Succeed with Donor-Advised Funds: 7 Creative Strategies

While donor-advised funds (DAFs) have been around since the 1930s, their popularity with donors has increased significantly in recent years for two reasons.

First, national investment firms like Fidelity, Schwab, and Vanguard joined the game, making DAFs more available and accessible to the average donor. Many community foundations have donor-advised fund thresholds of $5,000 or more that are out of reach for most donors. But today, donors can open a DAF at Fidelity, for example, with no minimum contribution; and they can even make grants through an app on their phone.

The second reason for the increasing donor interest in DAFs is the Tax Cuts and Jobs Act of 2017, which almost doubled the standard deduction for individual filers, joint returns, and heads of household. As a result, many donors who previously itemized their charitable deductions on Schedule A now get a better tax break using the standard deduction; but in taking the standard deduction, they lost some of the incentives for charitable contributions that are available to those who itemize. The donor-advised fund, however, provides an alternative tax incentive by allowing donors to use pre-tax dollars for their contributions.

Proponents of donor-advised funds claim that their increasing popularity benefits philanthropy. But critics take issue with some of the problematic aspects of DAFs:

• With no payout requirements, funds can accumulate in DAFs and not reach charities
• DAFs can act as a firewall between the nonprofit and donor, providing anonymity for the donor and impeding stewardship
• For-profit companies own the largest DAFs, where management fees incentivize hoarding
• When money does leave a donor-advised fund it often moves to another DAF
• A market downturn potentially means less money ultimately reaches the charity than the amount originally donated
• DAFs increase the potential for “shadow giving” where “dark money” flows anonymously to organizations

Efforts to address some of these issues are currently underway — most notably the Accelerating Charitable Efforts Act (the "ACE Act") introduced this past June by Senators Angus King (I-ME) and Charles Grassley (R-IA).

Regardless of whether reform efforts succeed, the DAF genie is out of the bottle. More than $140 billion resided in DAF accounts in 2019, up from $45 billion just seven years earlier, according to the most recent industry estimates. The donor-advised fund is simply the latest giving vehicle becoming popular with donors.

Therefore, your job as a fundraiser is to meet your donors where they are, accept the donor-advised fund as a valid giving vehicle, and ensure that your fundraising strategy accommodates donors who choose to make contributions via a DAF.

Here are 7 creative strategies to help your nonprofit adapt to the growing popularity of donor-advised funds.

1. Let Donors Know You Accept Grants from DAFs

Any 501(c)(3) nonprofit can receive grants from a donor-advised fund, so it may seem unnecessary to advertise that fact to donors. But just because a donor has a DAF doesn’t mean they understand it as well as you do. Maybe it was recommended by their financial advisor, or set up by a spouse or parent. Regardless, rule number one in fundraising still applies: You won’t get the donation if you don’t ask.

To start, make sure you add donor-advised funds to the “Ways to Give” sections of your website and other promotional materials. Include it as part of your outreach to your donors. Send a short “Did you know?” email to donors in advance of tax season, “reminding” them of the tax benefits of donating to your nonprofit from their DAF. And of course, include DAFs in your conversations with all major donors, especially when discussing planned giving.

2. Educate Donors about the Advantages of DAFs

Educating donors doesn’t stop with letting them know you accept DAF grants. You can also be proactive and educate them about how donor-advised funds might benefit them.

In addition to the tax benefits, a donor-advised fund can streamline giving for a donor. For example, some employers allow payroll deductions to donor-advised funds. Another advantage to the donor is the flexibility of DAFs to accept more complex gifts than cash. Contributions like securities, cryptocurrencies, private equity, and even privately held C-corp and S-corp shares can be made as-is without the need to convert them to cash first. Donor-advised funds can also simplify recordkeeping for the donor; the DAF management company will provide a simple statement of the grants from their fund instead of the donor having to track every contribution separately.

By taking the lead and teaching donors why DAFs are good for them, you become a trusted advisor in their eyes. They will associate you with their donor-advised fund so that your nonprofit is top-of-mind when it comes time to contribute and allocate those contributions.

3. Keep Practicing Good Fundraising & Stewardship

This tip isn’t sexy, but it’s one of the most important points in this article. A donor-advised fund is not a person. You can’t enroll a DAF in your mission, and you can’t steward a DAF. A donor-advised fund is a giving vehicle that a human being uses to support your organization. Therefore, your best strategy to “get DAF money” is to build lasting, mutually beneficial relationships with your best donors.

