Strategies to Leverage Donor Advised Fund Philanthropy

The use of Donor Advised Funds (DAFs) as a means for individuals to make philanthropic gifts continues to rise. So much so, in fact, I felt it imperative to help you understand how they work and how they may be of benefit to your charity.

Why?

1. You don’t want to leave money on the table.
2. You want to best serve your donors.

Today we’re going to take a look at:

• What a DAF is/is not
• Who DAF donors are/common characteristics
• How you can best serve DAF donors
• What you can do to leverage DAF philanthropy

Let’s begin at the beginning.

What is a Donor Advised Fund (DAF)?

It’s more or less a personal charitable savings account established by a donor with the sole purpose of supporting charities. The donor has made the decision to be philanthropic; they haven’t yet decided which charity will be the recipient of their largesse.  The DAF acts as a sort of parking lot.

Why might a donor want a parking lot? Here are some primary reasons:

1. The donor has a windfall.

This might be an unanticipated bonus, a sale of a stake in a family business, an inheritance, or a vesting of stock options.  The donor may not yet know which charitable causes they want to support. They want to make sure they set aside this windfall for philanthropic purposes so it doesn’t get frittered away and so they don’t have to worry about its investment.

2. The donor wants professional investment and advisor services.

Sometimes donors like to set aside a portion of their portfolio for philanthropy. Parking it with a trusted investment advisor is attractive, especially since DAF investments grow tax free. Generally holders of DAFs will offer advice and assistance in vetting charities when asked.

3. The donor needs a tax deduction this year.

When donors give to a DAF they get an immediate upfront tax deduction based on the full fair market value of their gift. And… they may spread out recommended philanthropic distributions over many years. With the passage of the recent Tax Bill in late 2017, some donors have taken to ‘bunching’ donations to consolidate the equivalent of two to three years’ worth of giving into one gift to a DAF. They get a large tax deduction in the year of the gift, can recommend distributions from their DAF to charities over ensuing years, and can stop worrying about deductions (simply taking the standard deduction) in the years they don’t “bunch.”

4. The donor likes the convenience of a centralized philanthropic account. 

Donors can avoid a lot of paperwork by centralizing their giving all in one place.  They get one tax deduction and need not worry about collecting and saving contemporaneous confirmations of their giving from multiple charities. They also needn’t write multiple checks, or visit multiple donation landing pages, to spread their philanthropy. They simply let the holder of the DAF know who they want to give to, and how much, and… voila!

Who are DAF Donors?

DAF donors are not the same as the stereotypical foundation donor who has established a multi-million dollar repository for their philanthropy.  In fact, because they are so easy to establish, have low overhead, and do not have strict distribution and bookkeeping requirements, a broad spectrum of donors participate. Minimums to establish a DAF vary, but an initial donation of at least $5,000 is typical; subsequent donations may be smaller. Funds usually set a minimum gift amount, which may be $50.

Fidelity Charitable Giving reports that 57% of their DAF accounts have balances of less than $25,000, while several thousand have balances of more than $1 million. Fidelity reports these diverse donors exhibit some common characteristics:

1. Strong prioritization of giving.

DAF donors don’t simply give on a whim. They’ve taken the extra step of setting up a formal charitable distribution vehicle.  They’re serious about philanthropy!

2. Desire to make an impact today.

Unlike private foundations, DAFs give their money away relatively quickly: 38% of the dollars donated are gone within a year, 74% is distributed within five years. Most DAFs are set up so they do not last beyond two generations. Many foundations, on the other hand, are set up as perpetuities that give out the bare minimum of 5% of their assets each year.

3. Make larger than average gifts.

Nonprofits report gifts from DAFs tend to be larger than typical contributions. Per Vanguard Charitable, for example, their average DAF gift is nearly $12,000.

4. High rate of volunteerism.

DAF donors often volunteer with grantee organizations through direct service and/or committee work. Through those experiences they hear of needs first-hand from the population they seek to help, and gain perspective on how they can become part of the solution.

