Best Practices for Non-Profits Seeking Gifts from Donor-Advised Funds
BY Kevin Wesley
Increasingly, healthcare organizations are seeing more donations from Donor-Advised Funds, commonly referred to as DAFs. Fueled by the tax advantages DAFs provide, donors, especially well-heeled donors, are likely to use the vehicles more frequently.
For non-profit organizations, DAFs present a remarkable opportunity to connect with donors, and the organizations that provide the DAFs. They also need to be handled differently at every stage of the donor lifecycle, from solicitation to engagement to acknowledgement to stewardship.
In this publication, we will define DAFs and show how they work, and discuss the latest giving trends around DAFs. We will also provide practical tips on how to engage DAF donors, evaluate your policies and procedures, and how to train staffs to more effectively work with them.
Donor-Advised Funds 101
DAFs can be considered a savings account used for philanthropic purposes. Donors can create accounts with sponsoring organizations, typically community foundations, national or single-issue charities, or the charitable arms of financial services companies. The largest sponsoring organization is Fidelity Charitable.
Donors can fund their DAF accounts with cash, stock and other assets. The sponsoring organization manages the assets, offering low investment fees and simplicity for donors.
Controlling the funds
One unusual element of DAFs is control, which rests with the sponsoring organization. The donor gives up control of the assets but may advise the fund to make a contribution to an eligible nonprofit. The organization is not legally obligated to do so, but in nearly every case, abides by the donor’s desire.
Receiving the donation
When a check arrives at your institution from a DAF, it is the sponsoring organization that is making the contribution on behalf of the donors. The hard credit should go to the sponsoring organization, not the person(s) making the gift. The sponsoring organization will typically share the name(s) of the donors, who can receive soft credit and acknowledgement for the gift.
If a sponsoring organization does not provide the name of a specific donor for soft-crediting purposes, the best practice is for a member of a foundation’s team to reach out to the sponsoring organization to try to ascertain the original donor (see sidebar for more information). Ideally a member of a foundation/fundraising shop should have contacts at all major sponsoring organizations, so that outreach is efficient and streamlined.
The State of DAFs in 2023
According to the National Philanthropic Trust (NPT), DAFs made $45.7 billion in grants in the United States in 2021, up 28% from $35.7 billion in 2020. While that number is about half of the $96 billion distributed by private foundations, it still represents a significant base of contributions.
The size and scope of DAFs continues to grow, attracting more donors, more dollars and larger available funds.
Source: National Philanthropic Trust (https://www.nptrust.org/reports/daf-report/)
By every key measure, DAFs saw extraordinary growth in 2021, led by a nearly 40% increase in charitable assets held, to $234 billion. Donors also contributed almost 50% more ($72.7 billion) to those funds than they did the year prior. According to these recent statistics, there are now 1.29 million DAFs in the United States, with an average size of $183,000 in assets per fund.
The NPT predicts that the rapid growth seen in 2021, coming out of the 2020 pandemic year, is likely to slow, especially with inflationary pressures and recessionary concerns. However, it’s evident that the impact of DAFs can have on healthcare organizations is significant and likely to continue.
The DAF Donor
While DAF donors historically have been high-net-worth individuals and families, that trend is shifting, especially as more sponsoring organizations relax rules around minimum contributions, according to a Giving USA report (purchase required).
Nevertheless, the typical DAF donor is likely:
- An older individual
- A household, rather than an individual
- Giving through multiple channels to organizations they support
- Working from a comprehensive philanthropic strategy
DAFs often carry the tagline “giving while living,” given the ability of donors to make a substantial impact while still alive. However, the ability to make contributions to a DAF without an intended donation allows donors to consider multiple options before asking for a donation from the fund sponsor.
That’s an important consideration for organizations. The nurturing and relationship-building inherent in fundraising means organizations will want to develop long-term, sustained and evolving relationships with donors that have DAFs, even if the donor has not used the DAF option yet to make a gift.
Recent studies also suggest that the longer a DAF donor has had a fund, the more generous they become with the assets within it. In 2023, Vanguard Charitable – one of the largest DAF-sponsoring organizations in the world – released results from a survey of 1,500 Vanguard Charitable donors and 440 nonprofit organizations. The study found that, of donors with a DAF for 10 years or more, 71% reported they gave more because of that DAF, and 68% reported they give more consistently to their favorite charities via their DAF. Additionally, donors with a DAF for more than 10 years gave on average $17,000 more in 2022 than donors with DAF accounts started 6 years ago or more recently.
Why DAFs Are Attractive to Donors and Nonprofits Alike
Why are donors increasingly turning to DAFs as investment vehicles? And why should your nonprofit focus on them? Let’s look at the attraction from both vantage points.
Why Donors Love DAFs
Donors are drawn to DAFs for many reasons, but the following are key incentives:
- Tax benefits. Donors receive tax credit when the gift is made to the DAF. Their donations grow tax-free within the DAF, giving them more money in the long run to give to organizations they want to support
- Tax bunching. The Tax Reform Act of 2017 lets individuals donate a large amount in one year and then skip donations for one or two years, letting them leverage the increased standardized deduction rules
- Privacy. Wealthy donors do not have to have their DAF disclose their identities if they wish to remain private
- Time to decide. Donors do not need to decide immediately where to recommend contributions
- Appreciated assets. Donors can contribute securities and real estate to their DAF and receive a deduction for fair market value
Why Organizations Value DAFs
There have been many grumblings over the years within foundations and fundraising units about the complexities that DAFs create – from crediting rules to reporting challenges.
