In recent times, the buzz around donor-advised funds (DAFs) has become increasingly difficult to ignore, and there's a solid reason behind it. According to the 2023 DAF Report by the National Philanthropic Trust, DAF grants to nonprofits reached a substantial $52.16 billion last year—a notable 9% surge from the previous year. Equally significant, the total contributions to DAFs rose by 9%, signifying a sustained momentum in the popularity of donor-advised funds.
Yet, if your nonprofit hasn't delved into the realm of donor-advised funds, you might be curious about the hype. Why do wealthy donors favor DAFs, and what implications does this hold for organizations like yours?
This article aims to unravel the appeal of donor-advised funds for both nonprofits and donors, shedding light on the reasons behind their increasing prominence. Additionally, we'll explore the steps your nonprofit can take to venture into the world of donor-advised funds. Let's dive in!
DAFs: A Gateway to Charitable Legacy
At the core of opening a donor-advised fund is the aspiration to establish an enduring avenue for charitable giving. Once a donor initiates a DAF with a public charity, community foundation, or financial institution, they create a dedicated space to set aside funds for future contributions to nonprofits. The act of opening a DAF reflects a donor's commitment to sustained support for charitable causes.
Similar to an endowment, the funds contributed to a DAF are invested by the provider, offering the potential for growth beyond the donor's initial input. As the fund accumulates, donors can strategically distribute grants to multiple nonprofits over their lifetime, shaping a lasting charitable legacy. This not only allows donors to diversify their impact but also presents nonprofits with opportunities to connect with new DAF-holding supporters.
Tax Incentives: A Driving Force for DAF Popularity
Beyond the appeal of perpetual giving, donors are drawn to DAFs for the tax incentives they provide. Donors can claim tax deductions each time they contribute to the DAF, even if the funds are not immediately granted to a nonprofit. This immediate deduction, coupled with the potential for fund appreciation, amplifies the overall impact of the donor's contribution.
Consider this scenario: A donor, Mark, contributes $7,000 to his DAF in 2023. Without making any grant requests that year, Mark allows his initial contribution to grow. When filing taxes for 2023, Mark claims a charitable tax deduction for the $7,000 DAF contribution. In 2025, Mark donates the original $7,000 plus any investment income to a nonprofit of his choice, resulting in a more substantial donation than if made in 2023.
Apart from immediate deductions, DAFs offer a higher tax deduction limit (60% of a donor's gross income), surpassing other avenues like private foundations. These favorable tax benefits serve as significant incentives, particularly for affluent individuals considering DAFs.
Simplicity in Comparison: DAFs vs. Private Foundations
While long-term charitable giving through DAFs is a compelling option, donors often weigh it against the alternative of establishing a private foundation. Although private foundations allow donors to support specific causes, the process involves substantial responsibilities and complexities.
Starting a foundation necessitates registration as a trust or nonprofit corporation, the formation of a board of directors, and active management of grant distributions. Foundations are subject to a multitude of legal requirements and regulations.
On the contrary, initiating and maintaining a DAF is notably simpler. Donors only need to choose a DAF provider, complete an application, and contribute to the fund. The responsibility of fund management lies with the DAF provider, as donors merely "advise" on grant recommendations, avoiding the intricate tasks associated with foundation management.
Making DAFs Accessible for Nonprofits
Navigating the world of DAFs need not be daunting for nonprofits. With strategic tools and marketing efforts, organizations can seamlessly tap into this fundraising opportunity to secure substantial donations and engage high-income donors.
To facilitate DAF donations, nonprofits can employ various strategies, including:
- Dedicated Website Page: Craft a web page detailing DAFs, their benefits, and steps for donors to request DAF grants for your nonprofit. Link this page on your website and in marketing materials.
- DAF Widget Integration: Embed a DAF widget directly into your donation page, enabling donors to swiftly access information on requesting a DAF grant by entering their provider's name.
- Informative Marketing Materials: Generate social media content, blog posts, or direct mail appeals that highlight the option of donating via DAF grants, elucidating the process for potential donors.
- Multi-Channel Promotion: Utilize diverse marketing channels to spread awareness about your acceptance of DAF grants. Conduct targeted email outreach to donors expressing potential interest in DAF donations.
By adopting these measures, nonprofits can demonstrate their enthusiasm for donors' commitment to charitable giving and streamline the donation process. Accepting DAF grants becomes a seamless aspect of engaging donors in diverse and meaningful ways.
Now equipped with insights into the motivations of both donors and organizations regarding DAFs, nonprofits can confidently embrace this avenue to broaden their fundraising horizons. With the right approach, your nonprofit can swiftly integrate DAFs into its strategy and harness the benefits of this evolving philanthropic landscape.