Donor-Advised Funds vs Foundations: Clearing Up The Differences for Grant Writers

It seems like everyone is talking about donor-advised funds—should you be listening?

If you’ve been hearing a lot about DAFs but aren’t sure what they are or exactly how they work, you’re in the right place!

In this article, our goal is to demystify donor-advised funds so that you can effectively integrate them into your fundraising strategy. We will explain what DAFs are, how they differ from foundations, and the benefits they can bring to your organization.

Let’s dive in!

Donor-advised funds have been around since the 1930s, yet they have recently become one of the fastest-growing types of charitable giving today.

According to a National Philanthropic Trust report, DAF grants increased to $51.16 billion in 2022, which was a new high in this type of giving.

To tap into these lucrative opportunities, you first need to understand how they work.

What Are DAFs?

Donor-advised funds give philanthropic individuals the perfect vehicle for donating to causes they are passionate about.

Here’s how they work:

1. A donor contributes to a donor-advised fund account where their donation can sit and grow
2. The donor gets an immediate tax deduction for their donation
3. The donor can then make “grants” to any qualified recipient (charity) at any time in the future

Even though they are sometimes referred to as “grants”, in reality, DAFs work a lot like individual donations. The difference is that with DAFs, the donor doesn’t have to decide on their recipient right away—but they still get an immediate tax deduction.

More than half of all DAFs are held by national sponsors, like Fidelity Charitable, Vanguard, Fidelity, and Schwab, while less than half are held by community foundations. Single-issue charities also manage DAF accounts, such as universities and Jewish Foundations. According to the Giving Institute Annual Report on Philanthropy for the year 2020:

• 61 percent of DAFs were help by national sponsors
• 26 percent of DAFs were held by community foundations
• 13 percent of DAFs were held by single issue charities

Once a donor makes a fixed contribution to one of these sponsoring organizations, the donor can then name the account, its advisors, and successors, and then make donations to qualified charities out of the account over time.

The donor doesn’t need to choose a 501(c)(3) organization to give to right away, but when they do, they can simply distribute whatever amount of money they would like that has accumulated in the DAF account.

Benefits of DAFs for Donors and Nonprofits

There are benefits to DAFS both for donors and the nonprofits that receive funding from them.

Many individuals choose to contribute to DAFs because:

• They give donors an immediate tax deduction without having to choose a recipient right away.
• They have much fewer administrative requirements to set up and administer as compared to a private foundation.
• The money grows over time, tax-free.
• They can handle not only cash donations, but other non-cash assets like appreciated stock or real estate.
• They streamline giving to any eligible IRS-qualified public charity through one, simple fund.

Since donors don’t have to decide right away where the money is going, they have flexibility to take their time and decide which causes they would like to give to at any time. And, they don’t have the hassle of having to administer the funds; instead, the sponsoring organization takes care of the maintaining and investing of the monies.

What about benefits to the nonprofit?

The main benefit of DAFs for nonprofits is that they provide a significant source of funding that can be tapped into. The money put into DAFs is already ear-marked for charitable purposes.

The rise in popularity of donor-advised funds means nonprofit organizations need to be prepared to partner with these dynamic donors.

Since many donor-advised funds are started by wealthy individuals, you may have noticed they name them after their family as a legacy builder, such as the John and Jane Doe Foundation.

However, don’t let this fool you—donor-advised funds are NOT foundations. Although donor-advised funds do have some similarities, there are more differences that both donors and nonprofit professionals should be aware of before moving forward.

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As noted above, both donor-advised funds and foundations are often established by a wealthy family or individual, whether it is to cement their legacy or is just used as a vehicle for charitable giving. The main similarity is that both allow for distributions to causes that the donors believe in during their lifetime and beyond.

Once you have an understanding of what donor-advised funds are, you can start incorporating them into your fundraising strategy.

Securing donations from donor-advised funds for your nonprofit organization is similar to securing regular donations. It’s all about building relationships and convincing donors why they should give to your organization.

Donor-advised funds will not just fall into your lap. You need a strategic plan for attracting these gifts. Here are some tips for successfully incorporating them into your fundraising strategy:

• Contact your current donors to see if they are already part of a donor-advised fund. You should emphasize the impact of their past giving and how their continued support will allow you to advance your mission in big ways.
• Use social media to your advantage! Social media platforms are critical to attracting current and new donors who give through donor-advised funds. You can share impactful stories of those who have been helped through DAFs along with an easy link to the giving page on your website.
• Make it easy for individuals to give by including donor-advised funds on your “Ways to Give” section of your website. Include all of the information a donor will need in this section—your nonprofit organization’s legal name, address, and federal tax ID number.
• Even better, enhance your marketing efforts by having an entire webpage dedicated to donor advised funds! Here’s an example from UNICEF, which clearly states the benefits of their DAFs and why people should choose UNICEF. They then they have an easy way to give immediately:

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Since most donor-advised funds are held through for-profit financial organizations, you will also want to build relationships with donor advisors who handle donor-advised funds, which include sponsoring organizations like financial firms or community foundations.

Remember: Individuals and families who have donor-advised funds are tactical about their giving. They have funds already set aside to help causes they are passionate about and want a seamless way for their money to be spent. By fostering relationships with current and potential donors, you can entice them to possibly set up a meeting, visit your site, and hopefully begin to make donations through their donor-advised fund to your nonprofit organization.

While they’ve been around for many years, donor-advised funds are a growing and positive trend in philanthropy.

Just look at the numbers from the the Giving Institute when they compared data between 2006 to 2019:

• Contributions to DAFs jumped from $9 billion to $38.81 billion.
• Value of assets rose from $31.10 billion to an astonishing $141.95 billion.
• Grants from DAFs went from $5.70 billion to $27.37 billion.

It’s clear that savvy donors are taking advantage of DAFs as a means for their philanthropic giving.

We noted above that donor-advised funds are not subject to many of the same regulations as foundations. However, there is an evolving regulatory landscape for DAFs and foundations. You will want to stay apprised of these differences so that you can help your donors navigate through the landscape effectively. That way, your team can adapt to changes and optimize funding strategies.

In terms of fundraising, donor advised funds are similar to almost any other type of giving—they are just different vehicles for receiving a gift.

By having a strategic plan to attract these savvy and dedicated donors—giving them easy ways to give and showing gratitude for their donations—you can tap into these lucrative opportunities!