Decoding Donor-Advised Funds As posted at Giving USA
Donor-advised funds began in the 1930s, but in recent years these funds have become the fastest growing vehicle in philanthropy. Giving USA recently released a highly anticipated Special Report on Donor-Advised Funds. You can access the full report on the Giving USA Foundation website. My colleague Victoria Dietz also recently had the opportunity to chat with Anna Pruitt, managing editor of Giving USA at Indiana University Lilly School of Philanthropy, about the recent report. Be sure to check out their conversation on The Curtis Group’s latest issue of “Let’s Talk Fundraising.”
Where are the dollars going?
- According to a recent report from the National Philanthropic Trust, contributions to DAFs accounted for roughly 10% of charitable donations in 2020 ($47.85 billion of the $471.44 billion contributed in 2020 according to Giving USA).
- Between 2014 and 2018, grants given from DAFs to nonprofits doubled. In 2020, grants from DAFs totaled over $34 billion and grew by 39% between 2019 and 2020.
- Education attracted the most dollars from donor-advised fund grants from 2014 to 2018, followed by religious and public-society benefit organizations.
- Preliminary findings with data from 2019 and 2020 revealed that DAF giving to human services grew 138%, while giving to public-society benefit organizations nearly doubled. DAF grants to Historically Black Colleges and Universities and other racial justice organizations more than quadrupled.
- The distribution patterns by DAFs track more closely with the trends of high-net-worth donors, who are associated with giving to education at higher levels than the average donor. DAF giving also closely mirrored giving trends of high-net-worth giving in 2020 with a large spike in giving to basic needs organization and an increase in giving to social and racial justice causes. To learn more about the giving patterns of high-net-worth donors, check out the recent release of Bank of America’s biennial study that examines the giving patterns, priorities and attitudes of affluent U.S. households for the year 2020. Here is access to Bank of America’s report.
Benefits of Donor-Advised Funds
- Create a Strategic Legacy: Donors can think strategically about disbursing funds not only during the upcoming year but in future years.
- Ease Administrative Burden: Donors maintain a central record of giving through a DAF. DAFs are similar to a family foundation without the added administrative and filing requirements. Also, many nonprofits are not equipped to accept complex assets, but DAFs are able to do so.
- Provide a Bunching Strategy: DAFs may be a giving strategy for those who no longer itemize every year. Bunching enables donors to increase their charitable contributions and itemize gifts every few years, while taking the standard deduction in other years.
- Pledges: While it is true that a donor cannot sign a legally binding pledge from a DAF, a donor can still make payments on a pledge using a DAF (with certain qualifications). According to the National Philanthropic Trust, some of these qualifications include: the DAF sponsor does not reference the pledge in the grant letter or check; the donor does not receive any benefits as a result of the gift; the donor does not claim the payment as a charitable contribution deduction. If the donor is still concerned about a pledge commitment, the donor could still sign a letter of intent, which should be adequate for a nonprofit to recognize the gift.
- Donor Engagement: At The Curtis Group, nonprofits sometimes share that it is too difficult to build relationships with DAF donors. This could be because the award letter did not provide the donor’s full contact information, or your organization is tracking the gift under the DAF sponsor rather than the individual donor. Whatever the case, nonprofits need to be more strategic in identifying, tracking, and engaging with DAF donors, focusing on each individual donor throughout the process. These individuals have taken the time to set up a specific vehicle for their philanthropic giving, so they have every intention of giving. This makes them very strong prospects.
- Disbursement: Some DAF critics have concerns that donors are funding DAFs but not disbursing funds to nonprofits. You may hear terms like “dormancy,” “pay out rates,” or “warehousing of assets.” There are some donors who do hoard assets, but most do not. Remember that DAFs are irrevocable, so funds will be given to the nonprofit sector, whether tomorrow or years from now.
How Can We Leverage This Information?
- Invest in donor relationships: Nonprofits must build relationships with donors and not view the grant as transactional. Strong donor relationships will position nonprofits to provide insight about giving vehicles such as DAFs. Take this opportunity to ensure that your nonprofit is communicating thoughtfully, strategically, and thoroughly. There is also a unique opportunity through DAFs to meet with some DAF sponsors, such as local community foundations, so they are educated about the work of your organization and can pass that information on to donors.
- Personalize donor communication: Impact reports, invitations, and thank-you letters should not be sent to the DAF disbursing the funds. To build relationships, stewardship efforts must be directed to the individual.
- Market DAFs as a giving tool: On a nonprofit’s website and other materials that provide ways to give, nonprofits should mention that they accept donor-advised funds. It’s also a good idea to spotlight current DAF holders in newsletters. But before promoting DAFs, make sure information is up-to-date on sites like GuideStar. Details like address, tax ID and legal name must be accurate.
- Increase nonprofit transparency: DAFs further highlight the need for transparency in nonprofits. As donors select nonprofits to support, DAF sponsors vet each nonprofit before disbursing grants.
Due to the projected ongoing growth of donor-advised funds, we foresee DAFs playing an increasingly important role in philanthropy. As a consultant, nonprofit staff, or board member, you need to be informed. With knowledge, we can continue our critical conversations, and ultimately increase awareness about philanthropy and its vital role in our country.