Understanding Donor Advised Funds
One of the fastest growing vehicles used by major donors today is the Donor Advised Fund or DAF.
Why do Donor Advised Funds Matter?
The number of DAF’s has surged to 300,000 in the past eight years, with Fidelity’s being the largest. There are now twice as many donor advised funds as private foundations, and in 2016, over $15 billion moved from DAF’s to charities just like yours!
(I realized this practice has filtered from what Forbes calls a “habit of the super rich” into the mainstream, when a friend casually mentioned over dinner that his family funds their church’s international mission program through their donor advised fund.)
What Exactly Is a DAF?
The National Philanthropic Trust describes a DAF as “a giving vehicle that allows donors to make a charitable contribution, receive an immediate tax deduction and recommend grants from the fund over time.”
How a DAF Works
Donors gift their tax-deductible donation to their personal DAF first. Then, they direct the financial institution to transfer money to charities of their choice. In essence, they “bundle” or “bunch” their philanthropy before it reaches your organization.
Example from The Ubiquitous Mrs. Smith
Let’s say that Mrs. Smith’s stock investments have soared. If she sells and then gives your organization a gift, she’ll incur stiff capital gains taxes. Instead, she opens a Donor Advised Fund, transfers the appreciated stock into her DAF, receives an immediate tax deduction, and, over the next few years, directs a gift to your organization.
Remember, Mr. Smith cannot deduct from her taxes the donation she sends to you through her donor advised fund. She already received a tax deduction in the year she transferred the stock to her DAF, and she received a tax receipt letter from that charitable fund.
Prepare to Receive a Donor Advised Funds
Your donor must complete a “grant request form” in order to move money from his DAF to your organization. Often, they’ll send you the form, or call you for information.
1. Know your legal name. This may seem matter-of-fact, but I’ve never worked for an organization which used its long, complex legal name on a daily basis. Many times, I’ve pulled out the paperwork to make sure I got this exactly right.
2. Speaking of paperwork, you’ll need a copy of your IRS charitable status – better known as your 501c(3) letter. All DAF forms request your EIN. I used to keep an “essential documents” file in my desk drawer because donors expected me to be ready.
3. Understand restrictions on associated benefits. For example, Schwab’s charitable form clearly states, “Neither I nor any individual will receive any goods, services or other private benefit from the charitable organization as a result of this grant.”
Be Ready, but Don’t Recommend
I suggest that we as fundraisers readily respond, but that we don’t recommend. Fortunately, not once as a fundraiser or consultant has a donor asked me for financial or accounting advice. (I am not legally or professionally suited.)
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