How Donor Advised Funds Work & How Nonprofits Leverage the DAF Ecosystem to Drive Philanthropy

By Peggy DeAngelo,
Director of Development at
John Chambers College of Business and Economics
West Virginia University Foundation

By Adam Miller,
Senior Vice President
at CCS Fundraising

Donor Advised Funds – or “DAFs” – have firmly established themselves as a philanthropic vehicle in the donor toolbox. A recent special report from the Giving USA Foundation and the Indiana University Lilly School of Philanthropy highlights that “total grant dollars from DAF-sponsoring organizations … nearly doubled from 2014 to 2018 .” In 2019, grants from DAFs represented 6.1 percent of all dollars given to charitable organizations – up from 3.8 percent five years earlier – and have experienced a 90 percent net growth in grant dollars from 2014-2018.

In this two-part article, we will unpack:

1. The DAF ecosystem: how money moves through the system and the unique roles each type of sponsoring organization plays within that system.
2. The two DAF donor types: known and unknown. We will define DAF donor personas and outline strategies to engage each persona and increase investments in your organization more deeply.

Part 1 – The Donor Advised Fund Ecosystem: How Do DAFs work?

To take advantage of this massive pool of charitable opportunity, veteran, green, and aspiring fundraisers across all sectors must understand not only what a DAF is, but also how the DAF ecosystem operates. Knowing who the stakeholders are within that ecosystem, and their roles and motivations, enables fundraisers to design strategies targeted at DAF donors that will help drive philanthropic revenue to their organization’s mission.

How a DAF Operates

Note: lines indicate the flow of cash.

1. The donor contributes to a DAF of their choosing. A DAF is operated by a sponsoring organization: a public charity that establishes and maintains the DAF. Depending on the type of sponsoring organization who maintains the DAF, donors may transfer any number of asset classes to the DAF (E.g., cash, appreciated securities, cryptocurrency) and make the DAF a beneficiary of a trust, will, or insurance policy.
2. The donor receives an immediate tax benefit at the time the donor transfers assets to the DAF (E.g., income tax deduction, capital gains tax avoidance). The donor’s assets will be invested while in the DAF with the goal of growing the donor’s philanthropic capacity, much like a typical investment portfolio. Depending on the type of DAF and the donor’s relationship with the sponsoring organization, the donor may have influence over how their contributions are invested and grown within the DAF.
3. Once the donor contributes to a DAF, they have officially made a charitable gift and no longer have control or ownership of the contributed funds. Rather, the donor will have advisory rights to recommend that grants be made from the DAF to a qualified charity of the donor’s choosing. DAF policies differ and may affect the timing of gifts, the amount of a gift, and the nonprofits that are allowed to receive grants.
4. Since the nonprofit grantee receives the actual gift from the DAF, not the original donor, the nonprofit grantee may or may not know the identity of the original donor. By their very nature, DAFs are a convenient way for donors to remain anonymous or difficult to identify (intentionally or unintentionally) through traditional research, which may present challenges to a nonprofit seeking to cultivate relationships with DAF donors and grow their fundraising revenue.

Tip: It is recommended that you research the DAF organizations that donors give through to your nonprofit and/or that your donor prospects utilize as their giving vehicle to better understand how your mission and work align with the policies and goals of the sponsoring organization. Armed with that knowledge, you can tailor your communications and show how your nonprofit will help the donor and the sponsoring organization meet their philanthropic goals. 

Donor Advised Fund Ecosystem Stakeholders

With a baseline knowledge of how assets travel through the DAF ecosystem, we will now take a deeper dive into the distinct stakeholders that drive this ecosystem. When building your nonprofit’s fundraising strategies, consider the unique characteristics of each stakeholder and design targeted approaches to best leverage the opportunities DAFs present.

Sponsoring Organizations

There are more than one thousand sponsoring organizations and over one million donor advised accounts in the United States as of 2020 . There are three main types of sponsoring organizations with different goals, motivations, and often different policies and regulations: National/Commercial, Community Foundations, and Single-issue Charities. Within each subgroup, individual sponsoring organizations may have additional policies that are unique to that organization.

Tip: While tax benefits are a motivating factor for many donors using DAFs, tax benefits in general remain a low priority for most donors in their decision to make a philanthropic gift.

Part 2 – Donor Personas: What Motivates DAF Donors? How Can I Fundraise from DAFs?

DAF donors are typically motivated to give through a DAF for several reasons, with three of the most common reasons being: (1) more control over tax benefits; (2) ease of the experience; and (3) ability to make secure, longer-term plans.

