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November 2014
 
The Elusive Donor-Advised FundThe What and How of a DAF              
Five simple strategies to increase gifts from DAFs.
 
According to the IRS, a donor-advised fund (DAF) is “a separately identified fund or account that is maintained and operated by a section 501(c)(3) organization, which is called a sponsoring organization. Each account is composed of contributions made by individual donors. Once the donor makes the contribution, the organization has legal control over it. However, the donor, or the donor's representative, retains advisory privileges with respect to the distribution of funds and the investment of assets in the account.” Although this form of giving has existed for over 70 years, it wasn’t until 2006 that the IRS formally defined DAFs.
 
The first donor-advised fund was reportedly created at the New York Community Trust in around 1931. It took some 60 years after that for DAFs to become more prevalent.  In 1991, Fidelity Investments, realizing DAFs could help facilitate charitable donations for its clients, created the Fidelity Charitable Gift Fund, a 501(c)3 nonprofit organization. Soon after Fidelity released its DAF, Vanguard and Charles Schwab each introduced a similar service.  Today, community foundations and universities offer DAFs, as well.
 
In general legal terms, donors lose the right to control a gift once a gift is made to a charitable organization. But, with a DAF, the donor is explicitly permitted to advise the sponsoring organization on how the donated funds should be invested and/or disbursed to other charities, with the caveat that the advice be subject to the DAF sponsoring organization’s ultimate discretion and control.
 
It is important to note that DAFs can provide a larger tax deduction than would gifts to private foundations by the donor, the reason being that cash gifts to non-operating private foundations are subject to lower limits on their total charitable contribution deduction.  Donors to non-operating private foundations (e.g., family foundations) have a 30 percent deduction limit on their adjusted gross income (AGI);  with DAFs, the deduction limit rises to 50 percent of AGI. It makes one wonder if the increased deductibility will, in the future, push more donors to create DAFs rather than private foundations, and we’re already seeing that bear out. The National Philanthropic Trust reports that, from 2011 to 2012, the number of new DAFs grew seven percent while, during the same period, the number of new non-operating private foundations grew only four percent. Last week, the Chronicle of Philanthropy published its annual list of U.S. charities, ranked by the amount of private donations received the previous year.  Fidelity Charitable was second on the list; Schwab Charitable and Vanguard Charitable were in the top ten.
 
DAFs do present challenges for fundraisers and prospect researchers.  DAFs are opaque; the sponsoring organization is not required to publicize a list of donors. Donors can remain anonymous, making further cultivation and stewardship nearly impossible.  Sponsoring organizations are required to report the total number of DAFs held, the aggregate value of assets in those DAFs, and the aggregate contributions to and grants from those DAFs during the tax year, so there is no reporting requirement to link grants to specific DAFs and their donors. According to the National Philanthropic Trust, DAFs hold more than $45 billion in funds, but many do not accept grant proposals. 
 
So, what is a fundraiser to do?
  1. When meeting with donors, ask the donors how they typically give. Do they have an existing charitable vehicle (DAF, family foundation, etc.)?
  2. Remember that donor contributions to DAFs can accrue value over time. If your donors have indicated they have a DAF, or, if your organization was lucky enough to receive a gift from donors who have chosen to make their DAF gift known to your organization, then maintain consistent cultivation and stewardship with those donors. With careful cultivation and stewardship, future gifts may be larger than the original gift.
  3. Look at the DAF checks carefully; often the name of the DAF will be noted on the check. Typically, the name of the DAF is that of the donor or a family member, giving real clues about your donor. Remember to respect anonymity though; it’s good stewardship.
  4. Change your donor response card and website to let donors know that your organization accepts gifts from DAFs—which, by the way, tend to be larger than gifts made by credit card or check.
  5. Look for innovative ways to initiate gifts from DAFs. For example, last year Fidelity created a web app called DAF Direct. DAF Direct can be used on a charity’s website to assist donors in initiating a grant recommendation from their DAF directly from the charity’s website. However, donors can only direct a DAF distribution recommendation through DAF Direct if they have accounts at Fidelity, Charles Schwab, or Greater Kansas City Community Foundation.

Read More:

 
Are you stumped by financial terms such as leveraged buyouts, private equity, and mezzanine debt?
There are some terrific tutorials that will help you better understand private equity:
A Primer on Private Equity at Work (from the Center for Economic and Policy Research)
Private Equity Primer (from the Meketa Investment Group)
 
And for those wanting to understand private equity but with a European flare:
 
Private Equity Demystified (from the Institute of Chartered Accountants in England and Wales)
 
Need help?
Let InfoRich Group, Inc. act as your prospect research department.
We are just a phone call or email away.  We are expert prospect researchers. Let us help you discover the wealth within your prospect pool or help you find new donors whose philanthropic goals match your organization’s mission.
 
We can act as your prospect research department or help you when you have too much work to do and too little time to complete it.
 
Contact us now for a free quote.
 
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Margaret King
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