Donor advised fund popularity has skyrocketed in the past years, becoming the fastest growing vehicle in philanthropy and outnumbering private foundations by more than two-to-one, according to National Philanthropic Trust. Contributions to donor advised funds at Community Foundations grew by nearly ten percent in the last year.

If you are a donor, do you know how to use this giving tool for your benefit? If you are a nonprofit, do you know how to nurture and encourage these donors? Donor advised funds can seem somewhat confusing to donors and nonprofits alike. Let’s look at how these popular funding vehicles work for donors and then we’ll consider ways nonprofits can help donors in their funding decisions.

How Donor Advised Funds Work

Donor advised funds are administered by and affiliated with financial institutions, community foundations, and single-issue charities. The funds are set up and maintained separately for each donor and they require a minimum initial donation and distributions determined by the fund administrator. They allow donors to contribute cash or assets to the fund and claim an immediate charitable deduction, while deferring decisions about how the funds will be used. Donors then request distributions to the charities of their choice.

Jean-Luc Bourdon, CPA, of BrightPath Wealth Planning points out that many investors are facing the prospect of paying significant taxes on their investment gains due to the healthy stock market growth. However, Bourdon recommends that these investors gift their appreciated investments to a donor advised fund to reap a double tax benefit as well as timing flexibility, convenience, and privacy options. This strategy, says Bourdon, “enables donors to avoid paying taxes on investment gains and receive a market-value charitable deduction for investments held over one year.”

Community foundations like the Santa Barbara Foundation were among the first organizations to offer donor advised funds. Today, several financial institutions and some charities offer this popular giving vehicle. During the third quarter of this year, the Santa Barbara Foundation made grants totaling more than $4.8 million—much of that through donor advised funds. This included $700,000 given to arts, culture and the humanities; more than $2.4 million given to education and youth development; more than $160,000 given to the environment and animals; and nearly $1.3 million granted to health and human services.

How Can a Donor Get Started With a Donor Advised Fund?

Here’s how it works at the Santa Barbara Foundation. The donor makes a gift of cash or other assets to establish a fund. A donor can open a personalized Donor Advised Fund with a gift of cash or other assets valued at $10,000 or more for an invested fund or $5,000 for a cash fund. The donor receives an immediate tax deduction for the charitable contribution. The funds can be invested according to each donor’s investment goal—to protect principal, generate current income, and provide capital growth. The donor recommends grants from the donor advised fund to support charitable organizations locally or nationally. After performing the recommended due diligence, the Santa Barbara Foundation makes the grants in the donor’s funds name.

The Foundation handles all the paperwork and the donor’s charitable giving is centralized without the costs and administrative burden of a private foundation. Donors enjoy some advantages over private foundations, such as no start-up costs and the possibility of greater tax benefits. Donors receive written acknowledgment of contributions made and regular summaries of the grants made through the fund. This process is common to most community foundations.

Donor advised fund popularity is understandable given its ease of use and multiple benefits. Even though this method of donating is a bit removed from the typical direct giving to nonprofits, charities can still develop relationships with these donors that deepen the partnership between the donor, the nonprofit, and the community.

How Nonprofits Can Encourage Donor Advised Fund Participation

Robert Evans with Giving USA believes donor advised funds offer a great opportunity to rethink how potential donors are approached. “Donor advised funds are a bank account for donors who are ready to go shopping for great projects. You need to ask people whether they have a donor advised fund and will use them to support your institution,” he says. “If they don’t have one, you are best served to offer donor advised funds to them.”

Chip Bryce, director of Trusts, Estates, and Gift Planning at Cornell University claims the biggest advantage of donor advised funds is they give another high-touch, high-service connection to the people who can make a difference in your institution. “These funds promote long-term commitments from donors,” he notes. “Our experience shows that people who have donor advised funds are extraordinarily more generous than people who do not. Our goal is to help donors make a gift that is right for them.”

 Eileen Heisman, President/CEO of National Philanthropic Trust, suggests these methods of encouraging gifts from donor advised funds:

• Cultivation—Donors’ names are usually not disclosed by the administering entity. And they rarely accept unsolicited grant applications. Therefore, ask donors to report the information voluntarily. You can do this by including “a grant from a donor advised fund” on your solicitation materials as a way to give.
• Tailor communications—A grant from a donor advised fund cannot be used to pay member dues, purchase benefit dinner tickets, or to fulfill a pledge because donors are not allowed to receive any goods or services in exchange for their contributions. Once you have identified donors who give to your organization through their donor advised fund, you can tailor your communications and point out the ease of setting up a recurring gift schedule.
• Start early—Donor advised funds appeal to younger donors because of their low initial gift requirement. So be sure to appeal to younger donors and you will increase the likelihood of cultivating planned gifts and having predictable, ongoing support.
• Remember the donor—When a grant is made from a donor advised fund, the sponsoring entity may send a letter confirming the grant and identifying the donor and the fund; although many request anonymity. If the donor is identified, remember to thank the donor as well as the sponsoring entity. This will cultivate them for the next gift.

Donor Advised Funds Benefit Donors and Nonprofits Alike

If you are a donor, remember that donor advised funds provide an easy way to contribute to your favorite charity while claiming an immediate charitable deduction and avoiding taxes on long-term investment gains. You also have the flexibility of deciding how much to give to which nonprofit(s) at a later date.

If you are a nonprofit, remember that encouraging gifts from donor advised funds is not very different from other donation vehicles. It takes continuous donor cultivation, which of course is built upon sincere relationship building. It’s all about helping your donors make the gift that is right for them. A gift that will enrich the entire community.