1. Tax Benefits: A donor receives tax benefits at the time they transfer assets into a DAF and not when a grant is made to a nonprofit from the DAF. Donors can decide when the tax environment is most advantageous to them and their financial plans. Donors can also avoid capital gains tax liability by deducting the full market value of their contributed assets (versus any gains they may make from selling those assets in the open market).Donors who invest in cryptocurrency and seek to make a philanthropic investment with revenue generated from their crypto investments may find DAFs appealing as well; because the crypto market is so volatile, the donor can decide to transfer crypto assets into a DAF, and at an opportune time suggest a grant from their DAF to a charity of their choice when they are prepared to make that decision. In this way, the donor can maximize the amount of their philanthropic investment and mitigate any risks associated with the volatile crypto marketplace. There is more predictability and control over financial planning for many donors when using a DAF as the preferred method of giving.Tip: Because some DAF donors can influence DAF investments, your nonprofit may have multiple opportunities to benefit. Consider speaking with your DAF donors about recommending your organization as part of the DAF investment portfolio if your organization can produce financial returns. 
2. Experience: Many DAF sponsors offer donors services such as access to online platforms that streamline record keeping and enable monitoring of their total philanthropic impact in one place. Others may offer the ability to research nonprofits, track the growth of their assets within the DAF, influence the DAF investment portfolio, name their DAF, and network with other DAF account holders (DAF accounts can be called “foundations” without having to comply with more strict regulations that apply to formal foundations). Sophisticated DAF sponsors can help donors liquidate assets and assist with complex asset donations. Commercial DAF sponsors may provide a one-stop shop for all of a donor’s financial planning needs (e.g., financial advising, portfolio management).
3. Long-term Planning: As noted previously, a key benefit of using a DAF is asset growth while the philanthropic dollars remain in the DAF. Donors can plan for future philanthropic gifts at a level higher than they may be capable of making today. As a result, donors can better build their philanthropic strategy and vision that includes near, mid, and longer-term impact goals.Additionally, DAFs can make estate planning a bit more seamless, giving donors the ability to name nonprofit beneficiaries of the DAF upon the donors’ passing. The average age for opening a DAF is 55 (an average that continues to skew younger) ; these individuals are likely contemplating their philanthropic legacies. Donors with families they hope to engage in shared philanthropy may also find DAFs appealing for this reason; donors can give family members advisory rights to their DAFs and name family members beneficiaries of their DAF, giving their beneficiaries a philanthropic platform that they can use to support their personal social impact goals into the future.

Every donor is unique, as are their philanthropic goals and motivations. However, these common motivators for using a DAF can help inform the way you discuss giving with your donors and prospects who use DAFs and enable new and creative ways to engage your donors in philanthropy.

Engagement strategies for DAF holders likely will not be as straightforward as those for more traditional donors. The complexity of the DAF ecosystem and its built-in anonymity prevents DAF holders from being easily identified as there are no DAF holder lists to tap into or databases to access. Instead, fundraisers need to emphasize:

• The Unknown DAF Donor – curating your own list of potential DAF donors by determining who within your organization’s network uses a DAF
• The Known DAF Donor – recognizing the best way to engage with those donors that are already known to use DAFs

Prospecting for the Unknown DAF Donor

While it may be difficult to identify which of your donors or prospects use DAFs, the following approaches are worth considering to help uncover DAF donors and prospects:

1. Survey your donor base periodically and ask them what their preferred giving vehicle is. Consider asking your donors directly whether they use a DAF as part of their philanthropic strategy.
2. Work with your Board (and other key stakeholders) – especially those who give through DAFs. Ask Board members to identify prospects they may know who use a DAF. This strategy translates to other high-level DAF donors who can be champions for your mission among their peers.
3. Create a “ways to give” page on your website that includes a separate section on DAFs and track traffic to that page. Consider sending targeted email outreach to groups of donors that highlight DAFs as a way to give to your nonprofit and provide embedded links to your website that offer more information on this topic – those who click through are likely DAF donors (or future DAF donors).
4. Use other marketing technology, such as HubSpot and Pardot, that track an individual’s engagement with you and your content – through your emails, websites, calls, and other platforms – to gather additional data points on activity that may identify them as a DAF donor.
5. Identify local DAF organizations and review their Board, volunteer lists, and donor roles for likely DAF holders. Develop relationships with these organizations that may then be more likely to highlight your organization and its mission to their DAF holders.
6. For DAF donors who give to your organization anonymously through their sponsoring organization (it is estimated that fewer than 5 percent of DAF donors give anonymously ), send stewardship materials to the sponsoring organization itself. Encourage representatives at the organization to share any stewardship materials and impact reports with that donor. Offer the donor (via the sponsoring organization) opportunities to remain anonymous to the public while engaging with your organization in special one-on-one conversations.

Tip: Many supporting organizations, particularly community foundations, also make grants directly from their operational and programmatic funding. Building relationships with these organizations can support potential grant opportunities with those supporting organizations beyond the DAF holders.

Leveraging the Known DAF Donors

In addition to traditional stewardship best practices, there are strategies you can build into your fundraising plans to fully leverage those donors that you know have and use a DAF. A few baseline recommendations include:

1. Accurately capture and track all information in your database or CRM so you know who has a DAF (use gift receipts from the sponsoring organizations and insights gleaned from the methods above).
2. Understand any restrictions and limitations that may exist for gifts from DAFs (e.g., no benefits of value can be provided, recognition is generally okay, allowance of pledges and pledge payments are dependent on sponsoring organizations and evolving IRS protocols/legislation). Educate your team and your board on these factors.
3. Consider sending DAF-specific appeals, mailings, or impact stories to donors and prospects you know give through DAFs or who you suspect may have a DAF.

There are also certain circumstances in which specific DAF donor persona types can be engaged to maximize philanthropic revenue.

Donor Personas

The Bottom Line

Contributions to and grants from DAFs continue to grow at impressive rates, meaning that DAFs are likely to play an even more prominent role in philanthropy in the future than they do now. Testing and implementing new, targeted strategies that are informed by the DAF ecosystem can position you and your organization for sustainable growth and future success.