A strong relationship with a donor eliminates many of the perceived problems of DAFs. For example, an engaged donor won’t hoard money in their DAF; they will continue to make regular contributions to your nonprofit, whether it’s from their DAF or their checking account. In addition, a donor that feels respected and valued won’t need to hide their identity behind their DAF; they will trust you to steward that relationship with care.

The ways that donors give may change, but tried-and-true fundraising strategies based on human relationships will always serve you well.

4. Have a System to Track DAF Grants to the Donors Who Make Them

Even with the best donors, the DAF grant process can cause some challenges if you aren’t prepared. Donor-advised funds are managed by companies that have a check payment cycle. Their accounting department is not thinking of you and your need to match grants with the donors who make them.

That’s why you need a system to make sure that those donors who are soft-credited are actually found when you do outreach and recognition. Your staff needs to know what to look for and what questions to ask if the information you need is not supplied with the check.

It’s possible that you may receive a first-time donation as a DAF grant. In this case, it’s especially important to match that gift accurately to the donor so that you can begin the process of building a good personal relationship with them. First impressions matter. A new donor who doesn’t get acknowledged in a timely manner, or gets thanked for the wrong gift amount, might not be inclined to give again.

5. Use DAFs as an Opportunity to Talk about Planned Giving

For donors who use donor-advised funds, one of the important decisions they must make concerns what happens to their fund after they’re gone. This can be an opportunity for fundraisers who might be uncomfortable having a planned giving conversation “out of the blue.” DAFs can provide a context for starting that conversation. And if your donor’s children are the beneficiaries of their fund, you could also ask about the donor’s succession plan.

If you have donors using DAFs, make sure your planned gift officer knows their names. By starting those conversations early and involving their family members when appropriate, you can help lay the groundwork for a family tradition of supporting your nonprofit that lasts generations.

6. Simulate a Donor-Advised Fund for Major Gift Donors

Technically, this next tip doesn’t involve an actual donor-advised fund, but it’s something your nonprofit can learn from DAFs to help you better accommodate certain major donors.

As we’ve established, one of the advantages of a donor-advised fund is the ability to accept complex gifts. In addition, some major donors like DAFs because they allow them to retain their financial advisor. Your nonprofit can provide that same convenience to your donors without the need for a donor-advised fund.

Let’s say a major donor has an investment account with ABC Financial Services. Your nonprofit can set up an account with that same investment firm so that your donor can transfer contributions directly into that account. The donor likes this situation because it offers them a higher level of convenience. The investment firm really likes this situation because they can keep those assets under management and continue to receive their fees, especially if you keep that money there for your endowment.

This arrangement also opens the door to have a conversation with the financial advisor about the work you do in the community. If you can engage her in your mission, she might talk about your nonprofit with other clients. She gets to help advance your cause while keeping their funds in house. Which leads us to our final tip....

7. Engage Financial Advisors as Partners in Your Mission

Despite the critics’ concerns about for-profit entities running donor-advised funds, financial advisors are people who care about causes just like anyone else. They can become allies in advancing your nonprofit’s mission and support your organization if you engage them proactively.

For example, if you have a good-sized Fidelity, Schwab, or Vanguard office in your community, consider putting someone from those companies on your board. Another idea is to educate your local financial advisors about charitable giving. Continuing education is a requirement for professional advisors. If you are able, host a seminar that teaches them about charitable giving and satisfies their continuing education credits. At a minimum, treat financial advisors as prospects; introduce them to your mission and why your organization is important to their community.

By educating and engaging your local financial advisers, you not only help make them better advisors to their clients, but you might even find an ally who will encourage their clients to make grants to your nonprofit.

Final Words

Whatever you may think about the risks of DAFs in their current form, donor-advised funds are very popular with donors, especially major gift donors. You have a responsibility to your nonprofit and the people you serve to work well with all of the available giving vehicles donors use to support your mission. Honoring the important role your donors play in advancing your mission means respecting their choices when it comes to giving, including how they choose to give. With a little effort, you can adapt your fundraising strategy to make donor-advised funds work for your nonprofit.

Disclaimer: The content in this article is not meant to constitute financial or tax advice. If you have questions about donor-advised funds, speak to a tax professional for more information.