There is a lot more that goes into overseeing a charity or non-profit organization than making sure the funds get to the people or places in need.
While that is very important, the individual or group who maintains this type of organization has several responsibilities, such as understanding all there is to know about donor advised funds.
What Are Donor Advised Funds?
A donor advised fund, or DAF, is a philanthropic giving vehicle administered by charitable sponsors.
The charitable sponsor is a 501(c) (3) organization who has legal control over the DAF. They are responsible for operating and maintaining the fund. The sponsors often include community foundations, public charities, and charitable funds associated with a major investment firm.
In simple terms, a donor advised fund is a charitable fund set up by a philanthropist or a frequent donor.
They may have a set amount in mind that they want to donate to one or more smaller charities. The only problem is that the smaller charities cannot handle relatively large donations because they don’t have the means to do so sensibly. So, the donor decides to break their donations into smaller amounts and give the money over time, perhaps over the course of three to five years.
For example, if someone wants to donate $500,000 to a charity, but needs to send in smaller amounts, they may choose to donate $50,000 twice a year for the next five years. So far, it doesn’t sound too complex. That’s until they want a receipt for their donation.
With a donor advised fund, the donor can request a receipt from the charity they are giving to for the full amount they plan to donate over the next five years. Which means while the charity only receives increments of $50k every six months, they would need to provide a receipt stating that they received $500,000 at once.
This is so that they can receive a hefty tax break the next time they file taxes, instead of only getting a small break over time.
How Do Donor Advised Funds Work?
DAFs work when a donor contributes to a fund that is held by a charitable sponsor. In turn, they receive an instant tax break. Over the years, donors may recommend grants from the fund to give to their favorite charities. The charitable sponsor will award the grants to the non-profit organizations recommended by the donors.
In addition to donating cash, donors can also contribute other valuable assets like stocks or real estate. This can provide the donor with an even larger savings on their tax return.
Donor advised funds are often invested into mutual funds or other forms of investments that allow the value to grow over time. This helps to increase the donor’s overall philanthropic impact.
What 10 Things Non-Profit Organizations Should Know About Donor Advised Funds
Donor advised funds can be a good thing for your non-profit organization, but it’s important that you understand the facts about the process before you accept this type of funding.
As with most good things in life, there is also a bad side to them as well. Here are a few details on DAFs that you may not know about.
Gifts Should Be Credited to the Donor and the Charitable Sponsor
Any time a non-profit receives a gift from a DAF, the charitable sponsor is recognized as the official donor. The gift should be recorded on a donor record for that organization.
It should also be “soft credited” to the donor who recommended the grant. In most cases, the owner of the donor assisted fund will be recognized as a grant maker, unless the donor has requested the gift be anonymous.
Charitable Sponsors Have No Idea Who Receives the Grants
If you attempt to send solicitations or other types of mailings to charitable sponsors, it will only be a waste of your resources.
Always keep a record of which organizations you shouldn’t send flyers or requests to by marking their donor records with “Do Not Mail”.
Donors Who Use a Donor Advised Fund for Giving Are Some of the Best Major Gift Candidates
By starting a donor advised fund, a donor will demonstrate their commitment to philanthropy as well as how much they are willing to contribute. The average amount in any donor advised fund is typically around $300,000. Most or all of those funds, plus more throughout the years, will be given to worthwhile organizations over time.
Most Donor Advised Funds Allow the Donor to Recommend Annual Grants
This allows the donor to initiate the grant every year and determine how much they want to give on a yearly basis. By asking the donor to make a recurring grant, your will increase your non-profit’s chances of receiving continued support from this donor.
Grants Dedicated to Donor-Advised Funds Are Unable to be Used as a Pledge
While this may be true, it is possible to ask a donor to commit to recommending a grant to your non-profit on a routine basis.
You Can’t Use Grants from DAFs to Buy Tickets to Events or to Provide Benefits to a Donor
However, that doesn’t mean that you aren’t allowed to provide the donor with a ticket as a thank you gift for them recommending a grant to you. This process has been done many times and is a good way to work around the DAF rules all while making sure that your donor has a great time.
Thank You Gifts Should Be in Pairs
Just like you credit both the charitable sponsor and the donor for their funding, you will want to thank them both in the same manner as well.
While a donor is only soft-credited on record, it’s a good idea to thank those who recommended the grant. You should compose a specific letter of acknowledgement that will recognize the donor.
Donors Have Different Ways of Regarding How They Use Their Donor Advised Funds
There are some donors who use their DAFs to create a philanthropic savings account. Others may use it as an immediate gift conduit and start to recommend grants immediately after they contribute to the cause. There are also some donors who will use their donor advised funds to contribute to several organizations at once while others choose to give to one single charity.
It doesn’t really matter how it is done, as long as everything has been carried out correctly and the cause or charity will receive the funding they need to carry on.
A Donor Advised Fund Can Lead to Larger or More Consistent Donations
Having a DAF can often lead to donors being more consistent with their gifts for organizations due to how easy it is to make grant requests. Not only are these donors ale to make a repeat grant request with very little effort, but they can also recommend having a recurring grant made automatically every year.
A DAF can also have a positive effect on the economy. Donors may be less likely to make extra contributions to a fund when the overall economy is in bad condition. But since most donors are able to maintain a balance for their funds, the theory of making grants from money that you have “already given away” can be more appealing.
Donor Advised Funds Can Make Giving Stocks and Other Assets Easier
When a donor presents appreciated assets as gifts to an organization from their DAF, the non-profit doesn’t have to have a brokerage account, nor do they have to take control of selling the assets or provide the necessary documentation for recognizing the gift.
Donating using a stock or other type of appreciated asset is one of the easiest ways to get a sizeable tax deduction. They can also eliminate the need to pay any type of capital gain tax. Without the use of a DAF, donating appreciated stock to a cause can be a hassle. You have to first find out if the charity has a brokerage account, find out how many shores of stock to give, and send your brokerage firm a request for the transfer of stock shares.
Then you need to check to ensure the shares have been transferred without errors. Once that is finished, you will need to request that the charity provides you with a receipt for tax purposes. Sometimes this can be a struggle for the non-profit organization, especially if they are unfamiliar with receiving stocks as gifts.
Non-Profit Organizations Should Encourage Their Donors to Create a DAF
Along with the many benefits that non-profit organizations can obtain from a DAF, they should also encourage their wealthier and more creative DAF members to provide significant gifts with little or no hassle.
Over time this will benefit the non-profit organization, especially those charities and causes that work to educate their donors on the many easy and tax-efficient ways to support a worthy cause.