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The nonprofit’s complete guide to donor-advised funds

Discover everything you need to know about donor-advised funds, including how they work, what benefits and drawbacks they bring for nonprofits, and a brand-new way to accept DAF donations.

Anna Bean
December 28, 2023
January 4, 2023
Nerd Mr Butter

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Donor-advised funds (DAFs) were once believed to only be a unique charitable giving option for the wealthy. But DAFs are much more popular than people think. In fact, DAF grants increased a whopping 9% in 2022 to $52.16 billion.

Even though DAFs have been around for decades, new tools are enabling organizations and donors to tap into this investment-based method of giving like never before. In this guide, we’ll cover everything you need to know to make the most of them for your nonprofit fundraising.

What is a donor-advised fund?

A donor-advised fund is a tax-incentivized investment account for charitable giving maintained and operated by a sponsoring organization. Donors contribute funds to the account, those funds get invested, and money generated from the account is, in turn, given to designated nonprofit recipients.

  • The sponsors 🏦 These tax-exempt sponsoring organizations tend to be large institutions with a national reach, like hospitals, or the charitable arms of for-profit financial corporations like Schwab.
  • The donors 💰The individuals, families, or groups that create DAF accounts make tax-deductible contributions, and advise the sponsoring organization on how money is invested and given out via grants (donations) to nonprofit organizations from there. 

While there is technically one donor-advised fund definition for tax purposes, each sponsor has its own donor-advised fund rules and stipulations, which suit different benefactors based on their wealth, geography, and values. 

DAF sponsoring organizations 

DAF philanthropy comes in several forms, and the most common sponsor types can be sorted into three categories: 

  1. National commercial DAF providers ⭐️ The nonprofit arm of private, for-profit financial institutions that offer DAF services on a national level (i.e., Fidelity Charitable, Schwab Charitable, Vanguard Charitable).
  2. Community foundations 🏘 Local or regional organizations that manage charitable funds to support nonprofits within a specific geographic area (i.e., The New York Community Trust and Silicon Valley Community Foundation).
  3. Single-issue DAF sponsors 🔦 Some organizations focus on specific causes or issues and offer donor-advised funds dedicated to those causes (i.e., The American Endowment Foundation focuses on supporting education).

Donor-advised funds vs. private foundations

While both DAFs and private foundations are engines for philanthropic giving, issuing grants, and receiving tax deductions, there are three key differences between the two that nonprofits should be aware of: 

  1. Structure 🏛 Both private foundations and DAF sponsoring organizations tend to be large institutions with a board of directors, but some donor-advised funds can be thought of as individual giving accounts, especially those from commercial providers.
  2. Process 🪜 While foundations often require letters of inquiry, grant applications, and meetings for nonprofit grantees, certain DAFs offer account holders much more flexibility in when, how, and to whom they give.
  3. Oversight 👀 Foundation grants can also require cumbersome reporting requirements for nonprofits and other obligations (including fees), whereas DAF grants have a far wider range in the amount of oversight they require. 

Why are DAFS important for nonprofits? 

With an intentional DAF strategy for nonprofit funding, your organization may be able to enjoy long-term benefits (not just one-time gifts), including: 

  • Increased giving 📈  In 2021 alone, contributions to donor-advised funds rose by nearly 50%, and the number of DAF grants given increased by almost a third.
  • Attract new donors 🧲  Individuals who may not have considered philanthropy can establish DAFs, helping to widen your potential sources of funding.
  • Create sustainable funding streams 💸  Certain DAF donors have the capacity to provide nonprofits with reliable sources of funding over a long period of time through planned giving

DAF rules: How do donor-advised funds work? 

So, how can a nonprofit like yours become the recipient of DAF grants? Here’s how it all comes together, along with some key rules to know about.

Step 1: Contribute 🪙

Donors decide how frequently they want to contribute their cash, stocks, real estate, or cryptocurrency to their DAF. Because the sponsoring organization is technically a charity, they can write large donations off as an income tax deduction immediately. 

