Kimberly Hays de Muga
Donor-Advised Funds: Catching Up
With overall giving growing by nearly 5 percent in 2013 according to Blackbaud, and a 4 percent increase among The Chronicle of Philanthropy’s fifty most generous donors, charitable donations seem to be back on track.
Donor-advised funds (DAFs ) are the fastest growing giving segment. Donors are increasingly favoring them because contributors to DAFs receive an immediate tax deduction on the full amount given, money deposited into them can grow tax-free before being disbursed to nonprofit groups, and there is less paperwork and administrative hassle than with other forms of gift planning.
Unfortunately, DAFs can mean more legwork and less clarity for fundraisers and grant seekers. Thus, it is not surprising that DAFs can be the least understood by fundraisers.
How It All Began
Starting in the 1930s, donors to community foundations and special interest/religious organizations (such as the Jewish Federation) deposited money into giving accounts, took their tax deduction up front, and then made grants from that account when they wished. Then if requested, advisors at these institutions would offer suggestions on how to direct the gifts.
However, the real growth of DAFs started in the 1990s when Fidelity began offering them. Then other commercial financial firms such as Vanguard, Schwab, and Goldman Sachs followed suit. Their fund managers are charged with sending the donors’ designated contributions to their chosen charities while generating returns on the funds’ assets.
Fidelity still leads the pack. The Boston Globe reported that Fidelity granted $2.1 billion on behalf of its DAFs in 2013, a 29 percent increase over the previous year. Fidelity ranked as the second-largest charity in The Chronicle of Philanthropy’s most recent Philanthropy 400 list .
Point and Counterpoint
Proponents of DAFs say that the ease of creating a fund means that more people will be encouraged to give. Community foundation and issue- or religious-driven funds maintain that they encourage considered giving. The National Christian Foundation, for example, describes itself as the largest Christian grant-making foundation in the world, having received $6.4 billion in contributions since 1982 and having made more than $4.3 billion in grants. Another example is the National Philanthropic Trust. One of the largest DAF organizations in the United States, this trust received $13.7 billion in contributions last year and granted $8.6 billion.
Skeptics point out that each year foundations by law must disburse at least 5 percent of their earnings and file a 990, while DAFs have no such mandatory regulations or required reporting. In fact, under current law, DAFs can be kept in perpetuity and are not legally bound to give grants to nonprofits or other organizations.
Ray D. Madoff, a professor at Boston College Law School, argues that donors and fund managers gain the immediate benefits of DAFs through tax incentives and fees for fund administration while charities are left waiting for funds that may never be granted. In a recent op-ed in the Chronicle of Philanthropy, Mr. Madoff wrote that private foundations can meet their 5 percent payout rule by transferring money to DAFs rather than giving to real charities.
What’s a Fundraiser to Do?
Successfully researching and cultivating DAFs requires a mix of major gift and grant seeking skills. Here are key methods to consider:
- Review any current DAF donors’ checks and transmittal letters - While many DAFs are set up anonymously for those individuals and families who want to remain very private about their philanthropic activities, other donors prefer to provide their names and addresses to their chosen charities when the DAF makes a gift on their behalf. Be sure to compare any names of funds to donors already in your database. Individual donors who gave personally may switch to a DAF for tax purposes. If you cannot find a match that way, and the donor does not provide a contact address in the gift letter, do not waste your time calling the company or organization managing the fund for more information. It is their job to follow their clients’ wishes to the letter. However, if you receive gifts through your local community foundation, reach out to the program officer who signed the gift letter to build a relationship. Most commercial firms ask that grantees not send a letter to the fund manager. Carefully review the entire gift letter to be sure.
- Identify Community and Cause-Centered Foundations – Find out who your nearest community foundations are by visiting http://www.cof.org. Remember that most community foundations have a mix of competitive grants and DAFs so reach out to local and regional community foundations’ program officers. Get on their email lists. Offer to host meetings and/or donor volunteer opportunities. When appropriate, apply for grant funds through their competitive grant processes. This will help their foundation officers get to know your organization’s background and needs – key information that they can pass on to DAF contributors.
- Check-Out DAF Websites – Visit the websites of DAFs, especially the larger commercial ones and cause-oriented funds. Look for their latest reports and other key information. Fidelity and the National Philanthropic Trust issue annual reports and other publications throughout the year with information on holdings.
- Do a Guidestar 990 Search – The IRS Form 990 filed by DAF owners or parent institutions/foundations are not required to list individual fund names. But these forms could give you a good idea about a fund’s aggregate assets and their level of giving. This can be especially helpful when seeking information about smaller, lesser-known funds.
- Make it easy for DAF Contributors to Connect with Your Organization – Your organization’s website, print publications, and social media networks are invaluable tools. Feature articles, posts, and other information about how donor advised funds could be given to your organization through each of your outreach efforts. Make sure your tax identification number is easy to locate because fund administrators must be able confirm your status as a non-profit entity.
- Determine How Often Your Targeted DAF Donors Want to Hear from You – After you have established which DAFs you want to cultivate, determine how frequently your potential DAF donors want to hear from you.