For our July blog post, we wanted to tackle the topic of Donor Advised Funds and talk about the open proposal to change the way these funds function.
What is a DAF?
The short answer is a Donor Advised Fund (DAF) is a money-earning holding account focused on charitable contributions that allow a donor to receive an immediate tax benefit, without immediately gifting the money to charity. A donor can contribute assets (e.g., cash, cryptocurrency, liquid assets, etc.) to the account and receive the immediate tax benefit, but the assets remain in the account and are distributed to charitable organizations over time. The donor loses direct ownership of the funds but can advise – over time – where the funds should be distributed. The over time portion is important, because these funds are allowed to grow tax-free within the DAF account. While the DAF can continue to grow, the donor only receives the tax benefits on the amount initially contributed during the tax year the assets were added to the fund.
For example…
Let’s say a donor was given stock in their company and they are retiring this year. They paid $0 for the stock, which is now worth $25,000. To avoid a capital gains tax of $3,750 they decide to put the stock into the DAF, which nets them a tax deduction of $6,000.[1] These stocks go into the DAF and they can decide when and where they would like to charitably transfer the stock in the future. Conversely, if they sold the stock and gave the proceeds to charity, they would end up being taxed the capital gains ($3,750), the non-profit would only receive $21,250, thus the donor tax deduction would be lowered to $5,100, which nets them a personal tax benefit of $1,350.
TL;DR …
(1) $25,000 → keep → pay $3,750 capital gains tax
(2) $25,000 → DAF → receive $6,000 tax deduction
(3) $25,000 → sell → pay $3,750 capital gains tax → donate remainder ($21,250) to charity of choice → receive $5,100 deduction (net tax benefit: $1,350)
DAFs also allow donors to make grants anonymously, though many continue to tie their name to the grants. The important part is that they can contribute to their DAF, receive an immediate tax benefit, and their contribution is set aside solely for charitable uses that they can select for an indefinite period of time.
DAF grantmaking
According to the National Philanthropic Trust’s 2020 Donor-Advised Fund Report, for the tenth consecutive year, DAFs grew in every key metric. Grants from DAFs accounted for over $25 billion in 2019, which was a 93% increase from 2015. From 2018 to 2019 the assets held in DAFs increased 16.2% to $141.95 billion. That is nearly 142 billion philanthropic dollars not in the hands of charitable organizations. The average size of a DAF account has continued to decrease since 2016, currently averaging around $162,556. The decrease in average size has been attributed, in part, to DAF accounts gaining in popularity, the emergence of employer-sponsored DAF accounts, and many organizations requiring no contribution minimums. This allows donors to open and maintain accounts at a smaller level.
The report projects that “grantmaking from DAFs to charitable organizations will continue to grow at an extremely high rate in the next Donor-Advised Fund Report.” It points to the global pandemic response as well as racial justice and other urgent issues from 2020 as a driving force for DAF grantmaking.
What is changing?
Currently nothing, but there is an active proposal from the Initiative to Accelerate Charitable Giving (IACG) which is targeting that over time portion we discussed. The proposal is hoping to free up the money currently sitting in DAFs and close the loophole that allows them to be, in essence, mini endowments. To free up these dollars, the proposal suggests creating two different types of DAF accounts with different tax benefits – sort of like an IRA vs. Roth-IRA account structure focusing on tax benefits rather than penalties.
1. 15-year DAF: Retains the current tax benefit structure, but the funds must be distributed within 15 years.
2. Aligned Benefit Rule: Allows the funds to be distributed over a longer time frame, but the donor only receives the income tax deduction once the funds have been distributed.
Why should you care?
Donors who gift via their DAF have a belief in philanthropy and are likely savvy philanthropists. After all, they set aside a specific amount of money to be used toward philanthropy, and there is no tax advantage to be gained or lost by keeping money in the DAF. So – what kind of difference can they make at your organization by investing in your cause? Almost $142 billion is currently invested in DAFs – imagine the impact a portion of that could make if invested at your organization.
Looking forward
Whether or not the IACG proposal is accepted as law, it appears that DAF giving will continue to remain a popular choice among donors. If you do not currently have a plan in place for DAF donors, now is the time to set up and assess fundraising strategies as they pertain to DAF donors.
Keep in mind, if you send a thank you note, it should go to the donor who advised on the grant rather than the institution holding the grant money. So, if a gift came from Fidelity Charitable from Jane Doe’s DAF, you want the thank you note to go to Jane Doe – but you must make sure to remove any reference to tax deduction. The donor is not eligible to receive another tax deduction for the grant. However, the note is a great chance to get them involved at your organization. After all, they have already told you they are interested in philanthropy (i.e., they have a DAF) and a cause (i.e., where they donated.) Now it is up to you to engage them.
New options are becoming available to make DAF granting easier for donors. For instance, DAF Direct is a free online application you can add to your giving page that helps donors initiate a grant from their DAF to your online fundraising campaign. Additionally, many organizations target communications specifically to DAF donors, knowing there is likely much more in the account that what has been granted. All of this is dependent on making sure you have a good system in place for tracking your DAF grants and the donors who initiated them.
How are you tracking DAF grants and donors in your database? Do you steward DAF gifts differently? Do you want to learn more from your peers? Drop us a line on social media or email us at ApraCarolinas@gmail.com to share your process or let us know if you would like to learn more.
