The recently released National Philanthropic Trust's (NPT) 2023 DAF Report should be of interest to not-for-profit organization CFOs and development leaders throughout the U.S. According to the report, grants from donor-advised funds (DAFs) to charities exceeded $52 billion in 2022, a record high despite a challenging year for financial markets. This marks the 13th straight year of growth in DAFs. The report serves as a good reminder to not-for-profits leaders to become more aware of established DAFs among their donor bases.
The 17th annual report from NPT, which is the largest national, independent public charity that manages DAFs, examined data from 1,151 charitable organizations that sponsored DAFs, including national charities, community foundations and other sponsoring charities. According to the report, in 2022, DAFs granted 22.5% of their assets from the previous year.
Donor-advised funds are accounts held within a sponsoring 501c(3) organization in which a donor-advisor contributes funds within a sponsoring organization. Donors receive an immediate tax deduction through their charitable contributions while still retaining recommending powers for grants from the DAF. Not-for-profits can benefit from alignment with donors who have such recommending powers — not only can these donors often make larger gifts, given that DAFs regularly accumulate significant resources based on tax planning moves by donors, but also because of the tax-free growth that can occur in a DAF.
Popularity of Donor-Advised Funds Climbs
As not-for-profit leaders know, DAFs have become one of the most popular vehicles for charitable giving in philanthropy, providing a win-win for individuals and not-for-profits alike. Tax law changes, including the change in the standard deduction, boosted the attractiveness of the funds. In addition to being prevalent at universities, hospitals and religious institutions, DAFs are used for individual and family giving. According to the 2023 NPT report, DAFs offer donors considerable flexibility and advisory privileges and substantial opportunities for not-for-profit organizations.
It should be noted that legislation in recent years — namely the Accelerating Charitable Efforts (ACE) Act of 2021 — seeks to close what some perceive to be loopholes in the tax code, namely the ongoing control donors have and the alignment regarding timing of when the donor-advisor receives the tax deduction and when the charity receives the funds. In the meantime, DAFs remain an attractive charitable giving option, offering considerable potential for not-for-profit organizations.
Not-for-Profit Strategies for Connecting With DAF Donors
DAF funds are popular with active philanthropists with dedicated charitable capital to grantmaking to support the causes that most to them. So, what are the best ways for your not-for-profit to engage with donor-advisors? Consider the following actions:
1) Communicate that your organization accepts grants from DAFs — you don’t need to convince donors to establish funds. Instead, connect with donors who already have DAFs and may be considering alternative tax strategies.
2) Be sure your development team is building DAF messaging into your organization’s solicitation materials.
3) Examine ways in which you can make it easier for donors to use their DAFs to contribute to your organization by automating the process and updating your website to include an option, such as “Donate from your donor-advised fund.” You can also help donors establish recurring automated grants.
4) Keep your organization’s profile current on sites such as GuideStar. Donors research charities online to explore their giving options.
5) Know your supporters. Many donors don’t regularly distribute the funds they have in their DAFs, so it’s important that your organization has a strategy to identify and engage supporters. Some grants from DAFs are received anonymously, so it may take some extra research to match donors with DAF grants. Consider asking donors (and prospects) if they have DAFs.
6) Nurture relationships with your donor/advisors to help ensure ongoing grants.
7) Ensure that your organization is closely aligned with donor-advisors.
Many not-for-profit organizations simply fail to let their donors and potential donors know they are eligible to set up and receive donations from DAFs. Not-for-profit organizations and sponsoring organizations can team to develop best practices to make it clear they can receive gifts from DAFs. Your organization will need to establish the right processes and systems for identifying and receiving these donations. As the popularity of DAFs continues to expand, it will be an important conversation to have within your organization and with donors as you examine the strategic direction of your fundraising.
By understanding the tax implications and benefits of different types of donations, donors can maximize their impact and realize significant tax savings. At CBIZ, our team of not-for-profit tax and accounting specialists are well-equipped to address your questions related to donor-advised funds, aiding not-for-profit entities in achieving their financial objectives and maximizing savings. Connect with one of our professionals today.
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