Donor Advised Funds or DAF are a large and growing channel for nonprofit contributors. Their importance and the sheer dollars being funneled through them are growing exponentially and this trend is expected to accelerate as a result of the recent tax reform law. So, it is time for nonprofits to learn about these vehicles and how to optimize funds from this contribution channel. This post will cover the basics of DAF and the next post will offer some recommendations for nonprofits on how to effectively make these funds part of your revenue diversity plan.
What are DAF?
Donor Advised Funds are a conduit vehicles which allow contributors to place money into an account which will be distributed to nonprofit causes at a later time. A Sponsor maintains the DAF and administers the fund investments and distributions. Independent community or national foundations can sponsor DAF or they can be an offshoot of an investment firm, such as Fidelity Charitable, Schwab Charitable and Vanguard Charitable.
Why do contributors like them?
- Contributions into a DAF are tax deductible when in individual makes a deposit. This allows contributors to gain the tax benefit now and figure out how to distribute funds later.
- The DAF invests funds until they are distributed, so the funds are expected to generate investment income. The contributor does not recognize those investment gains as taxable income.
- Some folks also view their DAF as legacy investments that can be passed on for others to distribute, again, without the tax impacts that would occur if the contributions where held by the individual.
- DAF can be an attractive alternative to setting up a foundation.
What DAF attributes are contributors not aware of or do not fully understand?
- Contributions are non-returnable, as the donor no longer owns the funds.
- The DAF sponsor has rules and processes and limitations, so the contributor may not be able to distribute funds to the nonprofit they choose.
- Dealing with the DAF is an extra administrative burden on the nonprofit. There are plenty of Funds, administered by many organizations, all with different processes.
- The investment firm-related sponsors may limit the donor’s choice of investment options and may provide investment options with parties related to the sponsor.
- The DAF sponsor makes money off the donor’s investments and those fees can be significant and are effectively unregulated. Fees on the investments held by an investment firm-related sponsor may be paid to the related investment firm. Those fees are unregulated and have no disclosure requirements to the donor.
- If the donor dies without providing specific guidance on the disposition of funds, the sponsor can make that determination.
- DAF do not face the regulated distribution requirements. Foundations/endowments have these requirements to ensure the distribution of funds in a reasonable time. While DAF proponents point to current high levels of distributions, there are no protections in place to ensure individuals will not park funds in accounts for the long term as a form of tax or estate planning.
For more on DAF from the donor’s perspective, check out this article on Medium
What challenges do DAF present to nonprofits?
- Nonprofits may lose information about the donor in the process. While some DAF pass along donor name, not all do so consistently. This can lead to contact issues with donors (over-asking) or less effective appreciation contacts to donors.
- Nonprofits need to engage both individuals and the Fund they work with. This effectively doubles the initial effort to get funds.
- DAF rules and restrictions may preclude some nonprofits from receiving funds even if the donor want the distribution to go to them. This occurs when the nonprofit does not have an existing relationship with the DAF and has trouble providing required information.
- There is an incentive for some sponsors to retain funds, so they may place distribution limitations or other restrictions.
- Distributions require more effort and take longer than a comparable donation directly from a contributor.
What opportunities do DAF provide for nonprofits?
- They represent a ready source of funds for nonprofits as these dollars are already donations, so part of the contribution cycle is already complete. The donated funds as well as any related investment gains are available, if the nonprofit can get to them. Knowing your donors is key.
- DAF can provide a conduit for non-cash donations and take some of the work out of liquidating securities or other assets (like Bitcoins) that the nonprofit may be uncomfortable with converting. Of course, there is a fee, but it might be well worth it to avoid the effort and complications.
For more information on DAF, check out this article from the folks at NPQ: Nonprofits Must Adapt to Continued Growth in Donor-Advised Funds
DAF are here to stay and are becoming a very significant funding channel. To remain viable long-term, nonprofits need to be aware of DAF and determine what part they play in their donors’ contribution plans. There are pros and cons associated with DAF, but nonprofits must develop strategies for addressing DAF in order to maintain and grow revenues.
So, now that you know the basics, you are probably asking; “What DAF strategies and tactics should your nonprofit adopt?” See Nonprofit Guide to DAF: The Tactics
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