Donor-advised funds represent a growing portion of the charitable sector. Before we introduce new regulations, nonprofits should get more strategic about them.
When I started a new role in fundraising, fresh out of college, the organization I worked for received a generous donation from one of our regular contributors through his donor-advised fund (DAF). We processed the check, thanked him, and kept moving forward with business as usual. No one paused to ask about this new charitable vehicle or its implications for our work.
A decade later, not much has changed. Though donor-advised funds have exploded in popularity over the past 10 years, the fundraising world has been slow to realize their potential.
With assets of more than $100 billion already earmarked for charity, DAFs represent a remarkable fundraising opportunity for nonprofits.
A new proposal by the Initiative to Accelerate Charitable Giving seeks, among other reforms, to impose new regulations on DAFs. Nonprofit leaders should be wary of the proposed changes. Regulation could inadvertently slow and stifle this flexible charitable vehicle, adding new administrative fees and other burdens that ultimately reduce the dollars given to charity. Before rushing to regulate, nonprofit fundraisers—and the public—need better information on these vehicles.
Under current regulations, anyone can contribute to a DAF and receive an immediate tax benefit. A contribution might be cash, stocks, or illiquid assets. The money in a DAF can only be used for charitable purposes, and the donor loses legal ownership of the funds. However, donors can advise on where the funds should be distributed when they find a charity that they would like to support.
The proposal from the Initiative to Accelerate Charitable Giving—often referred to as the “Arnold-Madoff proposal”—seeks to remedy the problem of funds sitting in DAFs indefinitely. To unlock these dollars, the Arnold-Madoff proposal suggests creating two types of DAF accounts: a 15-year DAF, which preserves the current tax incentive structure but mandates that funds be distributed within 15 years, and an Aligned Benefit Rule, which allows for a longer time horizon but only confers an income tax deduction once the funds have been distributed.
While obviously well-intentioned, it is unclear that the reforms will actually accelerate giving. Though DAFs have existed in their current form since 1991, there is has not been extensive research on these vehicles. Even a seemingly simple figure—the DAF payout rate—is a point of contention.
We need better data before concluding that a time limit is the best strategy to motivate giving from DAFs. Increased regulation might spur better research on DAFs, but it is unlikely that the benefit of this approach would outweigh the cost of implementation.
Regardless of whether the Arnold-Madoff proposal becomes law, charities should seize this moment to develop their own DAF fundraising strategies. As an employee of a nonprofit organization—and as a donor myself—I have only recently seen nonprofits begin to craft messages specific to DAF holders. If donors are giving too little from their DAF accounts, it could be that charities do not yet know how to ask effectively.
Educating fundraising professionals about how to solicit DAF money will go a long way toward unlocking charitable dollars for use today. Few organizations, for example, use DAF Direct, a free web application that makes the process of giving online with a DAF as easy as giving via credit card. A campaign that began last year—#HalfMyDAF—motivated DAF donors to give big with the promise of matching funds. In 2020, the campaign spurred a total of $8.6 million in giving, and this year, #HalfMyDAF has raised its goal to $20 million. The website includes a portal for nonprofit leaders to help educate them about how DAFs operate and strategies to incorporate DAF donors into their annual plans.
Of course, innovative campaigns like #HalfMyDAF do not preclude federal regulation. But those of us who believe that private, voluntary giving sustains the American way of life should be cautious about adding guardrails that might hamper this spirit.
Over the next few years, I believe we will see more sophisticated fundraising pitches targeted at DAF donors. If development offices have not done so already, they should begin tracking donors who contribute regularly through a DAF. Through special appeals, with messaging specific to the DAF audience, nonprofits can make the case for why donors should put their DAF to work now.
When nonprofits understand the preferred giving vehicles of their donors, it paves the way for more constructive conversations about the organization’s needs, the donor’s vision, and what gift will have the greatest impact. Moreover, it allows charities without the capacity or interest in creating an endowment to take advantage of investment gains. Say a charity would like to undertake a major capital project in five years and knows that its major donor typically makes an annual gift through a DAF. The charity could ask this individual to allow his annual gifts to reap investment gains in a DAF for five years, then make an appreciated gift in support of the capital project.
DAFs represent extraordinary—if not fully realized—potential for nonprofits. The flexibility they offer donors to design thoughtful giving strategies should be a boon to their beneficiaries. Taking the time to equip nonprofits to receive DAF gifts is more worthwhile than convincing the IRS to implement new regulations that may discourage donors from sending dollars to those who need it most.