National Philanthropic Trust (NPT) data from nearly 1,000 charities shows that donor-advised funds (DAFs) grew in all key areas, including the number of individual funds and total grant dollars awarded to charitable organizations, according to a 2019 report. Although they are popular, DAFs are not without critics. Some do not like the fact that many DAFs are allowed to stockpile funds indefinitely without making distributions. After all, most not-for-profit organizations need funds to help people now, during the COVID-19 pandemic and related recession. So, before your charity applies for DAF funds, it is a good idea to learn about potential caveats.

Donors get an attractive deduction

DAFs enable donors to contribute assets, including cash, securities and real estate, to an account controlled by a “sponsoring organization.” They receive an immediate tax deduction of up to 60% of their adjusted gross income in exchange for their irrevocable gifts.

There are roughly 1,000 sponsoring DAF organizations in the nation. Most fall into one of two categories, community foundations and charitable wings of investment-service companies, such as Vanguard Charitable and Schwab Charitable. A smaller group of sponsors focus on single issues or charitable grantees. All types generally invest and manage DAF assets, screen charities that will receive grants and make distributions. But policies vary widely by sponsor about issues such as the types of assets accepted, how funds are invested and how often donors must request distributions.

Related Read: Deduct Now, Donate Later: Donor-Advised Funds Offer Significant Benefits

Sponsors play a key role

Donors make grant recommendations and although sponsoring organizations are not legally required to honor them, they almost always do. But it is worth noting that sponsors play a major role in which organizations ultimately receive grants. Sponsors often suggest charities to donors that match their charitable criteria.

Sponsors may step in when donors fail to request distributions. For example, if Fidelity Charitable donors do not name grantees after two years, Fidelity names charities for them. But not all sponsoring organizations have such policies. Some critics contend that both donors and sponsoring organizations have incentives to hold onto DAF money as long as possible.

Communication is crucial

To encourage sponsoring organizations to direct gifts to your charity, prioritize these relationships. Let community foundations know that you welcome such gifts and are equipped to handle them. As your mission and programming evolve, keep sponsors up to date so they can accurately match your organization with donor interests.

Because some DAFs are anonymous, building relationships with potential donors can be a little harder. But if you have already received a DAF grant, you likely found the name of the fund in the gift letter. Be sure to send the donor a thank-you note (via the sponsoring organization, if necessary) and indicate your interest in receiving future gifts or being named beneficiary of a trust. Also put prominent notices on your website, including a link to DAF Direct on social media pages and in emails to donors. And think about featuring DAF supporters in your publications.

Related Read: Donor-Advised Funds Offer a Low-Cost Alternative to Private Foundations

There are dos and don’ts

The IRS has not issued much guidance about DAFs, so tread carefully when accepting these gifts. For example, there is some uncertainty about whether DAF funds can be used to fulfill pledges. The IRS has stated that DAF funds can be used for this purpose. But donors cannot take additional tax deductions for them and sponsoring organizations are not allowed to tell grantees that a gift is being issued to fulfill a pledge.

Also, not-for-profit organizations should not accept DAF funds if the donor will receive something of value in return, such as dinner or entertainment. For this reason, do not let donors use DAF gifts to buy event tickets.

Here to stay

The growth trend in DAFs indicates that this source of funding is likely to increase and your charity would be wise to access it. Sources such as the NPT report can help you.

For more information, contact Caitlin Gibbs at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Not-For-Profit Group.