
Make sure that your donors understand the difference between independent DAF and investment firm-related DAF. There are pros and cons, so nonprofits should facilitate learning to help donors make the best choice for them.
Engage DAF Sponsors
DAF are here to stay for the foreseeable future, so an important tactic for nonprofits is to get to know DAF that fund in your area of interest or community. There are many different DAF; some are large, many are small, some are community or geographically focused and some are general while others target specific segments of the nonprofit sector.
Nonprofits need to learn all they can about the DAF operating in their segment or that have relationships with their donors. Get to know the people at the DAF, their processes and procedures. Learn what you can do to facilitate the flow of funds from the DAF to your nonprofit.
There are pros and cons on all sides for DAF. For nonprofits, they are another degree of separation from your donors, increase administrative costs and DAF can block distributions if the nonprofit does not meet the DAF criteria or does not follow its processes. On the other hand, they represent a consolidated pool of potential donor funds, if you can unlock them.
When you talk to your donors, make sure they understand how DAF impact your nonprofit’s costs and access to funds, as well as, how they can restrict the donor’s contribution choices. Make sure that your donors are identifying your organization as one they want to contribute to early on, so that you can work with the DAF to surmount any administrative obstacles.
One of the most proactive tactics you can use is to provide alternatives to your donors that function similar to DAF for tax purposes. The clumping technique described earlier can be done via a donor restricted contribution. In that way, the donor provides the funds today and gets the tax benefit but can instruct the use of the funds for projects over time.
Another interesting tactic is for the nonprofit to create its own DAF and become a Sponsor. Implementing this option has benefits and costs. So, nonprofits should investigate this with your accounting and legal folks and get some outside advisory support.
Optimization via Learning and Planning
As DAF develop, nonprofits need to keep up, so a most critical tactic is to establish a learning plan. Management should identify individuals who will have the responsibility of staying abreast of what is going on in the DAF space. Those folks will also regularly brief leaders and Board members on events and trends in the DAF realm. This is really the only way to anticipate and prepare for DAF over time.
Finally, the nonprofit needs to craft a plan for DAF. In the short term, this will encompass the points addressed in this article. Over time, the plan will need to be extended into tactics and strategies for the nonprofit’s DAF activities.
Donor Advised Funds are a threat and an opportunity for nonprofits. Organization leaders must act to optimize donor contributions. The tactics set out in this article can provide a foundation for a DAF strategy. If properly managed, DAF can be an important part of a diversified funding base. If ignored or mishandled, DAF can negatively impact access to donors and their funds. Engage donors and understand their needs. Get educated and educate donors. Consider some proactive approaches but stay tuned to events and trends with DAF. Follow these tactics and ultimately integrate DAF into your organization’s strategic planning process.
How is your nonprofit organization interacting with DAF? Please share your experiences in the comments section!
Interested in other nonprofit leadership topics? Check out the nonprofit leadership blog: Not for Profit Beyond the Numbers
If you have questions or would like a consultation on a nonprofit leadership issue, contact me at: firstname.lastname@example.org
For more about the author, follow this link: Michael F. Cade, CPA, CGMA