Donor-advised funds (DAFs) are flourishing, at a rate not observed before by fund followers. According to a 2018 report from the National Philanthropic Trust, “For the eighth consecutive year, there was growth in all key metrics: the number of individual donor-advised funds, total grant dollars from them, total contributions to them and total charitable assets in them.”
The Trust’s 2018 Donor-Advised Fund Report, which examined 2013 to 2017 fiscal year data from 1,002 charities, says that, as of 2017, there were 463,622 donor-advised funds across the nation. And your organization, if it wants to, may be able to take advantage of the trend.
Sizing up DAFs
The popularity of DAFs isn’t surprising, sparked in part by the 2017 Tax Cuts and Jobs Act. DAFs enable donors to contribute assets, including cash, securities and real estate, to an account controlled by a “sponsoring organization.” Donors receive an immediate tax deduction, which may be limited based on their adjusted gross income and the type of assets they contribute, in exchange for their irrevocable gifts.
Most sponsoring organizations in the nation fall into one of two basic categories: 1) community foundations and 2) independent charities affiliated with investment-service companies, such as Vanguard Charitable and Schwab Charitable. A smaller group of sponsoring organizations focus on single issues or charitable grantees. All types generally:
• Screen charities that will receive grants,
• Invest and manage DAF assets, and
• Make distributions.
Although there are similarities, policies about issues such as the types of assets accepted, how funds are invested and how often donors may recommend distributions vary widely by sponsor.
Gauging sponsors’ roles
Donors make grant recommendations, and, although supporting organizations aren’t legally required to honor them, they almost always do. But it’s worth noting that sponsors play a major role in which organizations ultimately receive grants. Sponsors often suggest charities to donors that match their charitable criteria.
Sponsors also may step in when donors fail to request distributions. For example, if Fidelity Charitable donors don’t start naming grantees after four years, Fidelity names charities for them. After five years of donor inactivity, Fidelity grants the entire DAF balance to nonprofits approved by its trustees. But not all sponsoring organizations have such policies. And some critics contend that sponsoring organizations have too many incentives to hold onto DAF money when they can.
To encourage sponsoring organizations to direct gifts to your charity, prioritize these relationships. Let community foundations know that you welcome such gifts and are equipped to handle them. As your mission and programming evolve, keep your sponsors up to date so they can accurately match your organization with donor interests.
Because some DAFs are anonymous, building relationships with potential donors can be somewhat harder. But if you’ve already received a DAF grant, you’ll likely find the name of the fund in the gift letter. Be sure to send the donor a thank-you note (via the sponsoring organization, if necessary) and indicate your interest in receiving future gifts or being named beneficiary of a trust. Also put prominent notices on your website and social media pages. And think about featuring DAF supporters in your newsletter and annual report.
Following the rules
The IRS hasn’t issued much guidance about DAFs, so tread carefully when accepting these gifts. For example, there’s some uncertainty about whether DAF funds can be used to fulfill pledges. The IRS has stated that DAF funds may be used for this purpose, with no additional tax deduction. However, sponsoring organizations aren’t allowed to tell grantees that a gift is being issued to fulfill a pledge.
Also, nonprofits shouldn’t accept DAF funds if the donor will receive something of value in return, such as dinner or entertainment. For this reason, don’t let donors use DAF gifts to buy event tickets.
All’s not rosy
Proposed California legislation would require regulation by the state attorney general with more disclosure by sponsors of DAFs. A similar bill is in motion in Minnesota. Driving the legislation are claims that DAFs allow donors to plant funds indefinitely without making charitable distributions and without requirements to report the activity of each fund. Such stockpiling poses a challenge for charities that want to put the money to good use.
If your nonprofit is hoping to benefit from the largesse of DAFs, start by learning as much as you can about them. Contact your CPA for advice or NCheng LLP will always be able to help you. Give us a call today.