Donor-Advised Funds (DAFs) are investment vehicles designed to allow individuals to contribute to the Funds and recognize the contribution as a charitable donation in the year it was made. The funds are then managed by advisors and eventually contributed to charitable organizations of the contributor’s choice.
Research – The DAF Research Collaborative recently conducted a study that found that using DAFs is a growing trend, as 81% of the funds have been opened since 2010. A separate study showed that grants made from these funds have more than doubled in the past five years. The DAF Research Collaborative also found that most of the funds are advised by individuals and families (97%), with the baby boomer generation accounting for nearly half of those funds (49%). The majority of the contributions to these funds fall within the range of $10,000 and $49,999 (40%), with 49% of funds having a year-end balance of less than $50,000 by 2021. These trends show that donor-advised funds are not just for the ultra-wealthy but are becoming commonly used among the general population. To that effect, only 7% of funds had year-end balances over $1 million, and only 1% had balances over $10 million.
Connecting – Donor-advised funds can also keep the original donor anonymous. This can make it difficult for charitable organizations to connect to specific donors, though not impossible, and connecting the donors through these DAFs will be key to helping a nonprofit sustain growth.
Communication – Communication is crucial in developing donor relationships, even within DAFs. If the donor wants to remain anonymous, reaching out to the DAF to see if they can reveal their identity or contact information may help an organization stay connected. If not, the DAF may be willing to accept a thank you note on the original donor’s behalf and pass it on to them. Thanking donors, if possible, encourages them to remain involved. Communication with donors allows them to stay connected and know the value of the services the nonprofit provides. Additionally, it’s essential to be honest in communication and to share the organization’s financial position and the impact of the donor’s funds
Holistic Approach – Donoradvisedfunds.com is a resource available for nonprofit organizations that provides information on donor-advised funds. On that site, users can search for various funds, and what they can provide for receiving contributions and distributing grants. This information might help organizations determine which DAF could be a good partner with which to develop a relationship. Other key players are employers who might provide the benefit of matching contributions to charitable organizations of their employees or allow their employees to make charitable contributions through payroll. Finally, investigating pools of donors could be helpful in noticing trends, both with patterns of donations and donation vehicles.
IRS Hearings held in May of 2024 discussed whether additional restrictions should be placed on donor-advised funds. The three key proposed changes are below:
- Changing the definition of donor-advised funds, in the hopes of opening the benefits of the funds to more of the general public by being able to classify other investment vehicles as DAFs.
- Imposing penalties, with a proposed excise tax of 20% on donations that significantly benefit the donors.
- Broadening the definition of donor advisers to include personal advisors that manage assets in DAFs.
Concerns of these proposals include the following:
- Changing the definition of donor-advised funds could impact other investment vehicles or entities, including certain investment funds held by public charities.
- Broadening the definition of donor advisers to include personal advisers could provide more restrictions, particularly on earnings, from personal advisers and have an overall negative impact on the industry.
- The excise tax would disincentivize individuals from contributing to these funds, which have recently provided more funds for charitable purposes even when philanthropic contributions are constricted due to economic difficulties.
At this point, nothing is finalized regarding definitional changes in law and their impact on the industry. However, it is essential to monitor. Nonprofit organizations can benefit from taking a DAF-focused approach to securing donors.
By David Jacobson, CPA