Donor-Advised Funds: A Crash Course for Nonprofits

Donor-advised funds are incredibly powerful giving options for donors. Learn more about what they are and the benefits of these funds in this beginner’s guide.

When scrolling through the Internet, you’ll find all sorts of information and advice regarding the best ways to raise money for your nonprofit. Often, organizations are looking for new ways to grow their donor base or amplify the impact of specific fundraising campaigns.

One trend that’s becoming more and more popular for nonprofits to implement in their development plans is the donor-advised fund. These funds initially may seem pretty confusing. If you’re just starting to conduct your research and determine how these funds can support your nonprofit, this article is the perfect place to start.

This crash course provides all of the background knowledge that nonprofits like yours need to start incorporating donor-advised funds into your own strategies. We’ll cover the basics:

• What is a donor-advised fund?
• The benefits of donor-advised funds for nonprofits
• The advantages of donor-advised funds for donors

One of the keys to incorporating donor-advised funds into your organization’s own strategy is being able to explain exactly what this opportunity is and its advantages to supporters. Once you’ve explained the basics to supporters, they’ll be able to determine if it’s the right course of action for their future contributions.

What is a donor-advised fund?

Essentially, donor-advised funds are an investment account set up by donors and designed to support a nonprofit they’re passionate about.

Donors can set up these accounts and give all or a portion of the interest on their funds within it to charitable organizations. While donors entirely relinquish their ownership of the funds when they contribute to a donor-advised fund, they stay on in an advisory capacity with the financial service provider while the account is active.

So how exactly do these funds work? Here are the steps donors take to set up and start using donor-advised funds:

1. Your donor chooses a financial service provider to work with.

Donor-advised funds are run through a sponsoring organization, usually either a private foundation or a popular financial service provider. Fidelity, Schwab, and Vanguard are three big names among the donor-advised fund providers.

These funds are entirely set up by your supporters, so your organization will likely have very little to do with their selection of a financial institution. However, if they ask for your opinion, you’re welcome to share it with your supporters.

2. The donor names the account, its successors, and beneficiaries.

After your donor has chosen a financial institution to work with, they can set up the actual account. Your donor will have the opportunity to name successors and/or beneficiaries of the account in the event of their passing.

Successors are those who can take over the account for the donor. Meanwhile, beneficiaries are those to whom the funds are distributed in the event of the account owner passing away.

Supporters who decide to pursue donor-advised funds are also great candidates to discuss planned giving with. Introduce the idea that donor-advised funds can be used as planned gifts if the supporter names your organization as the beneficiary.

3. The donor makes charitable contributions to the account.

Once the account is set up, the donor makes the charitable donation. Often, these accounts contain funds equal to (or greater than) many of the major gifts received by nonprofits. Whether the donor puts all of the funds in at once or if they decide to spread out their contributions over time, donor-advised funds often have a lot of potential for growth.

Financial institutions typically have a minimum amount that needs to be contributed to these funds, which can be made in the form of liquid or assets. Then, the assets can grow tax free!

Once the supporter has made the contribution to the account, they relinquish all ownership of the funds. However, they are able to stay involved with the account in an advisory capacity. This surrender of ownership has been the cause of some scrutiny about the value of the funds, so be sure your supporters understand the impact of their setting up these accounts beforehand.

4. Your donor suggests the charitable organization to support.

As we mentioned, your donor advises the use of the funds they’ve contributed to the donor-advised fund. This means they are able to suggest the charitable organization they want to support through the fund.

That’s where your organization comes in! Ask your supporters to name your organization as the recipient of the funds in this account. The investment revenue generated by the donor-advised fund is then almost always contributed to the organization of the donor’s choice in the form of grants.

The benefits of donor-advised funds for nonprofits

Now that you understand the basics about how donor-advised funds work, you may be curious about the advantages these accounts offer. Donor-advised funds create a lot of long-term benefits for nonprofit organizations. Three of the primary benefits that nonprofits receive from donor-advised funds include:

1. Consistent funding. When supporters set up a donor-advised fund, they can suggest that the funds within it are distributed to organizations like yours over a certain number of years. This creates predictability for your organization’s fundraising strategy.
2. Increased donor retention. One great advantage of donor-advised funds is that supporters can give in large amounts to nonprofits whenever it’s most convenient. By continuing to leverage donor data, steward these supporters, and build relationships, you’ll have the opportunity to retain engagement with these valuable donors. You can build a lasting relationship where they’ll stay involved with your organization over the long term.
3. New giving opportunities. Donor-advised funds are a convenient way to give to your nonprofit. Make it easy for supporters to contribute through this method and encourage them to spread the word in order to get others on board as well.

Be sure your organization is maximizing the potential of these funds and discussing unique ways supporters can use the funds. Planned giving is only one example. According to Double the Donation, donor-advised fund contributions may also be eligible for matched contributions from a supporter’s employer! By identifying matches for even part of the contributions made through donor-advised funds, you can dramatically increase the amount of funding you receive from this important source.

The advantages of donor-advised funds for donors

In the conversations you have with supporters about potential donor-advised funds, you shouldn’t simply explain the benefits your nonprofit receives and leave it at that. You’ll also want to discuss the potential benefits that your supporters will receive by setting up a donor-advised fund.

Some of the benefits supporters encounter when they create donor-advised funds include the following:

• Easier management of funds. When supporters open a donor-advised fund, they have the opportunity to have the account professionally managed through an institution, providing a more straightforward investment process.
• Immediate tax deductions. Often, as soon as a contribution is made to a donor-advised fund, the money is immediately tax deductible for the donor. They don’t need to wait until the funds are distributed to obtain valuable tax benefits.
• Estate-planning options. When donors contribute to donor-advised funds, this money is no longer considered a part of the donor’s estate. Therefore, those funds are also not subject to estate taxes, providing some flexibility when it comes to estate planning.

When supporters create donor-advised funds and name your organization as the recipient of the funds, those donors deserve your immense gratitude. This appreciation guide provides ideas that your organization might use to thank major donors—read through that section to get ideas for showing appreciation to your donor-advised fund owners as well.

Regularly thank, engage with, and communicate impact to your donor-advised fund donors.

To communicate impact with these supporters, you might decide to send one-off letters and emails and make phone calls. You should also consider sending them regular copies of your annual report, especially during the years that these funds are distributed to your organization.

Effective appreciation will help you develop relationships with your donor-advised fund supporters so that you can encourage them to also get involved with other aspects of your organization, increasing their impact on your mission even further.