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Pros-and-Cons: Donor Advised Funds

Pros-and-Cons: Donor Advised Funds

Philanthropy is changing and the landscape of funding options continues to shift from one whose primary source is foundations to more diverse and flexible options. One of these options is donor advised funds (DAFs). Donor advised funds are only becoming more and more popular, and this growth in popularity is important when considering what funding options to consider for your non-profit. So what are the benefits and what are the drawbacks, and how do you know that donor-advised funds are the right choice for your organization?

What are they?

Put simply, a donor advised fund is an account specifically for the purpose of charitable giving. Be it cash, stocks, or other gifts, the owner of the account is eligible for an immediate tax deduction for any assets put into the account. The assets in the account then belong to  either the charitable foundation or the financial management firm where the account is being supervised. While donor advised funds legally belong to their sponsoring organization, the contributors to the account influence where the funds go, hence the name. The tax benefits of creating such accounts are clear and make such mediums for giving very attractive to potential donors, and the growth of their popularity is likely to continue to grow.

So, what are the benefits?

There are some considerable benefits to donor-advised funds when considering these as a funding option for your organization.

One of these benefits is that there are a variety of types of donor-advised funds. Because they can come from donors of all types with various personal goals and issues of interest, it’s very probable that there is a donor-advised fund out there looking to support the cause that your non-profit serves.

Additionally, because of the immediate tax deduction, it’s appealing to both donors and nonprofits. Both parties benefit from these types of accounts. Nonprofits are able to access more funds, sometimes for generations, and donors are able to benefit through immediate tax deductions.

And, what are the drawbacks?

One of the most frustrating things about donor advised funds is that there is no real deadline for giving. DAFs can be created by donors without any immediate intention for spending or any clear indication of the type of organizations they are looking to sponsor. And while foundations or corporations are required to report where their previous donations went in their 990s, DAFs are exempt from this process, so researching who a DAF is likely to fund can end up leaving nonprofits scratching their head.  So, while there may be a lot of funds out there, that doesn’t necessarily mean that they are accessible to the non-profits looking to access them, and the tax deductions are granted even before the money is given out to charity. Without payout demands, DAFs start to seem like a treasure chest of resources without a key.

Additionally, DAFs can vary greatly in size and amount of donation. There is no guarantee of consistency in the amount of money available from year to year.  Even if an organization manages to elicit funds from a DAF, because of the limited requirements for structure or consistency, there is no guarantee of continued donations or even that a DAF will be looking to donate money at all year to year.

The Takeaway

Donor advised funds are a rapidly growing area of funding for nonprofits. And, while they can be useful in their diversity and areas of interest, ultimately, to be more lucrative source of funding there will need to be a greater number of regulations around when and how money can be spent. Part of their appeal is the laid back structure, which although appealing to many donors, can prove frustrating. Donor advised funds are growing more popular, and nonprofits will need to develop the ability to convince donors to move money out of funds and into the world.

Written by Margaret Peth