5. Long-term thinking.

DAF donors take a thoughtful, organized approach to philanthropy. They’re often interested in collaborating with charitable recipients, and they care about demonstrated effectiveness.

6. Desire to engage family members in giving decisions.

Sometimes the funds will be set up to pass to succeeding generations, so often DAF donors will sit down with family members to discuss how to allocate annual philanthropy. Also, anyone can contribute to an already established DAF; children, for example, may wish to contribute to their parents’ fund in honor of a special anniversary or other occasion.

How are DAF Donors Best Served?

A recent article in the Stanford Social Innovation Review, How Nonprofits Can Help Donor-Advised Fund Philanthropists Listen and Learn, reveals research from Fidelity Charitable showing the choice to establish and use a donor-advised fund may predispose its holder to value feedback.

“DAF giving is rooted solidly in the donors’ desire for greater impact—both in terms of maximizing financial resources for giving, but also for creating a more organized and thoughtful approach to philanthropy, including selecting which nonprofits and projects to fund.” – Stanford Social Innovation Review 

1. Show impact everywhere you can think of.

Remember, DAF donors are serious about philanthropy. You need to show them you’re DAF-worthy. If your website is dull, old, ego-centric and focused on facts, figures and processes, you won’t impress. Share emotional success stories, using photos, videos and testimonials, to specifically demonstrate your beneficial impact. Do this on you website, blog, e-newsletter and via email and social media. Optimize for search so that DAF donors looking to help in your area of expertise will easily find you. DAF donors are in pursuit of what works.

2. Tell what was accomplished.

Always report back to donors on the impact of their gift. DAF gifts come from an investment, and folks need regular reports on how their investments are doing. People give to make a difference; you need to tell them they’re having that difference! You can’t just tell them once either, because good news wears off fast. Research shows that to be meaningful, gratitude must be repeated.

3. Meet with local DAF sponsor organizations.

Let your community foundation know you exist and you’d love to work with them to further their DAF donors’ interests.  Often these advisors are looking for organizations (like yours!) to recommend. You provide an invaluable service by offering on-the-ground insight into root causes of problems and opportunities to make a difference by offering more than band-aide solutions.

Recommendations: Strategies to Attract and Leverage DAF Philanthropy

1. Become a sleuth.

Look at DAF donations to other organizations, either local or within your field of operations, to get a sense of whether any of your supporters may have such a fund. Also look at annual reports from organizations which are traditional repositories of DAFs, such as your local community foundation, United Way or Jewish Community Federation. The biggest repositories of DAFs today are Fidelity Charitable, Schwab Charitable, the Silicon Valley Community Foundation, and Vanguard Charitable.

2. Look for hints as to donor interests.

Pay attention to the types of causes your donors are supporting with their DAFs and consider how you might tailor a philanthropic approach to them based on these interests.  For example, if you’re a comprehensive human services program, and you notice your donor has supported a homeless shelter in your community through their DAF, meet with them to talk about the services your organization provides to address the problem of homelessness. Often donors aren’t aware of the full depth and breadth of what you do.

3. Ask your donors if they have a DAF.

It can’t hurt to ask folks if they have a Fund, and if they’d like to make a distribution to you from this Fund. In Major Donor Fundraising: What to Know about the New Tax Law I wrote that some of your donors may have decided to “bunch” donations in one year in order to make the new tax law work in their favor when it comes to taking tax deductions. So… now they’ve got a DAF filled with money just waiting to be distributed! When you approach them for a gift this year, they may just have forgotten this little ‘burning pocket.’ It’s a painless way for them to give, and you may end up with a larger gift than you’d otherwise have received — just because you gave them a reminder!

4. Follow clues.

When you receive a gift recommended from a DAF try to ascertain the donor’s identity so you can steward them appropriately. Some DAF grants may not include the donor’s full name and contact information, but Vanguard reports only 5% of their donors choose to remain anonymous. Sometimes simply examining the accompanying paperwork that comes with the check will reveal the answer (e.g. “Made from the Jen Generosity Fund” or “Recommended from the John Doe Memorial Fund.”) If Jen Generosity is your donor, or if Jane Doe’s kids sit on your board, you’ll know who your donor is!

