The pros and cons of DAFs for nonprofits 

Donor-advised funds have become one of the most popular ways to give in the last few years — in fact, DAF contributions now make up about 13 percent of all individual charitable giving in the United States. In 2019 alone, DAFs contributed more than $27 billion to charities.

On the surface, DAFs appear to be a positive trend for charities, and for good reason. Not only do DAFs offer the chance for nonprofits to receive hefty donations, but they’re advantageous for donors too: donors get access to tax advantages, a simple way to give and the ability to do some long-term philanthropic planning. But, they do come with a few drawbacks that charities need to be aware of, too.

To better understand the global takeover of DAFs and how they might impact your organisation, it’s important to understand the basics of how they work — including the pros and cons of this kind of giving.

What is a donor-advised fund (DAF)?

Donor-advised funds are a type of charitable giving. In essence, they allow individuals, families or organisations to make charitable contributions and receive immediate tax deductions. But what makes DAFs different from more traditional forms of giving is that DAFs allow donors to recommend how funds are distributed and used by the receiving organisation over time.

DAFs have become incredibly popular — some of the best and most well-known donor-advised funds include Fidelity Charitable, Schwab Charitable and Vanguard Charitable.

Donor-advised funds pros and cons

The pros of DAFs

DAFs offer tax benefits

DAFs are a great option for donors for tax reasons: tax deductions for DAFs can be up to 60% for cash contributions and up to 30% of AGI for contributions of appreciated securities. Donors can also avoid capital gains tax, too.

DAFs are simple and flexible — and put donors in control

Unlike other forms of giving, DAFs give donors a straightforward and flexible way to give and manage their contributions. For example, donors can contribute various types of assets, such as cash, stocks or real estate. DAFs can even serve as a tool for legacy planning, allowing donors to involve their families in philanthropy and establish a tradition of giving that can extend beyond their lifetimes. Plus, DAFs can eliminate the need for donors to create a private foundation, which can be costly.

DAFs also allow donors to make recommendations about how funds are spent, giving them more control over their contributions—a phenomenon that plays a huge role in how and why donors give.

This is a win-win situation for both charities and donors: donors can give without jumping through hoops, which means charities have a chance of receiving more donations.

DAFs can bring in a lot of money

Given the flexibility and simplicity of giving on the donor’s behalf, and the tax benefits, DAFs tend to bring a fair amount of money through the door.

Last year, grants from DAFs equaled $52.16 billion, a new high for grant dollars. Plus, during times of crisis or emergency need, DAFs tend to step up: in the first half of 2020, grantmaking from DAF donors totaled $8.3 billion, with 1.2 million in grants.

The cons of DAFs

While there are plenty of pros, donor-advised fund rules can present a few issues for charities, too.

DAFs lack accountability

 Critics of DAFs argue that a lack of transparency and accountability is a serious issue. With DAFs, donors can recommend grants without disclosing their identities or the reasons behind their choices, which can leave charities in the dark. And, this lack of transparency might not always align with public interests and leave charities and the public wondering about philanthropic decisions.

Plus, because DAFs handle the donation process on behalf of donors, nonprofits may have limited opportunities to engage with donors directly and cultivate long-term relationships.

DAFs can be inactive

With DAFs, contributions do not have to be distributed immediately, meaning that funds in DAFs may remain inactive for quite a while. For charities, this can spell disaster, especially if the funds are critical to their operations.

DAFs put the donor in control

While donor control over assets is advantageous for donors and might encourage them to give, for charities, this can often be a challenge. Charities might find that recommendations don’t align with their goals, or prove too rigid.

Plus, nonprofits have limited control over when funds from DAFs will be distributed to them, as donors can recommend grants at their discretion. This uncertainty can make it challenging for nonprofits to plan their budgets and programs effectively.

Make DAFs work for your nonprofit

DAFs give donors more control over their contributions, encouraging them to give more to charities than they otherwise might have. But, nonprofits should note some of the potential downsides, like a lack of transparency and accountability, potential for inactivity and adherence to donors’ preferences and recommendations.

 However, DAFs do have several perks, and as many nonprofits know, diversifying funding sources is a strategic and important decision for the longevity of any organisation. So how can nonprofits make DAFs work for them?

In order to make the most out of the positives of DAFs, and minimise the negatives, nonprofits should encourage donors who contribute through DAFs to engage directly with the nonprofit. Offer opportunities for donors to visit program sites, attend events or participate in volunteer activities. And of course, make sure these points of communication and invitations are personalised in order to help strengthen donor relationships and cultivate long-term support.

Lastly, be sure to use the right technology in order to support transparency. Use tools like Good Grants to provide donors with clear guidelines and streamlined procedures to facilitate timely grant processing.