What are Donor-Advised Funds?
A DAF is an investment account set up by donors used solely to support qualified charitable organizations. When a donor funds a DAF with cash, securities, or other assets , they can take an immediate tax deduction for the total sum, building up the balance of funds available to support nonprofits over time. The deduction applies whether the funds given are distributed that year or not, but notably those funds can only ever be dispersed for charitable purposes — in this way, they are earmarked for nonprofit giving, no matter what.
DAFs have an added benefit of being invested over time, so that the principal amount given by the donor to the DAF can increase for even greater charitable impact. Notably, this growth is also tax-free, given that it has been set aside for charitable purposes. The donor can then recommend grants to virtually any IRS-qualified public charity whenever they choose to do so.
Many nonprofits have benefited from DAF contributions despite little investment in soliciting them. But donors do not necessarily know that every charity can receive a DAF contribution. So, just imagine the opportunity if DAFs were to be actively solicited!
Donor-Advised Funds are Popular and Growing
In 2019, DAF contributions represented 12.7% of all charitable giving in the United States, a sum that is 33% greater than bequest giving.
While many financial institutions, community foundations, and other nonprofits manage DAFs on behalf of donors, Fidelity Charitable is the largest DAF holder in the nation. Their DAF contributions alone represent 1.6% of all individual charitable giving, estimated to increase to 3% of all charitable giving in 2020. This makes their institution particularly interesting to consider when watching how DAFs are on the move.
The number of Giving Accounts at Fidelity Charitable has more than doubled in the last decade, with the Fidelity Charitable community topping 225,000 donors and $7.3 billion in donor-recommended grants in 2019. The pace of growth has increased in recent years as well, with 2018 seeing a 17% growth in DAF contributions compared to 2017. But 2019 seeing a 39% increase from 2018! Fidelity Charitable has even predicted growth in 2020 and 2021 of 50% or more.
Institutions like Fidelity Charitable have often had required minimum balances to open DAF accounts, meaning that the populations most likely to benefit from them have historically been high net worth individuals. However, as the appeal of DAFs has grown, such minimums are being set aside — making this a convenient giving tool for donors at all levels. However, like many sophisticated financial instruments, it is not unusual to see this tool most frequently accessed by wealthier donors.
Of course, it is important to keep in mind that while contributions to DAFs are accounted for in annual charitable giving statistics, the funds did not necessarily immediately go to charitable purposes. Many donors can use these vehicles to gain valuable tax breaks, but the giving itself can be deferred. However, as noted above, that money will eventually go to charities.
How to Market Donor-Advised Fund Giving
As noted above, while donors at all levels may have a DAF, it is still a tool most frequently used by wealthy individuals — meaning that one important way to build these valuable streams of giving is to communicate about DAF giving with mid-level and major donors who are likely to have such accounts. It is also important to target those who have already indicated a pledge to leave a bequest. These donors are already planned giving savvy, and by showcasing their unique commitment to your organization, we know they are far more likely to give other forms of planned gifts, such as recommended grants through their DAF.
Yet you can also use DAF giving to uncover high-potential donors in your broader annual fund base. A donor who may have recommended a small gift to your organization through their DAF may be flagged for greater attention, given that this could mean they are high net worth.
More than that, DAF giving can increase the long-term value of donors! Asking for DAF contributions can lead to gifts that are ten times greater than gifts of cash, and we know that driving a donor to give through multiple vehicles is a critical to growing value over time. Therefore, it is important to communicate this as a giving option through multiple channels.