Understanding DAFs: A Comprehensive Guide for Nonprofits
Donor advised funds, also known as DAFs, have become one of the most essential tools for nonprofit organizations looking to raise funds and further their philanthropic impact in the areas they serve. While DAFs have been around for a while, they’ve become increasingly more popular and convenient over the last few years—for donors and nonprofits alike. For nonprofits, understanding how to leverage donor advised funds within your larger organizational infrastructure can unlock significant opportunities and create meaningful impact.
The allure of DAFs goes beyond just access to funding; these funds fuel immediate projects and programs and pave the way for lasting relationships with donors eager to see their contributions create real change. This guide will delve into everything you need to know about leveraging DAFs at an organizational level, highlight their benefits, and discuss strategies for engaging donors.
Key Insights
- DAFs can provide nonprofits with a steady funding stream as many donors use these funds for regular contributions.
- DAFs streamline non-cash donations for both donors and nonprofits.
- DAFs often contain significant philanthropic capital, positioning nonprofits to receive larger gifts through consistent engagement.
- Organizations that serve as DAF providers, like Greater Houston Community Foundation, bring local knowledge and expertise that help donors direct their DAFs effectively to address regional issues, enhancing the impact of each donation to the fund.
- Engaging DAF donors long-term requires tailored outreach and a strategic approach, but can increase donor interest and foster important relationships.
Table of Contents
- Why are DAFs important?
- What do DAFs do?
- How do DAFs work?
- Community foundations and DAFs
- Benefits for nonprofits
- Strategies for engaging donors
- Encourage connections by partnering with the Foundation
Why are DAFs popular? An overview of their importance.
DAFs largely owe their ubiquity to their ease of use and flexibility as a charitable wealth planning tool. Whether a donor is doing complex estate planning calculations that require moving money or participating in year-end giving for their favorite causes, you can bet that a donor advised fund will be involved. The accounts are favored particularly because they allow donors to contribute various asset types (cash, stock, real estate, and other non-cash assets), receive immediate tax benefits, and stay involved in the grant recommending and distribution process.
Managed by sponsoring organizations—typically community foundations or financial institutions—DAFs provide a streamlined, structured, and tax-efficient approach to charitable giving. Their popularity and flexibility mean integrating DAFs into fundraising efforts is essential for attracting funds and building long-term donor relationships for nonprofits of all shapes and sizes.
What do DAFs do?
First and foremost, what is a donor advised fund, exactly? DAFs are philanthropic investment vehicles created to support charitable organizations. Donors can contribute cash, securities, or other illiquid assets to their DAF and receive an immediate tax deduction.
The important thing about this model is that it allows donors to separate the act of giving from the timing of their donations, which creates flexibility and enables strategic, long-term philanthropic planning—all with a relatively low barrier to entry.
These funds are often managed by sponsoring organizations—like Greater Houston Community Foundation—that handle administrative tasks like fund management, compliance, and distribution processing. The sponsoring organizations also offer unique insights and expertise that allow donors to maximize the impact of their donations.
Read more about giving appreciated stock and how to gift real estate to a donor advised fund.
How do DAFs work?
How do donor advised funds work? What does the process of establishing a fund and making grants actually look like?
- Choosing a sponsoring organization. Establishing a DAF begins with selecting a sponsoring organization, which will inevitably make all the difference in donor experience. Community foundations, in particular, offer specialized knowledge of local needs and can guide donors interested in making a regional impact.
- Initial contributions and funding. Contributions to DAFs are irrevocable, meaning they are legally bound for charitable use. The initial funding and subsequent donations grow tax-free, enhancing the fund’s potential for future giving.
- Recommending distributions. Donors can recommend grant amounts and when to allocate them to their chosen nonprofits. Some sponsoring organizations also provide grant-making tools to assist donors in making informed decisions.
- Tax implications for donors. DAFs provide substantial tax advantages, which may include an immediate deduction for contributions, a reduction in capital gains taxes, and potential estate tax benefits. By combining tax savings with charitable giving, donors can maximize their philanthropy while reducing their tax burden.
- Potential for long-term charitable planning. DAFs also serve as a legacy tool. Donors can recommend recurring grants or set up guidelines for family members to continue their charitable mission after they pass. This is essential for nonprofits and grant recipients because it creates a reliable funding source across generations.
The role of community foundations in donor advised funds
Community foundations like Greater Houston Community Foundation are nonprofit entities that play an integral role in administering and distributing donor advised funds. Because community foundations are generally focused on improving the quality of life in a specific region, they offer essential knowledge about local issues and infrastructure. A few important notes on the role community foundations play with DAFs include:
- Infrastructure and support for donors. Even the simplest forms of philanthropy involve complexities and challenges. Community foundations offer valuable resources that enable donors to make impactful contributions to their communities more easily.
