You Don’t Know DAF: Approach Donor Advised Funds by Learning This Before You Die

By December 14, 2018 April 9th, 2019 Fundraising Best Practices, Giving & Philanthropy

Change isn’t just coming; it’s already here! With the explosion of donor-advised funds and recent tax reform, the entire charitable landscape in the United States has shifted tremendously right under our noses.  The fundraising community needs to pivot, too, or risk missing out.

What exactly has changed, though?  While donor-advised funds themselves seem to have been around forever, remarkable growth has occurred very recently in for-profit investment arms setting up not-for-profit donor-advised funds.  This turn of events is most evident in the recently released 2018 DAF Report.

For those who need a refresher, a donor-advised fund is when you aggregate many different donors into a fund, collectively invest the assets, and then, almost like a mutual fund, the donor’s fund “owns” a number of shares in that overall fund.  The donor is then able to direct the DAF to disburse a portion or all of their share of a DAF to a charity or a number of charities.

Who oversees donor-advised funds?  While there are different sponsors of DAFs, among the oldest are community foundations along with single charities, organizations dedicated to specific causes, and federated organizations.  The most noteworthy growth in DAFs, however, has been with companies such as Fidelity, Vanguard, Schwab, and others who have set up and then aggressively marketed donor-advised funds to their clients and potential clients.

And even more profound than how many DAFs now exist is just how much the money within these funds has grown. There is now over $110 billion in donor-advised funds.  And in the last five years, the number of donor-advised funds and the amount of money in those funds has effectively doubled.  Not surprisingly, when there was major growth in the stock market during the past several years, there was also a flood of money into donor-advised funds.  The answer as to why is simple: in order for people to avoid their capital gains and not have to decide where they are going to give their money right away, many chose the option of putting their money into a donor-advised fund.

But what does all of this mean for fundraisers and the donors they advise?  Donors and fundraisers alike need to truly understand how DAFs work and what their limitations are so that there are no surprises on either side of the giving equation.  Here are four important things to keep in mind:

It’s Time to Change

Fundraisers, the same approach won’t work anymore when it comes to navigating the subtle nuances of donor-advised funds.  Reason being: once a donor puts money into a DAF and has taken their deduction for that tax year, the only reason they have to distribute that money is when someone gives them an incentive to do so.  So, if you keep in mind how all of this money is going to DAFs first, simply tweaking your language and stating “don’t forget to direct funds from your DAF to our charity” can prevent those funds from sitting idly by or going elsewhere.  Plus, your donors will be reminded as to how they can easily make a gift with funds they have already set aside.

Don’t Fall into the “Pledge Trap”

Donors, don’t get trapped.  Simply put, a donor who is able to direct funds from a donor-advised fund or a private foundation cannot utilize funds from that source to pay a legally binding pledge.  This is because when you make a binding pledge, that in effect is a debt from you to the charity, and that is how the IRS looks at it.  That is the “pledge trap”.  If you have your donor-advised fund or your private foundation fulfill that pledge, then you actually should be declaring the revenue that is being paid to the charity as income for that particular year because that organization is effectively paying a debt for you.  Both charities and donor-advised funds need to be more vigilant in informing donors of this.   Most donors do not know this and become surprised when they are told by the charity or the donor-advised fund that they cannot fulfill a pledge from a distribution through a donor-advised fund.

See the Future

Fundraisers can and must see the future right now: DAFs are changing current giving and could have a significant long-term effect on philanthropy, as well.  How so? While $22 billion was distributed last year to charities from donor-advised funds, there is still $110 billion waiting to be distributed.  Several generations ago, much of that principal would have been given directly to charities, with a significant portion going to the permanent endowments of those organizations.  Those with donor-advised funds today, however, may take the position that they and the Fidelity Charitable Gift Fund are better at investing those funds than the charity itself.  Making the case for gifts to your charity either directly or through a donor-advised fund, particularly for endowment, has never been more critical.

Do This Before You Die

Donors, keep this in mind: figure out what you’d like to do with your money before it’s too late to have a voice in the matter.  Reason being: if someone passes away and they haven’t distributed all the money from their donor-advised fund, then that money can remain in that donor-advised fund to support its general purpose since, remember, a donor-advised fund is also a 501c3 charity.  This is not the intent most donors have in mind when they set these funds aside.  So those establishing donor-advised funds need to be specific in directing to the fund holder what is to occur in the event of death or inability to advise on distributions of funds.

Donor-advised funds are only growing.  Knowing how to navigate them best can help both fundraisers and donors alike to continue to elevate philanthropy.

Stuart Sullivan is a Senior Vice President at Graham-Pelton Consulting.  Contact him by email or calling 1800.608.7955.

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