Donor-advised funds (DAFs) are an increasingly popular way for individuals to manage charitable donations while providing an excellent potential funding source for charities. As nonprofit leaders and fundraisers look to diversify revenue, understanding how DAFs work, their benefits, and their challenges can empower organizations to build long-term donor relationships and financial stability.
What is a Donor-Advised Fund?
A donor-advised fund is a type of giving account managed by a sponsoring organization, often a community foundation or a public charity formed by a financial institution for this purpose. Donors contribute to a DAF, receiving an immediate tax deduction, while having flexibility in deciding when and how to recommend grants from the DAF to other 501(c)(3) nonprofit organizations, typically another public charity. The funds can grow over time through investments, potentially increasing the impact of a donor’s initial gift.
Benefits for Nonprofits Receiving Donations from DAFs
- Long-term Funding Potential: Donations to a DAF are often invested, meaning that the value of these funds can grow, potentially resulting in larger gifts to be made to the nonprofit.
- Consistent Donor Engagement: Donors using DAFs tend to be engaged philanthropists, offering the nonprofit an opportunity to build long-term relationships with committed donors.
- Flexibility and Simplicity: For the nonprofit, DAFs streamline the donation process, allowing the nonprofit to focus on engaging with the donors themselves rather than administrative tasks.
Challenges to Consider
- Delayed Funding: Since DAFs allow donors to recommend grants over time but receive a charitable tax-deduction immediately, donors are not incentivized from a tax standpoint to recommend distributions out of the DAF to the nonprofit grantee they might have otherwise donated to immediately.
- Limited Donor Transparency: Some sponsoring organizations don’t always share donor information with the recipient nonprofit. This lack of transparency may challenge nonprofits that want to build personal relationships with their supporters.
- No Distribution Requirement: Unlike private foundations, DAFs have no minimum payout requirement, meaning funds can sit in an account indefinitely without benefiting charities.
Maximizing the Impact of Donor-Advised Funds on Potential Grantees
To engage effectively with donors who use DAFs, a nonprofit can take a few proactive steps. First, include DAFs as a giving option in donor communications. Educating supporters on how they can support your organization through their DAF, including the possibility of setting up recurring donations, can increase awareness. Additionally, building partnerships with sponsoring organizations can help bridge the transparency gap and may provide access to otherwise unavailable donor information.
Conclusion
Donor-advised funds offer valuable funding opportunities for nonprofits, but an awareness of the rules relating to DAFs is important. By understanding how DAFs work and how to engage DAF donors, nonprofits can build sustainable funding channels and enhance their capacity to serve their communities. For expert advice and assistance with your nonprofit’s governance and compliance matters, contact The Law Firm for Nonprofits to schedule a consultation.