5. Promote the fact you accept DAF gifts.

Donors know what you tell them. People have a funny way of making assumptions. If you don’t let them know you accept gifts from DAFS or, for that matter, gifts from IRAS or bequests from wills or trusts, folks just won’t think of you when it comes to making their philanthropic distributions.  So include this information prominently on your website and in your donor communications.

6. Provide comprehensive, up-to-date information to Guidestar-Candid.

Many DAF sponsors share this nonprofit profile information with their donors. If they don’t share it, they use it themselves to help their clients make informed, strategic decisions. For example, as they research charities to support, Vanguard Charitable advisors make more than 15,000 searches each month via this National Nonprofit Directory.

7. Steward DAF donors appropriately.

DAF donors have already received a tax deduction for their giving, so don’t confuse them (or the IRS) by intimating they can double up on this.

1. Do not thank donors for their “tax-deductible gift.” They already took the tax deduction when they gave to their DAF. A good way to handle this is simply to say “Thank you for your $250 gift made from your Jen Generosity Donor Advised Fund.” This gives a heads up to their accountant not to double count this when they prepare your donor’s tax return.
    
2. Do not ask the DAF sponsor to let you know this gift fulfills the donor’s pledge. This used to be a complete no-no, and you had to be careful not to even mention to your donor when you thanked them that this gift fulfilled their pledge. The IRS has eased up on this, but DAF sponsors are still not allowed to put this in writing.
    
3. Do not tell the donor they will receive anything of value. For example, if they are using this gift to buy a Gala ticket, they’re required to subtract the fair market value of what they’ll receive for purposes of tax deductibility. Since they already took a 100% tax deduction for this money, they can’t get anything of value back. To keep it kosher, you’ll need to tell them they owe you the amount it cost you for the meal and entertainment.
    
4. Do thank donors for their gift. Just because the check came from their DAF, and not from the donor directly, is no reason for you to ignore the fact that saying thank you is just about the most important thing you can ever do! It lets the donor know you received their gift, it shows how appreciative you are, and it gives you an opportunity to reassure them they’re making the impact they intended to make.
    
5. Also thank the DAF sponsor organization. Remember, the folks running these funds are people too. If you build a positive relationship with them, they just may recommend you to other donors who are looking to enact the values your organization enacts.

8. Prioritize proactive engagement with DAF donors.

It makes common sense to consider DAF donors as a special segment for donor cultivation. Don’t forget DAF donors are more serious about philanthropy, and make larger gifts, than your average bear. So think about how you might further engage these folks and make them feel like valued members of your community.

1. Ask DAF donors to participate in direct service volunteering.  This helps donors see your mission come to life. And since we know many DAF donors like to involve family members in philanthropy, why not include kids, grandkids, and grandparents and tailor volunteer opportunities accordingly. I used to bring families with older kids to package beans and rice when I worked at a food bank; I invited young kids to decorate gift cards to include in care packages delivered to seniors when I worked at a social services agency. Plant seeds that will grow and blossom.
    
2. Ask DAF donors to join It’s a great testing ground and pathway to board involvement. It enables them to learn a lot more about your work and impact. And it also connects donors to multiple folks who are passionate about your organization, serving as powerful testimonial to your credibility and creating pleasurable opportunities for networking and socialization among people with shared values.
    
3. Consider which DAF donors might be prospects for upgraded and/or major gifts. You may want to include some of these supporters in your preliminary major gift donor portfolios; then go about the process of qualifying them to ascertain whether they’d be open to building a deeper relationship with you. If so, that’s when you’ll put in place a cultivation plan tailored just to them!

Whatever you do, don’t turn a blind eye to DAF support. Not only are there more and more of them, but DAF grants increased nearly 20% from 2016 to 2017 (per the 2018 national Philanthropic Trust DAF Report), a faster rate of growth than almost every year prior.  Make it a priority this year to learn more about this subject, be on the lookout for DAF donors, and set up a plan to cultivate and steward these special supporters.  You’ll be glad you did!