However, the benefits of DAFs far outweigh what are mostly simple operational modifications. Institutions gain great value from DAFs in the following ways:
- There’s a greater opportunity to reach older, wealthier donors who have established DAFs
- Often, donations come in unsolicited
- Contributed funds have already been accounted for, meaning this is not “new money” to be contributed by donors
The power and flexibility of DAFs are considerable. Understanding the basics, the motivations and the format of DAFs can help organizations engage strategically with donors and sponsors to leverage more contributions.
Best Practices for Fundraising with DAFs
To be successful at leveraging DAFs, organizations need to take new approaches with familiar tactics. At the heart of it, DAF fundraising is still about relationships. Nurturing those relationships means having personal connections between donors and gift officers, leaders and clinicians. It also means strategic and consistent communication to raise awareness about DAFs. And it requires sound policies and procedures to ground the institution’s approach to DAFs.
Fishing In Your Own Pond
No matter how many gifts your organization receives today via DAFs, the likelihood is high that there are many more donors with DAFs or considering them.
As part of conversations with existing donors and prospects, your gift officers should ask if a DAF is in place. If they indicate they have a DAF, it’s a tremendous opportunity to probe for more details – what is their approach to using the DAF, what causes or organizations do they support now via their DAF, what’s their long-term DAF strategy. This information is critical for shaping donor intent and interest.
Marketing DAFs
Raising awareness about DAFs is an important component. At its most basic level, your messaging needs to emphasize that your organization is eligible to accept donations from DAFs.
There’s low-hanging fruit when it comes to DAF marketing. Including simple messages about DAFs takes little real estate on existing pieces. Adding language to direct-mail appeals and reply forms, emails, reply forms, websites and online gift forms is easy to do. Including a short article about DAFs in newsletters is another good way to raise awareness.
However, a more compelling approach would be to complement those messages with a bolder outreach strategy.
First, be sure to speak to DAF donors as DAF donors. Recognize in your acknowledgements that the donor gave via a DAF. In future solicitations, recognize that their previous gifts have been made via the DAF.
Donor profiles are a tried-and-true approach to recognize and celebrate donors. Consider highlighting donors who’ve made DAF gifts (and have them talk about why DAFs are a good option) in your publications and website.
There are compelling cases to be made about the advantages and uses of DAFs, including:
- Establishing a legacy
- Addressing stock appreciations
- In Memoriam gifts
- In Honor Of gifts to recognize a clinician
- Establishing a family tradition of philanthropy
- Flexibility and convenience
Think Locally
Many community foundations manage DAFs. Building relationships with these foundations is a smart choice. Understanding their marketing, how they work with donors can help you in working with your donors. Provide them with information about your organization, its philanthropic priorities and needs. The relationships may lead to new gifts from existing or new donors.
Engage Board Members and Other Volunteers
Board members and other volunteers should know about the impact of DAFs on your philanthropic results, how DAF gifts work, and how to connect potential donors to your organization. Also ask volunteers to identify acquaintances that have DAFs for outreach.
Incorporate Into Your Planned Giving Strategy
DAFs are designed for the long term. Assets in DAFs grow tax-free and there are no mandatory disbursements. They are an ideal component to a planned giving program.
Using DAFs as an option can help donors with succession planning, generational giving (children can be named secondary advisors) or converting complex assets such as real estate, stocks and cryptocurrency.
Training Your Staff to Work with DAFs
Your entire advancement or foundation staff should learn about DAFs, how they work and how to work with donors. Here are some of the key considerations.
Know the Rules
DAFs have unique rules. Your staff should know these basic rules before engaging with donors:
- DAFs may only contribute to 501(c)3 organizations
- There are no mandatory disbursement rules
- Single-issue charities, community foundations and private organizations (typically financial services firms) can act as sponsoring organizations
- Thresholds to establish a DAF vary by sponsor
- A DAF cannot be used to fulfill a legally binding pledge. A non-binding gift agreement may be necessary if a donor wants to use a DAF for a major gift
- DAF donors may not receive gifts or benefits in exchange for their gift
- Some sponsoring organizations allow donors to remain anonymous.
Policies and Procedures
Your organization may already have guidelines in place to manage gifts made via DAFs. Among the key considerations are:
- Gift credit. Typically, organizations provide hard credit to the sponsoring organization and soft credit to the donors who recommended the gift. This is a good approach, especially given the tax rules
- Records. Each sponsoring organization will need to have a record in your database. If you segment, assess and assign family foundations, you should model management of DAF sponsors similarly. In addition, think about what information is needed for DAF donors, such as the fund account name and sponsoring organization. Relationship records should be established to link sponsoring organizations and individuals at those organizations with your donors
- Coding. Consider assigning constituency or interest codes that identify DAF donors as such. This step will make easier to message and solicit DAF donors as an identity group
- Reporting. How will you report on DAF gifts? Are they a separate category altogether or are donors parsed out and included in other categories, e.g., grateful patient, community member or staff member
- Acknowledgements. Your gift acknowledgements need to recognize the type of gift and how it was received. Your language to DAF donors needs to recognize that the gift they recommended from their sponsoring organization has been received. Another important note – some sponsoring organizations prefer not to be acknowledged. Be sure to check their websites before sending a thank-you letter
At GOBEL, we understand the importance of philanthropy and the value of DAF gifts. Our teams can help your organization with the technical needs and staff training necessary to fully leverage this important philanthropic vehicle. To learn more about GOBEL and its services, contact us today.
