Authored by Atticus Technology and Bobby McDonald, President of South Carolina Christian Foundation
The Rise of Donor-Advised Funds
Donor-Advised Funds (DAFs) have surged in popularity in recent years. Between 2012 and 2022, DAF assets grew by 411%. These vehicles are an now an essential part of the philanthropic landscape. For Major Gift Officers (MGOs), understanding DAFs is crucial to their success. Here’s Atticus’ guide to understanding the unique opportunities – and sometimes challenges – of navigating the DAF universe.
What is a Donor-Advised Fund?
A Donor Advised Fund is a financial account a donor can contribute wealth to that is dedicated to donating to charity. A DAF is unique in that it is a:
- Charitable Account: Assets can only be moved out of the DAF if going to a qualified 501c(3) organization.
- Tax Deduction: Donors receive a tax deduction in the year they contribute assets to the DAF, even if those assets are not distributed to a charity in that year.
- Advisory Role: Donors retain advisory privileges, meaning they can recommend grants from the DAF to qualified charitable organizations, but the sponsoring organization makes the final approval and therefore gift.
Why Donors Choose DAFs
DAFs provide a range of benefits that appeal to high-net-worth individuals but most important are the following:
- Tax Efficiency: Allowing the donor to cluster multiple years of giving into one windfall year can maximize deduction opportunities.
- Tax Strategy: Wealth transferred into a DAF can be in many forms (cash, stock, real estate, etc.) and is not subject to capital gains tax. Rather than losing a chunk of their gift to taxes, they can give the entire amount in kind to the DAF and avoid those taxes. The money within the DAF will also continue to earn interest (depending on how the DAF sponsor organizes the fund), which will also continue to grow tax-free.
- Simplicity: Rather than keeping track of many giving receipts for their tax deductions, donors get one receipt from the DAF for their total charitable giving that year.
- Legacy and Family Engagement: DAFs allow families to engage in philanthropy across generations, providing a vehicle for charitable giving that can be passed down. Though the money within the DAF cannot come of out of the fund, even if the account holder dies, control will pass to the heirs.
- Confidentiality: DAF giving is undisclosed. Unlike private foundations which must publish their grants to the IRS who then release these for public consumption, DAFs are not required to disclose. (And yes, private foundations can give to a DAF which absolves them from disclosing their giving). This makes looking for DAF givers very difficult.
What an MGO Needs to Know About DAFs
Money in a DAF is no longer the donor’s money, legally speaking. Most DAF sponsors allow their donors (who are their clients remember) to decide where those donations should go but often only if within the DAF sponsor’s parameters. Consequently, a donor should and will pick a DAF sponsor that is aligned to their missional giving.
The Role of DAF Sponsors
DAF sponsors are either financial institutions (like Fidelity Charitable) or Community Foundations.
Financial Institutions: These are large, often national sponsors that do not publicize a charitable mission. They are for-profit organizations like Fidelity or Charles Schwab..
Community Foundations: These are local, nonprofit organizations that manage DAFs for donors in a specific geographic area. They tend to have a mission that aligns with community-building and often play a key advisory role in helping donors make the most of their charitable giving.
The Influence of Community Foundations
Community Foundations want to attract more donors to their DAF programs because that’s how they grow. They work hard to meet donors’ needs and offer guidance on how to store and spend their donations wisely. The President or CEO of a Community Foundation, for example, has a lot of influence on the charitable giving decisions of their donors. Building relationships with these leaders can help you understand your donor’s giving strategy, give you access to new potential donors, and provide opportunities for your nonprofit to network with potentially like-minded people.
DAFs and Non-Cash Assets
Not all assets in a DAF are cash. In fact, 94% of wealth in the U.S. is tied up in assets like real estate, stocks, or other investments. Donors can contribute these assets to a DAF and avoid paying capital gains or income taxes on them.
A couple examples:
- A donor might buy a warehouse, rent it out for $10,000 a month, and then contribute that warehouse to a DAF. The rental income from that warehouse (now held in the DAF) is not subject to taxes. The donor can then direct the DAF to donate this income to your nonprofit.
- A donor pledges to give $100,00 then goes and liquidates some investments for $125,000 so they can make the $100,000 gift. $25,000 goes to capital gains. A helpful major gift officer might point out that the donor should rather put the $100,000 of investments into a DAF and then gift it to their nonprofit leaving $25,000 for the donor to give another day. Or better yet give the full $125,000 through the DAF since they were prepared to part with it anyway.
As an MGO, being open to gifts in diverse forms—like real estate or stocks—can unlock new opportunities for funding. You need to think creatively about how to help donors structure their gifts for maximum impact.
DAFs and Private Foundations
- Private foundations can donate to DAFs, and DAFs can give to other DAFs. This can make tracking donations more complicated for your research team, as money moves through various entities. Sometimes a private foundation will simply move their required 5% distribution into a DAF – further increasing the growth of DAFs in philanthropy.
- DAFs are not required by law to donate a set percentage of their assets each year (unlike private foundations, which must distribute 5% annually). However, some DAF sponsors require their clients to give a certain percentage each year or the sponsor will redistribute it according to their own mission. Another reason it’s always good to know your local Community Foundation directors.
Funding Strategies in the Brave New World of DAFs
As a Major Gift Officer, engaging with DAF donors requires a strategic approach and understanding of the unique characteristics of DAFs. Here are some key strategies for effectively engaging with donors and foundations:
1) Network with your local community foundations. These directors know and influence all the right people.
2) Educate yourself on wealth management. If you can help your donors make savvy giving choices you will become invaluable to them. You may also think of some creative giving opportunities that enhance each gift you receive.
3) Understand the implied differences of someone who gives from a financial institution DAF and a Community Foundation – that donor made that choice for a reason. Understanding the difference will help you understand that donor.
4) Finding new donor prospects is very hard in the undisclosed giving world of DAFs. Partner with Atticus to find new major donors that can propel your mission.
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