Investments
2024 Capital Market Assumptions
The 2024 edition of our 10-Year Capital Market Assumptions (CMAs) offers our projections for asset class returns, volatilities and correlations over the next decade. This yearly exercise helps in shaping the design of our investors’ long-term portfolios.
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Investments
2023 Year-End Fundraising Checklist
The approach of the end of the year means end-of-year tax planning, which for many includes finalizing annual charitable contributions. This presents an opportunity for nonprofits to engage donors and help them complete their gifts by December 31.
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June 2023
The key to unlocking DAF dollars is not by relying on potential legislative changes, but by recognizing that DAFs are simply another vehicle for charitable giving.
Donor advised funds (DAFs) have become an increasingly popular option for donors seeking to fulfill their philanthropic goals. In order to understand how charities can tap into DAF assets, it is important to be familiar with the mechanics of DAFs, the features that make them attractive to donors and the creative ways that donors are utilizing them. With that knowledge, fundraisers and charities can more effectively employ strategies to reach donors with DAFs.
Rules of the road
According to section §4966(d)(2) of the Internal Revenue Code, a DAF is defined as a separately identified fund or account owned and operated by a sponsoring organization. Each account is composed of contributions made by individual donors. Once the donor makes the contribution, the sponsoring organization has legal control over the funds and the donors have advisory privileges with respect to the distribution of funds and the investment of assets in the account. The following illustration provides an overview of the relationship between the donor and the sponsoring organization:
The process flow for DAFs can be divided into two phases: gifting and granting. This two-part process is one of the reasons that DAFs are distinct from other giving vehicles and appealing to certain donors.
Gifting
Donors make an irrevocable gift to a DAF and, if they itemize deductions on their income tax returns, may receive an immediate tax deduction in the year the gift is made – up to 60% of adjusted gross income (AGI) for gifts of cash; up to 30% of AGI for gifts of publicly traded securities. Depending on the sponsoring organization's rules, donors can not only make gifts of cash and marketable securities, but of complex, non-cash assets as well. Donors should consult with their personal tax advisor when contemplating gifts to a DAF.
Granting
The second phase of the DAF process occurs when donors make grant recommendations to benefit a particular charity. The Internal Revenue Service (IRS) has specific guidelines around which kinds of organizations are eligible to receive grants, as well as what purposes those grants may serve. The chart below highlights the granting guidelines outlined in the Internal Revenue Code, section §4966:
Historically, grants could not be used to satisfy legally binding charitable pledges. However, the release of Notice 2017-73 by the Department of the Treasury and the IRS potentially changes that limitation. Section 4 of the notice states that grants that fulfill the personal pledge of a donor, even a legally binding pledge, would not be treated as "more than incidental benefit" under Section 4967 of the Internal Revenue Code, as long as:
- The sponsoring organization makes no reference to the existence of a charitable pledge when making a distribution
- No donor/advisor receives, directly or indirectly, any other benefit that is more than incidental on account of the DAF distribution
- The donor/advisor does not claim a charitable contribution deduction for the DAF distribution (even if the receiving charity mistakenly sends a tax acknowledgement)
While a section of the notice states that it may be relied upon until additional guidance is issued, many sponsoring organizations and grantee charities are waiting for a more definitive ruling.
Popularity
Ask any salesperson at a car dealership and they will tell you that the features of a vehicle often get the attention of a buyer, but the benefits of those features ultimately influence the decision to purchase. Similarly, the benefits of DAFs have helped to fuel its growing popularity.
Donor's motivation
Donors use DAFs as charitable giving vehicles in a variety of ways. The following table summarizes some of the primary reasons that donors use a DAF:
Strategies to leverage DAFs
Stewarding donors with DAFs is important for all charities and can have a meaningful impact. The chart below highlights strategies for fundraisers and charities to consider.
Charities can go one step further by offering a DAF program, giving them an additional charitable planning tool and stewardship opportunity. This would be accomplished by sponsoring their own DAF program or participating in a private-label DAF offered by a different organization.
Conclusion
The key to unlocking DAF dollars is not by relying on potential legislative changes, but by recognizing that DAFs are simply another vehicle for charitable giving. To many donors, DAFs are not that far removed from their brokerage accounts or revocable trusts. Charitable organizations and individual fundraisers must take positive steps to engage DAF donors. They must practice, in a word, stewardship.
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