How Donor-Advised Funds Can Support Your Nonprofit

The nonprofit landscape is always evolving, with exciting trends like AI integration and influencer marketing making headlines. But amidst these innovations, it’s essential not to overlook impactful strategies that have shaped the sector in recent years. One such strategy is the use of donor-advised funds (DAFs)—a powerful tool for securing substantial donations and enhancing your organization’s financial stability.

You might wonder: Are DAFs still relevant today? And despite some negative press, should your organization continue to pursue them? The answer to both is a definitive yes. Here’s why.

What Are Donor-Advised Funds (DAFs)?

Donor-advised funds are specialized charitable giving accounts established by individual donors through a DAF-sponsoring organization, such as a public charity or community foundation like Fidelity Charitable. While the organization manages the funds, the donor acts as an advisor, recommending grants to specific nonprofits or causes.

DAFs offer several key benefits for donors:

• Potential for Growth: Funds set aside in a DAF have the potential to grow over time. For example, a $1,000 contribution today could become a $5,000 donation to your nonprofit in a few years.
• Tax Efficiency: Donors can claim tax deductions on contributions to their DAF, even if those funds aren’t immediately donated to a nonprofit. This encourages ongoing contributions, ultimately leading to larger donations in the future.
• Impact on Multiple Nonprofits: Unlike legacy giving, where a single nonprofit often benefits after a donor’s passing, DAFs allow donors to support multiple organizations throughout their lifetime.

For nonprofits, DAFs represent a significant opportunity to secure ongoing funding from committed, long-term donors.

The State of DAF Giving in 2024

Now that you understand the basics, let’s examine the current landscape of DAFs and what they mean for your organization.

A Growing Industry

The DAF industry is booming. According to the latest report from the National Philanthropic Trust, nearly $230 billion is held in DAF accounts. In 2022 alone, contributions to DAFs and grants from these funds to nonprofits increased by 9%, totaling $52 billion in donations. This continuous growth, with grantmaking doubling in the last five years, highlights the immense potential for nonprofits to tap into these funds.

Focus on Major Donors

In the current economic climate, while the total number of nonprofit donors is decreasing, there’s a noticeable shift toward major giving. According to Double the Donation’s nonprofit trends report, organizations are increasingly focusing on high-capacity donors, who are more important than ever.

These donors are seeking tax-efficient ways to maximize their impact, including stock donations, cryptocurrency, and, of course, DAFs. By prioritizing DAFs and other non-cash giving methods, your nonprofit can better engage and retain these crucial supporters over the long term.

Potential New Regulations

As DAFs continue to grow in popularity, they’re attracting more scrutiny from the media and regulatory bodies. Concerns about transparency and the rate at which DAFs distribute funds to nonprofits have led to increased regulatory attention.

In November 2023, the IRS proposed new DAF regulations aimed at ensuring these funds fulfill their intended purpose—supporting nonprofits. The proposed rules include clarifications on DAF definitions, tax applications, and penalties for misuse, particularly in cases where funds are used for lobbying or personal gain. While these regulations primarily affect DAF-sponsoring organizations, it’s essential for nonprofits to stay informed about these developments.

How to Tap into Donor-Advised Funds as a Nonprofit

Given the enduring relevance of DAFs, how can your nonprofit tap into their potential? Here are some practical steps:

1. Simplify the Giving Process with a DAF Widget: One of the main barriers for DAF holders is the complexity of the giving process. Make it easier for them by adding a DAF widget to your donation page, which streamlines the process and provides clear instructions on how to give.
2. Promote DAF Opportunities to Donors: Educate your donors on how easy it is to request DAF grants for your nonprofit. Use infographics, social media, and dedicated website pages to highlight the benefits of DAF giving. Consider including information on how donors can open a DAF if they don’t already have one.
3. Identify Potential DAF Holders with Prospect Research: Use prospect research to identify high-capacity donors who may already have a DAF or are likely to open one. Personal outreach to these donors can help secure future DAF contributions.
4. Steward DAF Donors to Encourage Future Giving: Once you receive a donation from a DAF, maintain communication with the donor to build and strengthen the relationship. Regular updates, engagement opportunities, and expressions of gratitude can increase the likelihood of future DAF donations.

Remember, many DAF holders need reminders to request grants, so don’t hesitate to follow up with personalized appeals.

Conclusion

Donor-advised funds remain a significant fundraising opportunity for nonprofits, offering a pathway to financial sustainability and growth. By diversifying your revenue sources and cultivating relationships with high-capacity donors, you position your organization for long-term success. Ask for them and make DAF grant and all non cash donations a regular part of your giving culture.

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