November 13, 2019Blog

Donor-Advised Funds and Nonprofits

By Devin Morrissey

Large financial corporations have had their hand in nonprofit donations for decades. More recently, individuals have been donating cash and assets to donor-advised funds managed by these companies. For donors, there are favorable tax advantages, and it makes their donations easier to manage, but it has changed the way nonprofits are getting the money they need and how they account for those funds.

What are Donor-Advised Funds?

According to the guidestar.org, donor-advised funds (DAFs) are special funds or accounts that are controlled by a sponsoring organization. A good way to look at DAFs is to think of them as charitable investment accounts. Donors may add cash donations, stock, or other assets to a DAF and the account is controlled by the sponsoring organization, often through a fund manager like Schwab or Fidelity. Currently, the top five donor-advised funds are Fidelity Charitable Gift Fund, Schwab Charitable Fund, National Philanthropic Trust, Vanguard Charitable Endowment, and the American Endowment Foundation.

After the donor has added the funds to the account, they can then instruct the sponsoring organization as to which nonprofit they’d like to contribute to, though the sponsoring organization is not legally required to follow that advice. Increasingly, individuals have begun donating money through DAFs so they can make their preferences known. In 2017 alone, $110 billion was held in donor-advised funds.

DAFs do not have minimum payout requirements, unlike private foundations. Organizations providing donations through DAFs are not required to divulge the same information as private organizations do when making a donation. This makes it difficult to track funding activities.  Donations can be made anonymously making it hard for nonprofits to acknowledge the gift.

How Does This Type of Funding Impact Nonprofits?

Because the popularity of DAFs has exploded in recent years, nonprofit organizations are having to learn a lot about how this type of funding works. Even though they have been around for decades, their increase in popularity is leaving nonprofits scrambling trying to figure out how to attract the attention of donors, how to utilize the funds, and how to go about thanking people for their gifts. Not to mention, one of the biggest issues is how to track and provide reports for these types of donations.

First, having accountants with leadership traits within the nonprofit organization who understand how DAFs work is key. One important thing for them to remember is that not all DAFs are created equal. There are three main categories of DAFs: commercial, community-foundation, and single-issue funds.

Commercial funds are those made through companies like Schwab and Fidelity, mentioned above, and they are the most popular. They are managed by financial institutions. Many individuals decide to contribute to commercial DAF because they are easier to use and offer lower investment fees.

These perks are largely to thank for the increase in DAFs.  Donors receive their tax deduction the year that their cash or assets are placed in the DAF account.  Nonprofits that receive a gift from the DAF cannot issue another tax receipt.

What Nonprofits Can Do To Keep Their Best Interests in Mind

Nonprofits are having to make strides in changing the way they do their accounting and even the “thank you’s” they send out to donors.   If the donor of a DAF is listed on the gift a thank you letter can be issued without it being a tax receipt. To be sure, their organization remains relevant in a commercialized donor world; nonprofit organizations need to have a strategic plan for how they will manage the donated assets.

They also need to plan how they’ll stay relevant in this type of donor environment. Nonprofits need to set themselves apart from other organizations to be chosen by DAF donors. For example, Pets of the Homeless are as transparent as possible with their nonprofit documentation.

Organizations should actively promote the fact that they accept grants and other assets from DAFs. Pets of the Homeless shares its donation information on its website, including a link to some DAFs. It is also wise to acknowledge donations publicly if at all possible. A DAF donor will have already received a tax deduction upon making the donation, but public acknowledgment of the gift will never go amiss. This can be as simple as thank you letters or as elaborate as publishing your benefactors on your site.

In addition to public transparency, it is also a good idea to educate the rest of the staff as well. This will make the nonprofit seem more organized and efficient, which many donors look for. When educational materials are being shared, be sure every member of the staff is also familiar with the IRS rules surrounding DAFs.

Because DAFs can sometimes be inconsistent, it is important to have some type of business insurance in case of a financial shortfall. This is extremely important for organizations relying on outside funding, in general. If the nonprofit seems to be getting fewer DAF donations, it is possible to see if any DAF checks received have donor names and addresses included. Given that information, nonprofits can reach out to them to solicit additional donations.

When all is said and done, DAFs are changing the way nonprofit organizations are able to discover and obtain funding for their everyday activities. Understanding the ins and outs of this popular type of donation will make it easier to get the funds needed and continue the good work.