Landmines and Goldmines: Why You Need to Understand Donor-Advised Funds
Adapted from a presentation by Clinton Travis, Director, Planned Giving, Nationwide Children’s Hospital Foundation and Adam Miller, Assistant Vice President, CCS Fundraising, at the 2017 AHP Annual International Conference in New Orleans
Which U.S. non-profit received the greatest amount of public donations in 2016? Not the United Way, Feeding America or Catholic Charities USA, although those organizations all made the top five. Instead, Fidelity Charitable, a donor-advised fund, topped the chart. Another, Schwab Charitable, checked in at fourth place.
This illustrates the growing popularity of donor-advised funds (DAFs) as a vehicle for private giving. The number of donor-advised funds has grown significantly in recent years, from about 180,000 in 2010 to 270,000 in 2015, according to The Economist.
Donor-advised funds are charitable investment accounts managed by a third party like Fidelity or Schwab. Donors make tax-deductible contributions to the fund, which accrues interest over time. When the donor decides to support a charity, they make a recommendation to the fund advisor. The fund advisor then awards a grant from the fund to the designated nonprofit organization, a process similar to a private foundation’s grantmaking.
However, unlike private foundations, donors can choose to stay anonymous, aren’t required to make annual minimum distributions or file annual reports and can let the charitable fund handle administrative tasks rather than hiring foundation staff.
Donor-advised funds can be a goldmine to hospital foundations, as long as they avoid a few specific landmines. Here are four key things to know about donor-advised funds.
1. Understand the growing role of donor-advised funds.
Goldmine: Potential source of unrestricted support
The total charitable assets held in DAFs has more than doubled, from $33.6 billion in 2010 to $78.6 billion in 2015. Unlike private foundations, DAFs have no annual minimum distribution requirement. Despite this, DAFs pay out an average of 22 percent each year, compared to the 10 percent average of private foundations.
About 10 percent of grants from donor-advised funds are directed to health care organizations. Of that amount, 48 percent is unrestricted, making DAF grants a potentially significant source of operational support for health care foundations.
2. Make sure your staff is aware of a donor-advised fund’s significance.
Goldmine: Great potential for major or legacy gifts
As donor-advised funds become more common, each department within your organization has a role to play. Researching and developing a list of your donors who have a DAF benefits your entire organization.
Prospect researchers should recognize donor-advised funds as an indicator of wealth. Fidelity Charitable reports that 94 percent of their donor-advised funds make grants to the same charity more than once. While those $50 or $100 checks may fly under the radar, checks that come from a DAF could signal greater capacity.
Planned giving officers should consider fundholders as premium legacy giving prospects. Forty percent of Fidelity Charitable fundholders have a bequest or other charitable legacy vehicle — more than twice the number of affluent donors nationally.
3. Know both of your donors.
Landmine: Not stewarding the fund advisor
A grant from a donor-advised fund technically comes from the fund, not from the person who made the contribution to the fund. While the fundholder typically decides which organizations receive grants from their DAF, don’t overlook the fund advisor’s role in the process.
Fundholders often look to their advisors to have the pulse of the charitable sector in their community and to know which non-profits will use the grants wisely. As such, advisors can have a significant influence on the donor’s grant recommendations. Be sure to keep advisors up to date on your organization’s needs and the impact philanthropic gifts can make, both before and after the grant.
4. Be aware of the legal differences of gifts from donor-advised funds.
Landmine: Treating a DAF contribution the same as a standard gift from a tax perspective
Because the donor accrues a benefit in the form of a tax deduction when they make a contribution to their fund, not when the fund makes a grant to your organization, there are some special considerations when recognizing DAF fundholders.
For example, be careful not to send a tax receipt, since the donor has already received their deduction. Instead, thank them for their recommendation that the DAF grant money to your organization. Be sure to thank the fund advisor as well.
Similarly, any binding gift agreements are made between your organization and the fund, not the fundholder. You can, however, draft a non-binding letter of intent for the fundholder that indicates their desire to recommend that the fund make a grant to your organization.