Mercer Advisors Logo

Grow Charitable Gifting Through Donor-Advised Funds

Mark Eshman

Director of Foundations and Endowments Group, Senior Wealth Advisor

Summary

Nonprofit organizations can grow endowments and annual giving through tax-deferred vehicles like donor-advised funds.

Group of people at a conference
Facebook
Twitter
LinkedIn
Email

Last fall, Mercer Advisors’ Foundation and Endowment Group hosted annual conferences in both Sun Valley, Idaho, and Portland, Oregon. Central to the “Growing Your Gifting” theme was a focus on driving donor engagement, endowments, and annual giving for nonprofit organizations. While we covered a range of vehicles for gifting, donor-advised funds seemed to resonate with guests the most. What are donor-advised funds, how do they work, and what drives their popularity? Read on to find out.

 

Donor-advised funds by the numbers

A donor-advised fund (DAF) is a charitable giving vehicle with numerous tax benefits wherein a donor (grantor) can donate cash and securities, including real property and appreciated assets, to a nonprofit (grantee) of their choice; these contributions are tax-deductible. Although there is no obligation for future gifting, the grantor can develop a plan for periodic charitable giving. What’s more, placing appreciated assets in a DAF can help minimize capital gains taxes. With larger DAFs, the grantor can choose to hire a financial advisor to help manage and invest assets held within the fund.

DAF assets have grown dramatically over the past decade. According to the National Philanthropic Trust, DAF contributions have increased by 18.1% annually to $72.67 billion as of December 31, 2021.¹ The total asset value of all DAFs at the end of 2021 was $234 billion. Most remarkable is the sheer number of DAFs, which topped 1.2 million in 2021.

According to conference speaker and Schwab Charitable Managing Director Julia Reed, Schwab received $9.4 billion in DAF contributions and made $4.7 billion in DAF grants to over 117,000 charities in 2022. Of these donors, 88% made a grant in their home state and 75% supported at least one new charity.

The numbers are impressive. Let’s do the math on why DAF contributions have grown exponentially over the last decade.

 

The power of donor-advised funds

Donor-advised funds (DAFs) are useful tools for both grantor and grantee. The rapid growth of DAFs can be attributed to a few key factors:

  • Flexibility: Allow cash, property, appreciated assets, and other security investments.
  • Ease of use: Easily administer recurring grants.
  • Tax efficient: Grow assets tax-free.
  • Tax planning: Provide deductions in the current year and in the future.

DAFs can also encourage a charitable legacy, enabling family gifting intent across generations. Donors can gift funds through their wills and tax-deferred plans like IRAs, 401(k) plans, life insurance policies, and even through a charitable remainder trust.

 

Why establish a DAF instead of a private foundation?

Why would donors establish a DAF versus a private foundation? The donor-advised fund has several advantages for the grantor. It’s easier to set up, and unlike private foundations, there are no legal fees, excise income taxes, or requirements for annual distributions. Donors can deduct up to 60% of adjusted gross income (AGI) for cash grants and 30% for stock or real property, which is more than the 30% for cash and 20% for stock allowed for private foundation grants.

Donor-Advised Funds Private Foundations
Tax deduction for cash grants 60% of AGI 30% of AGI
Tax deduction for grants of stock or other securities 30% of AGI 20% of AGI
Start-up costs Minimal Potentially substantial legal fees
Time to create Almost immediate Several weeks or months
Excise tax on income None 1.39% annually
Grant distributions No requirements 5% of net asset value (NAV) annually

Source: National Philanthropic Trust2

DAFs have additional advantages. They allow the flexibility of making anonymous donations, as opposed to private foundations, which require a name corresponding to donations. A private foundation or community foundation may also be restricted by their missions—a DAF may be a better solution for donors providing support outside those missions. If a donor has more sophisticated granting needs or wants to make international grants, a DAF may be the preferred mode of giving.

 

Other considerations

IRS rules dictate which organizations qualify for DAF grants, and which grants may be subject to excise taxes. Most domestic 501(c)(3) charitable organizations, 509(a)(1), and 509(a)(2) public charities can accept grants without following special rules.

Incidental benefits—where the grantor receives something of personal value—are prohibited. For instance, tickets to a charity event, memberships, or tuition for a grandchild are not permitted, as those are not tax-deductible gifts. Per the IRS, excise taxes will be imposed on unqualifying distributions, including grants in which a donor receives “more than incidental benefits.” The easy way to think about this is whether the donation is 100% tax-deductible.

According to the Indiana University Lilly Family School of Philanthropy, most public charities receive, solicit, and are prepared to receive DAF gifts. Schwab Charitable has a useful checklist for how your organization can best use and attract grants. If you want a copy, or are simply interested in learning more, find it here.

 

Make DAFs work for your organization

Individuals represent about 67% (or $324 billion) of all charitable giving in the U.S.ᶾ If you run a nonprofit organization, it might make sense to start conversations with donors about using DAFs. Moreover, many donors may have DAFs, so building awareness that you can receive grants may drive additional donations. As always, your Mercer Advisors team is here to answer questions on how to drive donations and discuss long-term potential benefits. Are you using DAFs in your funding strategy?

Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an investment advisor with the SEC. The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements.

All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate but is not guaranteed or warranted by Mercer Advisors. Content, research, tools and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. For financial planning advice specific to your circumstances, talk to a qualified professional at Mercer Advisors.