- Knowledge of community needs. One of the benefits of working with a community foundation is access to their expertise and knowledge of local issues and opportunities. This expertise helps donors make well-informed decisions that address specific community needs, enhancing the impact of their contributions.
- Knowledge of important guidelines. Philanthropic advisors can help you get the most out of your giving while staying within important legal guidelines.
One such guideline that is essential and changing is the rules on bifurcated gifts. A bifurcated gift is a grant where one part is tax-deductible, and the other is not. According to the IRS, donor advised funds cannot facilitate bifurcated donations, as it may help confer benefits that exceed incidental benefits to the donor, advisor, or related persons—but this hasn’t always been the case.
Because of the constant changes to limits and guidelines on every type of gift, donors increasingly need professionals who can help guide their hand, and nonprofit organizations increasingly need experienced professionals dedicated to compliance and reporting.
Read more about the recent IRS changes to bifurcated gifts
Benefits of DAFs for nonprofits
DAFs offer innumerable benefits to donors looking to give strategically while making an impact, but they’re also essential tools for nonprofits helping to effect change. Some of the biggest benefits for nonprofits include:
- Steady funding sources. DAFs can offer a steady funding source for nonprofits, as many donors use these accounts for regular, scheduled contributions. DAF donors tend to be highly engaged, often giving repeat gifts, which can foster long-term partnerships.
- Potential for larger gifts. DAFs often hold a significant amount of philanthropic capital, making them a valuable source of larger gifts. By cultivating relationships with regular donors, nonprofits can position themselves as viable recipients of substantial contributions through these funds.
- Simplification of non-cash giving. For both donors and nonprofits, donor advised funds can simplify the process of non-cash giving. Donors can contribute complex assets like securities, real estate, and art, while the nonprofit receives cash grants from the sponsoring organization without the need to manage these assets directly.
- Recognition and partnership opportunities. Building recognition among regular donors can greatly enhance a nonprofit’s visibility. Community foundations often acknowledge nonprofits supported by DAFs in their publications and events, which can expand a nonprofit’s reach and foster partnerships with other donors.
Effective strategies for engaging donor advised fund donors
Because of the convenience inherent in donating to donor advised funds, nonprofit organizations will likely benefit from taking the extra time to develop outreach programs and employ strategies to engage their donor base. Some things your organization can do to engage DAF donors include:
| Strategy | Method |
| Understand donor motivations and interests | Successful engagement with DAF donors requires understanding what motivates them. Many DAF donors seek to create a lasting impact and are interested in causes like education, healthcare, or the environment. |
| Tailor outreach and communications | Nonprofits should tailor their outreach efforts by sharing stories, updates, and impact reports that resonate with DAF donors’ interests. Personalizing communication can help establish a connection with donors and make them feel invested in the organization’s mission. |
| Build relationships within the community | Networking within the community, including community foundations and sponsoring organizations, can open doors for nonprofits to connect with potential donors. Hosting events or joining educational programs can also increase visibility within this network.Locally, nonprofit organizations are a primary partner of the Greater Houston Disaster Alliance and play a crucial role in disaster response, recovery, and building disaster resiliency in communities. |
| Promote specific projects or initiatives that align with their causes | Promoting targeted projects or initiatives can attract donors who wish to fund specific causes or outcomes. Highlighting particular needs or goals provides a concrete purpose for their donations, which can lead to larger, more impactful contributions. |
Encouraging connection with Greater Houston Community Foundation
DAFs are an essential resource in the modern fundraising landscape and can be a jumping-off point for real connection and sustaining relationships with your donor base—especially if you work with the right sponsoring organization.
Nonprofits with a thorough understanding and a strategic plan can position themselves not only to receive and manage grants from donor advised funds but to benefit from long-lasting partnerships and grow their impact.
Nonprofits seeking to amplify their impact can greatly benefit from fostering relationships within the DAF ecosystem, particularly with community foundations. These organizations are not barriers; rather, they serve as valuable partners in enhancing philanthropic efforts and extending the reach of nonprofit initiatives. We urge local nonprofit organizations to follow these steps to stay informed about the initiatives and contributions of the Foundation and our donors.
- Stay informed. Sign up for Insights and Community Insider to stay up-to-date on what is happening at the Foundation.
- Submit your nonprofit. If you are a Black-led Houston nonprofit organization, submit your nonprofit to be included in the Foundation’s Giving Guide of Houston’s Black-Led Organizations.
- Follow us on Facebook, LinkedIn, Instagram, and Threads!
More Helpful Articles by Greater Houston Community Foundation:
- The Power of Collective Giving
- Tax Strategies for Charitable Giving
- Maximizing Corporate Philanthropy
- How Do Community Foundations Work?
- How Charitable Giving Can Enhance Your Legacy Planning
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