Donor-Advised Funds: What Nonprofits Need to Know

Donor-Advised Funds (DAFs) have become one of the fastest-growing tools for charitable giving in recent years, offering donors flexibility and tax advantages while providing nonprofits with critical funding. However, the increasing prevalence of DAFs also brings unique challenges and responsibilities for nonprofit organizations.

What Are Donor-Advised Funds?

DAFs are charitable giving accounts that allow donors to make irrevocable contributions, receive an immediate tax deduction, and then recommend grants to nonprofits over time. These funds are typically managed by sponsoring organizations such as community foundations, financial institutions, or nonprofit affiliates.

For nonprofits, DAFs represent a growing share of contributions, often coming in the form of large, lump-sum donations. However, they also require careful handling to ensure compliance with regulations and alignment with organizational missions.

Opportunities for Nonprofits

Steady Funding Streams

DAFs can provide a reliable source of funding, especially when donors commit to making recurring recommendations over time. Building strong relationships with DAF donors can lead to sustained support for your programs.

Larger Donations  

Since contributions to DAFs are often made during a donor’s high-income years for maximum tax benefits, the grants directed to nonprofits can be significant. These larger gifts can fund impactful projects or long-term initiatives.

Engaging High-Capacity Donors

DAFs are popular with high-net-worth individuals, making them a valuable connection point for nonprofits looking to engage major donors. Developing strategies to nurture relationships with DAF account holders can yield long-term benefits.

Challenges and Compliance Considerations

Acknowledgment Letters and Tax Compliance

Unlike traditional donations, nonprofits do not issue tax receipts directly to DAF donors because the tax deduction occurs at the time of the contribution to the DAF. Instead, nonprofits should:

– Provide acknowledgment letters for grants, clearly stating that no goods or services were provided in exchange.

– Avoid implying that the grant was directly from the donor, as the official donor is the sponsoring organization.

In addition, the contribution should be recorded on the organization’s Form 990, Schedule B as coming from the DAF, not the individual.  All donations from a DAF should be added together and reported as one amount.

Restrictions on Benefits

IRS regulations prohibit donors from receiving any personal benefits (such as tickets to events or goods) in exchange for DAF grants. Nonprofits must ensure that any benefits associated with a grant are eliminated or declined.

Navigating Restricted Grants

Some DAF grants come with restrictions or recommendations for specific uses. Nonprofits must carefully review the terms to ensure alignment with their mission and track restricted funds separately in their accounting systems.

Building Relationships Without Pressure

DAF donors retain advisory privileges but are not obligated to make grants to a particular nonprofit. Building relationships with these donors requires a delicate balance of stewardship and respecting their autonomy.

Best Practices for Managing DAF Grants

Know Your Donor Base 

Track and segment donations that originate from DAFs in your donor management system. This helps identify trends and potential high-capacity supporters.

Strengthen Partnerships with Sponsoring Organizations

Cultivate relationships with community foundations and other DAF sponsors. They can serve as valuable connectors between your nonprofit and potential donors.

Educate Your Development Team

Ensure your staff understands how DAFs work, including IRS rules and the unique stewardship approach required for these gifts.

Communicate Your Impact

DAF donors are often motivated by measurable impact. Share compelling stories and data showing how their contributions make a difference.

Stay Transparent

Maintain clear documentation of how DAF grants are used. This ensures compliance with donor intent and builds trust with both donors and sponsoring organizations.

Looking Ahead

With donor-advised funds continuing to grow in popularity, nonprofits must adapt to this evolving funding landscape. By understanding the rules, seizing the opportunities, and implementing best practices, your organization can maximize the potential of DAF contributions to further your mission.