Certain sponsors require a high minimum contribution (Stanford University’s minimum is $1M). But, workplace-giving DAFs and sponsoring organizations with low or no contribution minimums have attracted new donors at a large scale

Step 2: Invest 🏦

As with other investments, like a 401k, DAFs can enable donors to choose what level of volatility they are comfortable with and what kind of portfolio they prefer for their investments (stocks, bonds, etc.) over time. 

A key difference between a DAF and other investment accounts is that contributions are irrevocable (i.e., donors can’t get them back). The sponsoring organization legally controls the funds from there, but donors can weigh in on where the funds go. 

Step 3: Give 🎉

At some sponsoring organizations, like a large university or certain community foundations, the idea is generally that a substantial amount of the grants will go to programs and groups affiliated with the sponsor. 

But at a financial institution like Fidelity, donors have a lot more say. That's why it’s crucial to let your supporters know that your nonprofit can accept DAF donations.

What can’t you do with DAF funds?

While donor-advised funds can be beneficial for many nonprofits, it’s critical to be aware of the ways that donors cannot use these funds, including:  

  • Support political groups, personal crowdfunding campaigns, or any other non-501(c)(3) activities
  • Give in exchange for a gift (auction items, raffle tickets, a table at a gala, etc.)
  • Provide grants and scholarships to specific individuals
  • Make a qualified charitable distribution from an Individual Retirement Account (IRA)

Who are DAF Donors?

Nonprofits interested in creating a DAF fundraising strategy can start by taking a look at who DAF donors are and what drives them. 

What are the characteristics of a typical DAF donor? 👤

Though times are changing, people with donor-advised fund accounts tend to share these characteristics: 

  • Close to retirement: The average age of a DAF donor is 65. 
  • More likely to give major gifts or engage in planned giving: DAF donors are often more interested in building a legacy and may name family members as successors of their DAF account. 
  • Have wealth from various sources: Last year, for example, 61% of DAF contributions to Schwab Charitable were non-cash assets like publicly traded securities and restricted stocks. 
  • Already engaged in nonprofit communities: 79% of DAF donors volunteer their time as well as their money. 

Why do people open donor-advised funds? 🔑

It’s no coincidence that contributions to DAFs reached an all-time high of $85.5B in 2022. DAF donors enjoy many benefits, including time to evaluate where and how they contribute to charities. A donor, or group of donors, might also go the DAF route in order to:

  • Enjoy immediate donor-advised fund tax deductions 
  • Grow their nonprofit contributions through investment
  • Facilitate planned giving now and well into the future
  • Avoid the headache and cost that come with starting a private foundation
  • Give anonymously 

Donor-advised fund pros and cons

Nonprofits interested in engaging with DAFs should consider the strengths and weaknesses of this giving method.

Benefits of donor-advised funds for nonprofits and their supporters

✅ Fee-free: (For grant recipients, that is!) Nonprofit Trust breaks it down for us: “Grants from DAFs do not include any grant-related expenditures, administrative fees, or operational overhead costs.”

✅ Growth potential: Investing DAF funds can increase their value, potentially enabling donors to give a higher amount to a charity than they would have been able to otherwise.

✅ Tax advantages: Donor-advised fund tax benefits are one of the top perks for contributors—especially high-dollar donors.

✅ Administrative support: Sponsor organizations manage all the investing and granting for donors, which can facilitate more consistent planned giving as well as legacy giving in the future. 

Donor-advised fund disadvantages   

❌ Less transparency: With DAFs, nonprofits don’t always have access to individual donor information, which can make donor stewardship and building relationships with donors difficult, to say the least.

❌ No payout requirements: The IRS doesn’t require DAFs to make any annual donations. However, compared to private foundations’ annual payout average of just over 5%, the average DAF payout each year is around 20%.

❌ Lengthy donation process: Until recently, donating through a DAF was typically a complicated process that required donors to leave a nonprofit’s website to recommend them for a donation. Thankfully, new technology has greatly improved the process.

7 DAF fundraising best practices for nonprofits 

Giving through a DAF is now easier than ever thanks to Givebutter’s free DAF donate button—the very first of its kind to hit the charitable sector. ✨ 

The following strategies can help nonprofits build relationships with  DAF donors, communicate with supporters more effectively, and set themselves up for long-term success. 

