Donor-advised funds are a common tool used by donors or investors to make charitable gifts to nonprofit organizations. This blog post will talk about what a donor-advised fund is, how investors are using them, and what this means for nonprofits. It’ll cover the pros and cons of donor-advised funds so your organization will be in the know about donations made this way.
- What is a donor-advised fund and why does it matter
- Who qualifies to receive gifts from donor-advised funds
- Donor-advised fund pros for your nonprofit
- Donor-advised fund cons for your nonprofit
- Dos and don’ts for dealing with donor-advised funds
1. What is a donor-advised fund and why does it matter?
A donor-advised fund is a fund that’s managed by a sponsoring entity, often a foundation, created for the sole purpose of distributing charitable gifts to nonprofit organizations that the investor cares about.
Why do they matter? According to the Stanford Social Innovation Review, there are more than 500,000 individual donor-advised funds across the United States with assets upward of $100 billion. That’s a lot of revenue that is set aside specifically to give to qualified charitable organizations!
2. Who qualifies to receive gifts from donor-advised funds?
A 501(c)(3) organization most likely qualifies for a donation from a donor-advised fund, but there are exceptions. A private, non-operating 501(c)(3) cannot receive donations from a donor-advised fund. You also can’t contribute to trusts or individuals through a donor-advised fund.
3. Donor advised-fund pros for your nonprofit
While arguably the greatest benefit to a donor-advised fund is the tax benefit to the donors, there are benefits to nonprofits as well.
The first, and most important benefit, is the fact that donor-advised funds accept more than monetary contributions. Gifts of stock and real property go into donor-advised funds, are liquidated, and then passed on to nonprofit organizations as cash donations. This means that nonprofits no longer need to turn down donations of assets that they don’t have the capacity to liquidate themselves. This is a big deal for smaller nonprofits that often have to turn away gifts of property and thus lose out on crucial funds that could have gone toward their mission instead.
The second important benefit to donor-advised funds is the payout. While there is no payout requirement for donor-advised funds, meaning that unlike foundations there is no 5 percent payout demanded of them, the average donor-advised fund pays out about 20% of its worth a year. That’s significantly more than the 5% required by foundations. Why is the payout higher? In the case of donor-advised funds many of the creators of those funds want to see good done during their lifetime through the use of those funds.
That said, a donor-advised fund also has the power to delay donating to nonprofits and isn’t required to pay out any funds annually, which leads us to the cons associated with donor advised-funds.
4. Donor advised-fund cons for your nonprofit
Because donor advised-funds don’t require annual payouts, funds can be held onto and not reach nonprofits. By holding off on making gifts until a later date, the donor-advised fund’s assets have time to grow and make more money, but in the meantime, many nonprofits fail to benefit from the fund because it isn’t dispersed.
This is the chief complaint about donor-advised funds. Their ability to delay grants can cause frustration for nonprofits as they wait for a gift. That’s why it’s important to work with the advisor and come up with a timeline for when gifts will be disbursed to your charitable organization. There are, after all, some good reasons to wait. Asset appreciation for higher gift amounts is one reason and another reason could be wanting to wait to make a large contribution to a capital campaign.
Talk with donors who hold a donor-advised fund and figure out what their plans are to mitigate the wait.
5. Dos and don’ts for dealing with donor-advised funds
When it comes to donor-advised funds there are some dos and don’ts to keep in mind.
- Try to identify donors with donor-advised funds and encourage them to include their name in the name of the fund. Donors can name their funds anything they like, which often means that they leave their names out of it. In doing so, their gifts look anonymous. Encouraging donors to include their name in their donor-advised fund’s name eliminates the problem of giving anonymously on accident. That doesn’t mean that you should push to eliminate a donor’s right to anonymity, however, but making a conscious effort to identify donor-advised fund donors is important to good donor stewardship and retention efforts.
- Take advantage of donor-advised funds. As stated previously, one of the benefits of these funds is the ability to take and liquidate assets so that cash donations can be made. When faced with a donor who wants to give appreciated stocks or other assets in lieu of cash, this option can make it possible for you to accept their donation. They just need to set up a donor-advised fund using those assets.
- Don’t view a donor-advised fund as your competition. Contributions to these funds are to promote charitable giving after all. Instead, think of these funds as an opportunity to make more money for your cause. Because these funds invest and earn interest on those investments there’s more funding to be given out than with a single one-time donation.
- Don’t provide benefits in exchange for gifts from donor-advised funds. The grants made from these funds must go wholly toward supporting the charity and shouldn’t be awarded with any type of compensation beyond “de minimis” value.
- Don’t use donor-advised funds to benefit a named individual. A donor-advised fund can’t be used to give gifts to individuals, and that includes as donations to a scholarship fund in which the advisor names the recipient of those funds. The donation should instead go to the charity to do with what they choose.
- Don’t allow a donor to fulfill their obligation via donor-advised funds. It’s against the funding rules for donor-advised funds to satisfy a binding contract between a donor and a nonprofit organization via a donor-advised fund donation. Instead, the donor is responsible for settling their commitment using their own funds.
- Don’t encourage donors to use their donor-advised fund to donate to individuals or unqualified organizations. If you aren’t an active 501(c)(3) organization, you’re not qualified to receive donations from a donor-advised fund. Most donor-advised funds have to do their due diligence to determine whether the advisor’s choice of nonprofit to fund is eligible. Just know that your organization cannot persuade a donor-advised fund to give to you unless your nonprofit has its 501(c)(3) status and is active. A donor-advised fund should never make donations to individuals.
While donor-advised funds aren’t the perfect charity vehicle, they do provide some beenfits for nonprofit organizations. Be on the lookout for gifts from donor-advised funds as they become a more commonly used way of giving.