Working with Donor-advised Funds
This page is meant to help educate charitable organizations who are getting started or expanding their fundraising efforts about a common vehicle for donations called a Donor-advised Fund (DAF). I primarily (but not solely) utilize a DAF for giving and often explain to new or small scale charities how best to work with DAFs to reach more donors.
What are DAFs?
Donor-advised funds are a registered public charity (like yours!) that donors can donate to and then “recommend” future donations from. This is valuable for donors because it gives them flexibility to increase their deductions in years where they make significant income, maximizing their future giving potential and their deduction in that high-income year. The assets will then appreciate without income tax in future years – so the donated assets can be invested and grow more than if the donor retains the funds and donates in future tax years.
The donor cannot access this money again directly – but the donor does have an intangible benefit having these assets accessible to them for giving, allowing them to make recommendations to the DAF to make a grant to an organization.
Note: I say intangible because it’d be dishonest to claim that the donor receives no benefit at all from future donations, as there are social and cultural benefits to being philanthropic and directing grants made by a DAF to charities. But the IRS would see this as an "incidental" benefit – thus being allowed by the DAF. More on that below in the controversy section.
Let’s say a charity-minded individual has a large wind-fall in the tax year 2023 of $100,000. They may want to give a large portion of this to charity, say $50,000, but they do not have a charity in mind for a gift of that size, and would rather give the money across a number of years to come.
They may also know that this is a one-time windfall and they will not have capital to give in the following years. So to maximize their giving potential through a reduction of tax liability in that year, and to retain flexibility for future gifts, they give $50,000 to a donor-advised fund.
Once the gift to a DAF is made, the assets can’t be taken back – the charity now owns the assets, be it cash, equities, or otherwise, and likely re-invests or re-balances them according to their own investment strategy. The donor can now “recommend” a gift to a specific charity in 2023, 2024, or onwards into the future. This is where the “advised” aspect of donor-advised funds comes in – as a donor, you can recommend or "advise" the charity to write a grant but you cannot guarantee the grant is written.
DAFs are quite controversial
I wanted to talk a little bit about some goings on and criticisms in the DAF world, but this isn’t strictly necessary to follow along with if you're just trying to receive funds from donors that use DAFs, which is probably why you're here. But it's interesting!
There are opponents of DAFs who say that money too often enters DAFs and doesn’t leave them in a timely manner, lowering the amount of money flowing into truly public charity. This is being legislated most recently in H.R.6595 – the "ACE Act" which will reorganize how DAFs work, essentially imposing an excise tax on DAFs if funds are held for more than 14 years without being distributed (with some exclusions). There is a lot more in that bill – and lawyers are wincing hearing my summary – but my main takeaway is that to capture a deduction from a cash donation within a tax-year you’ll need to commit to distributing it within 14 years.
In addition, there are transparency concerns with how this money is tracked – DAFs are a flexible alternative to a more regulated private foundation model that comes with minimum gifting and more stringent reporting requirements.
There is great background put together by staff in Congress associated with the ACE Act that covers all of this with references. My position is that you should give and keep giving if you are philanthropically inclined. This legislation is likely necessary to keep money flowing into service-oriented charities writ large, but I believe DAFs in their current form can be a good tool to increase the net contribution to public charity from individuals. So I think I do support this bill.
How to prepare for DAF donations
So if you’re an organization and hope to receive DAF donations, I recommend doing the following:
- Sign up for GuideStar. You’ll want a profile here as many large DAFs (Vanguard, Schwab, etc.) reference GuideStar profiles when validating organizations
- If you have a website (you should try to) have a section on your donation page for “Donor-advised Funds” that provides the following:
- Your organization's EIN (IRS tax ID)
- A current mailing address for checks. Ideally this matches your recent federal filings and GuideStar profile
- A contact email address for DAF related questions as the charity that runs the DAF (eg. Schwab Charitable) may have follow-up questions
Finally, keep in mind the original donor is simply recommending a grant for your organization and cannot guarantee it is made – they simply advise the charity. :P
If you think this page could be improved, amended, or you’d like to discuss any of the material, please email me at firstname.lastname@example.org. Last updated April 5th, 2023.