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Donor-Advised Funds and How Nonprofits Can Effectively Work with Them

May 7, 2015

By Mitch Lewis and Ron Ries

This article was originally published by Accounting Web on May 7, 2015. Click here to view original article.

At a time when nonprofits are scrambling to replace funding from cutbacks in government programs, some fundraising professionals have noted significant amounts of money sitting just beyond their reach in donor-advised funds (DAFs).

DAFs operated by financial services firms or community trusts offer tax advantages to all levels of philanthropist. Individuals who deposit cash into the fund receive an immediate tax deduction for the amount donated. When appreciated shares of stock are deposited and sold, there is no payment of capital gains tax, and the tax deduction for that year is calculated on the increased value of the asset. The deduction may represent up to 50 percent of adjusted gross income for cash gifts and up to 30 percent of adjusted gross income calculated on the cost basis of appreciated securities, mutual funds, real estate, and other assets.

In recent years, assets in DAFs have significantly increased. There are now at least 217,000 DAFs that collectively hold about $54 billion in assets, according to the National Philanthropic Trust’s 2014 annual survey.

This represents major growth since 2011 a both for the number of DAFs, at a rate of 4 percent to 5.7 percent each year, and for total assets, at an annual rate of 10 percent to 23.5 percent.

The money in a DAF is distributed to qualified nonprofit groups over an undefined period of time. The donor effectively pre-plans their donation strategy, which may include subsequent deposits, in such a way as to benefit their tax planning.

In contrast to private foundations, which are required to distribute 5 percent of assets annually, there is no such minimum amount, nor designated timeframe for donations to be made by DAFs.

Strategies for Nonprofits to Strengthen Relations with DAFs

How might nonprofit groups cultivate donor and DAF relationships to secure a larger share of this massive DAF pie?

For one, executive directors and directors of development should flag donation checks from DAFs and cultivate those donors more aggressively. Clearly, supporters with DAFs have a greater capacity to give to nonprofits; an organization might responsibly ask for increased support above a donor’s most recent level of giving.

Through more frequent communication and customized outreach to the donor, development professionals may learn the individual’s other interests. This tactic might lead to timely requests for a donation to support specific programs or activities that align with those interests, perhaps to be given directly to the nonprofit. Of course, as with all donors, there are ways to motivate giving throughout the year, not only just before Dec. 31.

There is also an opportunity to capitalize on those significant donors who focus their DAF-based philanthropy on the sector in which the organization’s mission fits. Nonprofit professional advisors might propose a range of collaborative programs and alliances with other entities with a similar mission so as to present a more appealing option for such targeted DAF funding.

Finally, nonprofit professionals should, to the extent possible, identify contacts at the DAFs. These staff may be the gatekeepers to the already-identified donors and to others for whom the nonprofit would hold particular appeal. It’s important to determine to what extent there is an affinity for missions similar to their own and pursue that relationship.

Act Now

Nonprofit professionals are already measuring their outcomes in order to emphasize the impact of donor dollars. In order to capture donations today – to fulfill immediate program needs like feeding the hungry and sponsoring affordable housing for indigent people – they need to also convince donors of the urgency of action. Use of statistics and case studies, combined with references to the limited resources of government grants, may motivate donors to give sooner whether directly to a charity or to a DAF.

It appears unlikely that there will be any marked changes in the operations of DAFs in the near term. Therefore, the nonprofit sector must actively engage their individual donors, the respective contacts at the DAFs, and the favored recipients of DAF monies. Individual charities need to be more proactive and get their message out. DAFs say they will listen and are always looking for new donation opportunities. So, too, charities can attract more funds, as well as educate donors on alternative tax strategies. It’s a win-win.

 


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