Why Donor Advised Funds Are Good for the Nonprofit Sector
There is a lot of conversation about donor advised funds and whether they are “good” for society in general and the nonprofit sector more specifically. Here are seven reasons why donor advised funds are good for both donors and for the nonprofit community they support:
- MAXIMIZED CHARITABLE DEDUCTIONS: Many donors contribute to their donor advised funds using appreciated non-cash gifts, which allows them to maximize their tax deduction. This in turn means that there is more money to give to charitable causes important to them instead of paying those same dollars to the IRS. In fact, studies have shown that donors who make grants from their donor advised funds make larger contributions to the nonprofit organizations they support than do those who write checks. The reason is that their donor advised fund assets have already been designated for charity, and so they see their fund as a pot of charitable dollars to allocate rather than a donation that hits their checking account. Sponsoring organizations of donor advised funds, like the Community Foundation, specialize in all forms of charitable giving, which makes it easy for donors to be more generous.
- TIMING: Donor advised funds allow the donors to be better able to sync their charitable deductions with their income tax obligations. Donors who have a significant tax event – like the sale of a business or real estate – in one year can offset that income by prefunding several years’ charitable donations at once. To help donors address their income tax challenges allows them to set aside more charitable dollars.
- CONVENIENCE: Donors who create donor advised funds enjoy the convenience of making a single charitable donation – and getting a single tax receipt – and then granting their money over time without worrying about collecting additional receipts. It also allows the nonprofit who receives the money to forego generating that tax receipt.
- DUE DILIGENCE: Donors who grant to charity from their donor advised funds can rest assured that the Community Foundation will conduct due diligence to ensure that the organization they want to support is indeed a qualified charity under IRS guidelines. The Community Foundation also helps donors navigate the sometimes confusing guidelines about charitable giving. This ensures that donor dollars are reserved for qualified organizations and qualified purposes.
- ANONYMITY: Many donors give, not for personal recognition, but because they want to support the work of the nonprofit organization. Some of our donors want to do so anonymously because they want to do good but to “fly under the radar.” A donor advised fund allows a donor to make anonymous grants to get needed resources to nonprofit organizations but to keep their own identity confidential. A donor has the option with each grant to make the decision he or she deems best for that situation.
- INVESTMENT GROWTH: Although there is no required minimum annual pay-out for donor advised funds, the industry average – and our Community Foundation average – is that donors pay-out about 20% of their fund balances annually. This compares to a pay-out rate of just over 5% for private foundations. In addition, a donor advised fund is invested while under management with the investment gains creating even more money that is designated for charitable purposes.
- ESTATE PLANNING TOOL: A donor advised fund is a great estate planning tool and an easy way for donors to include charitable giving in their estate plan. By naming their donor advised funds as a beneficiary of their will, trust, or retirement assets, donors can make one designation in their estate plan but then change their charitable beneficiaries as often as they like through their donor advised fund. Anytime a donor includes charitable giving in an estate plan it’s a win for the nonprofit community!
Donor advised funds are clearly good for donors, which is why they have become so popular in recent years. However, donor advised funds are also good for the nonprofit sector because they generate even more money for charitable causes both now and later.