Four key takeaways from the 2020 donor-advised fund report

By Kristi Howard-Shultz

In the wake of the twin crises of the global COVID-19 pandemic and an economic recession, how nonprofits perceive and interact with donor-advised funds (DAFs) is particularly important.

DAFs have become an important tool for donors to respond to these crises. In fact, the four largest DAF sponsoring organizations, as well as community foundations of all sizes, reported significant increases in grants from DAFs during the first part of the COVID-19 pandemic. The question of how nonprofits, donors, and DAF sponsoring organizations work together has never been more vital.

A new report, Nonprofits and Donor-Advised Funds: Perceptions and Potential Impacts, was published October 7 by the Indiana University Lilly Family School of Philanthropy with funding from Schwab Charitable. The report, which examines nonprofit organizations’ perceptions of and experiences with DAFs during the past three years, is based on a two-part research study conducted by the school that included a national survey of nonprofits and in-depth case study interviews with nonprofit organizations.

No matter your level of personal experience with DAFs or your organization’s current use of DAFs as a giving vehicle, it is essential to understand donors’ and nonprofit organizations’ perceptions of them. Perceptions not only affect how and when DAFs are used, but impact policymakers’ decisions about rules and regulations, thereby influencing the long-term efficacy of DAFs as a philanthropic vehicle.

How donor-advised funds work

DAFs are a type of planned giving, and the process for contributions made through DAFs can be described as a three-stage process. In the first stage, donors make a tax deductible contribution to their personal DAF account held by a sponsoring organization. The second stage of the process is triggered by the donor, who can suggest or advise the sponsoring organization to make grants to other 501(c)(3) public charities recognized by the IRS. Lastly, the nonprofit organization receives the grant as a check from the sponsoring organization.

DAFs provide numerous benefits for donors, particularly those in the middle-upper income bracket, including tax benefits, assistance with liquidating contributions of non-cash assets, low administrative costs and increased administrative support, and the option of anonymity.

Benefits and concerns

In addition to providing numerous benefits to donors, DAF giving also provides a multitude of benefits to the nonprofit organizations. Our study found that many nonprofit organizations believed that larger gift sizes, the ability to reach wealthier donors, and receiving unsolicited gifts were positive aspects of DAF gifts.

In addition, organizations who had received a DAF gift in the past three years were less concerned and more encouraged about DAFs, suggesting that experience with DAFs is associated with more positive perceptions of them.

However, nonprofit organizations have some concerns about DAFs disrupting their relationships with their donors. Lack of direct contact with the donor was perceived to be the biggest issue with DAF gifts. In some cases, organizations could only communicate with the donor through the sponsoring organization. In these cases, opportunities to thank, steward, or re-solicit the donor were seen as missed.

Recommendations 

The results of the report brought forth a number of recommendations for nonprofit organizations:

1. Expand your attempts to solicit gifts from DAFs

   Nonprofit organizations that explicitly solicited for DAF gifts–for example, by talking to donors about DAFs, talking to DAF sponsoring organizations, or including information about giving through a DAF in fundraising communications–received DAF gifts at a higher rate (87 percent) than nonprofits that had not solicited for them.

   However, 42 percent of organizations that did not solicit DAF gifts also received them, suggesting that nonprofits may need to understand and be prepared to accept and process gifts made via DAFs, whether or not they actively solicit such gifts.

   Easy ways to do this include adding a widget on your website to accept gifts from DAFs and including an option for giving through a DAF in your print and online communications.

2. Have a process in place for tracking DAF gifts

   Gifts are typically received in the form of a check from the DAF sponsoring organization. Therefore, in some ways, receiving a gift from a DAF differs little from receiving traditional cash or check donations.

   However, there are nuances to processing gifts from DAFs, such as crediting both the sponsoring organization and the donor that nonprofits need to address to ensure proper tracking, acknowledgement, and reporting of DAF gifts. Many organizations shared that they “soft credit” the donor and “hard credit” the sponsoring organization for the gift. This makes it easier to thank the original donor properly.

   For example, organizations can have template thank you letters for donors who give through DAFs that recognize that they recommended the gift without including tax deductibility information. Providing tax deductibility information in response to a gift from a DAF can confuse donors.

3. Familiarize your staff with the benefits and limitations of gifts from DAFs for both your organization and your donors

   Many nonprofits, particularly smaller organizations, still lack a basic understanding of how DAFs work and what limitations are applied to DAF gifts. In particular, many survey respondents were confused by IRS regulations about whether DAFs can be used to fulfill pledges, purchase memberships, or qualify for other benefits.

   DAFs cannot be used to make a donation in which the donor advisor receives any direct benefit; in other words, DAFs cannot be used to purchase memberships, buy tickets to a fundraiser, gala, or other charitable event, or to pay for any other items (e.g., silent auction items).

   However, in 2017, the IRS clarified that DAFs can be used to fulfill pledges with some restrictions. Making sure your staff understand these limitations and sharing them with donors can help avoid confusion and inspire confidence in the donation process.

4. Connect with sponsoring organizations

   Nonprofits surveyed indicated that they were interested in strengthening and personalizing their relationship with DAF sponsoring organizations. While strengthening this relationship requires work on both the part of the sponsoring organizations and the nonprofits, there are some things that nonprofits can do to begin opening the channels of communication.

   Nonprofits can reach out to their local community foundations that sponsor DAF accounts and can explore resources offered by national sponsoring organizations such as Fidelity Charitable, Schwab Charitable, or Nonprofit Philanthropic Trust.

   From there, you can work to learn what donors typically want from nonprofits that are trying to solicit them through DAFs; what procedure sponsoring organizations use to process a gift after a donation is triggered by a donor; what priorities DAF donors have; and how nonprofits can tell sponsoring organizations, especially national sponsoring organizations, about their needs.

There is still a lot to be learned about how nonprofit organizations perceive and interact with DAFs. However, this research provides a jumping-off point for nonprofit organizations to improve their experiences with DAFs.

As the popularity of DAFs continues to grow, the benefits and challenges nonprofits encounter when working with DAFs will continue to be an important conversation in the philanthropic sector.

How does your organization handle DAF giving? What have you learned?

Kristi Howard Shultz, founder of Kristi Howard-Shultz Consulting, is a nonprofit executive that leads with head and heart. With 20+ years of experience working for nonprofits including nationally-known, time-tested institutions like The Boy Scouts of America, Big Brothers Big Sisters, and Boys & Girls Clubs, she has worked in nearly every capacity of fundraising throughout her career. She has a proven track record of success in board and fund development, campaign management, and capacity building. She has built a strong reputation within the community and is sought after for her industry expertise and thought leadership. Kristi is a natural relationship builder who loves to put plans into action. Championing “firsts” for organizations is her specialty.