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You are here: Home / Managing Your Nonprofit / What Every Nonprofit Should Know About Donor Advised Funds

What Every Nonprofit Should Know About Donor Advised Funds

November 21, 2010 By eJP

by Doug Schoenberg

A couple of years ago I made a posting to my blog called Why I Love My Donor Advised Fund. Donor Advised Funds (or DAFs) provide a low-cost and simple vehicle for making tax-deductible contributions of assets, where the donor can, over time, recommend grants to charitable organizations from their DAF account. They provide many of the advantages of a private foundation, without the complexity, cost, or public disclosure of a private foundation. Donor Advised Funds are offered by many community and educational foundations, as well as by programs setup by most of the major investment firms such as Vanguard, where I have my account. I still love my Donor Advised Fund, but I continue to be surprised by how little understanding most non-profits have about DAFs, and was surprised to learn that some non-profits even view DAFs as a type of competitor for donor dollars. So here’s why I think non-profits should love DAFs too!

DAFs make giving appreciated stock and other assets easy

Making donations using appreciated stock or mutual fund shares is one of the most tax efficient ways of giving because donors not only get a tax deduction, they also eliminate paying any capital gains tax. Before I had a DAF, giving appreciated stock was always a hassle. I had to find out if the non-profit had a brokerage account, determine how many shares of what stock to give, send my brokerage firm a request for the transfer of the shares, check that the shares had correctly been transferred, and then often pester the non-profit to send me a correct donation acknowledgement letter for tax purposes. Most of the non-profits I gave to probably received relatively few such donations and they often struggled with the process. As a result, I made such donations just once a year and only to organizations where I wanted to make a substantial gift.

Since DAFs like the Vanguard Charitable Endowment are constantly receiving gifts of appreciated assets, they understand the mechanics and have made the process unbelievably fast and easy. I can do it all online in less than 5 minutes! I especially love that I can give a large block of stock whenever I want – for instance when I think a stock is fully valued – but can also make individual grant recommendations whenever I decide I want to support an organization’s cause. Whereas I used to make such gifts to two or three organizations, I now often give to a dozen or more, without reducing the amounts I gave previously to any of them.

DAFs lead to larger/more consistent donations

The Vanguard Charitable Endowment, like most DAFs, has a minimum grant request – in Vanguard’s case $500 – so I often choose to make a $500 grant request rather than just give the $100 – $200 I might have donated by check or credit card, due to the tax advantage.

The DAF has also led to my being more consistent in my support for organizations because of how easily I can make my grant requests. Not only can I make a repeat grant request with almost no effort, but I can also recommend a recurring grant to be made automatically each year.

Finally, a DAF can have a very positive effect in challenging economic times like the present. In such circumstances, donors might be less likely to make an additional contribution to the fund; but since most donors keep a balance in their fund, the psychology around making grants from money you’ve “already given away” is much more appealing. I personally have not reduced my giving through my DAF despite economic factors, and I suspect most donors are treating their DAF similarly.

DAFs are great vehicles for Planned Giving

If you have an IRA or 401K plan, which has assets that are greater than you believe you or your heirs need, making your DAF the IRA beneficiary can also offer tremendous tax advantages. That’s because unless you have converted to a Roth IRA, all distributions from an IRA are taxed at regular income tax rates. For most wealthy donors, those rates will still be very high, even in retirement, making IRA assets a great choice for funding a planned gift.

This is also a great way to establish a legacy of philanthropy for your heirs without the hassles and expense of creating a private foundation.

Three Tips For DAF-Friendly Fundraising

  • Don’t ask for Pledges – DAF grants cannot be made to fulfill a pledge so don’t ask donors who have a DAF to make a pledge. If you feel it’s important to have them pre-commit to an amount of support, you can ask them to indicate that they will recommend a grant from their Donor Advised Fund.
  • Correctly Acknowledging DAF gifts – The actual donation is being made by the Charitable Endowment, but it is of course still appropriate to thank the donation advisor for their support. Any good donor management system should make it easy for you to “soft credit” supporters and provide them an appropriate thank you letter.
  • Track Donors who have a DAF – Create a field or “flag” to identify and selectively attract donors who have a DAF. You can then target them with more appropriate solicitations.

Non-profits should encourage donors to create DAFs

In addition to the benefits I outlined above, non-profits should generally be encouraging their wealthier and best donors to create DAFs because it encourages philanthropy and makes giving significant gifts easy. In the long-term, that will certainly benefit the non-profit – especially one that helps to educate their donors about easy and tax-efficient ways to support their cause.

Doug Schoenberg is CEO, SofterWare, Inc., makers of DonorPerfect Fundraising Software.

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