1. Set the foundation for DAF giving 💪

There are several steps you can take to ensure finding your organization and giving with DAFs is as seamless as possible:

  • Make it easy to find 👀 Include a DAF donation option on all of your fundraising forms, pages, and website widgets.
  • Inform your team 👋 Educate your staff on what DAFs are and how to communicate the DAF giving process (and its benefits) effectively.
  • Show you’re legit 💪 Keep your organization’s information updated on websites that DAF providers use to verify your nonprofit status, such as GuideStar and Charity Navigator.

Start accepting DAF donations in 3 easy steps

2. Reach out to DAF donors in a variety of ways 👋

Donors won’t know that you can accept DAF donations unless you tell them directly. Educating your supporters on donor-advised funds and how they can make a difference is vital—and so is connecting with DAF donors before and after they give.

Add a section to your website or donation page that educates readers on DAFs, grant opportunities, and planned giving programs. Then, craft a communication plan for your staff, board members, and volunteers outlining if and how you’ll share about DAFs through each channel:

  • Email and text messaging 📧 Create a quick and easy explainer for donors on how your nonprofit now accepts DAF grants.‍
  • Direct mail 📬 Especially for older donors, receiving letters in the mail specifically about donor-advised funds can have a major impact.
  • Social media 🤳 Consider posting about DAFs leading up to your next fundraising campaign or major event.‍
  • In-person 🤝 At events or in one-on-one conversations with your supporters, make sure to bring up DAFs, and offer educational resources like flyers, brochures, and even seminars with experts. ‍
  • Direct outreach 🎂 It doesn’t hurt to reach out to donors as they hit major birthdays (40s, 50s, and 60s) with information about the benefits of DAFs and planned giving.

3. Connect with sponsoring organizations 🤝

Donors often use community foundations or the charitable arm of companies like Fidelity to house, invest, and ultimately grant DAF funds. 

Through proactive outreach and networking with sponsoring organizations, nonprofits can learn more about DAF opportunities and build relationships with sponsors that can benefit them well into the future. 

4. Solicit DAF donors for immediate needs ⚡

Because certain DAF funds are immediately available, many DAF donors give to charity when donations are urgently needed. 

Regardless of your mission, reaching out when your organization urgently needs funding is a good way to show DAF donors that they can have a huge impact with their contributions. 

5. Encourage DAF donors to give complex assets 🤓

Many donors have complex assets—stocks, real estate, even cryptocurrency—that they may not realize that they can give to charity (or how they would even go about doing that). 

DAF funds provide an excellent way for donors and nonprofits to put these gifts to use. Inform donors about how DAF funds can help them use these types of assets.

6. Recommend recurring donations 🔁

Recurring donations are a huge convenience for donors and an essential tool for nonprofits seeking financial sustainability.

Make sure that recurring donations are an automatic option when DAF donors give, and add information about DAFs to any recurring donation appeals. 

7. Take a different approach with donors and DAF sponsors 💌

Nonprofits that receive DAF grants often make the mistake of not personally thanking individual DAF donors. But when it comes to best practices, nonprofits must instead send a personalized thank you to the donor in order to start building a relationship.

The easiest way to track DAF donations is to give hard credit to the sponsor and soft credit to the donor for every contribution in your database. This information will help your team communicate better with each party and set you up for a successful relationship moving forward. 

💪 Pro tip: Givebutter’s native integration with Chariot sends you real-time donation details and key donor contact information when a donor gives to your nonprofit through their DAF. 

A revolutionary way for nonprofits to accept DAF donations

With Givebutter, nonprofits can give donors the choice to give with a wide range of methods, from Venmo and Paypal to digital wallets like Apple Pay and Google Pay, classic cash or card options, and now donor-advised funds! 

Every single Givebutter campaign page, donation form, fundraising event, and website widget can be customized to accept DAF donations in just a few simple steps. You'll enjoy up-to-date grant status tracking in Givebutter, so you know where your DAF gift is every step of the way. See when a donor has initiated a DAF grant to your organization, when the grant has been approved, when the money has been sent, and when the funds have been received.

Sign up for your free Givebutter account and start accepting DAF donations today. 💪

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