Not exactly sure what donor-advised funds are or what to do when your organization receives a gift from one? Here’s a quick guide you can use.
A donor-advised fund, otherwise referred to as a DAF, is a philanthropic vehicle established by institutions like investment firms or community foundations. Some of the largest DAFs are at Fidelity, Schwab, and Vanguard. The way it works is a donor makes a charitable contribution to their donor-advised fund and receives an immediate tax benefit.
Then, while the donor no longer has legal control over the money in their DAF, they can recommend that grants be distributed from their fund to charity. Unlike foundations (public and private), donor-advised funds are not required to disburse to nonprofits each year.
There is an increasing likelihood that your organization may see a gift from a DAF because, according to the National Philanthropic Trust, annual contributions to donor-advised funds totaled $22.26 billion in 2015 and DAFs are some of the largest charities in the country.
What to expect
When you receive a gift from a donor-advised fund, it will likely be accompanied by a letter that reads something like this:
It is a pleasure to present a $1,000 grant to ABC ORGANIZATION to be used for PURPOSE. This grant was made at the recommendation of a fund advisor through a donor-advised fund at the XYZ Foundation.
Fund Advisor: Jane Doe
Fund Name: Jane Doe Family Fund
Please note that it is not necessary to send the XYZ Foundation any tax receipt or acknowledgment letter, and we ask that you do not add the XYZ Foundation to your mailing list.
The check is made directly from the public charity, such as Fidelity Charitable, so you won’t see the individual donor’s name on the check.
Entering the gift
To record the gift, you’ll do the following:
Enter the gift under the record of the donor-advised fund.
Here’s why: While the individual donor made the recommendation to send this donation, the final decision and the distribution of the money is managed by the donor-advised fund.
Enter a soft credit on the record of the individual who made the recommendation to send the gift.
Here’s why: A soft credit is used to track and steward supporters who may not make a gift directly, but who have considerable influence over the decision to make a gift to your organization—as is the case with a donor-advised fund.
It’s important to note that IRS regulations prohibit a donor from fulfilling or reducing the balance of a pledge with a payment from a donor-advised fund.
Acknowledging the gift
You do not need to send a tax receipt or acknowledgment letter to the donor-advised fund itself. It is important, however, that you express your gratitude to the person who recommended the grant. You can create a letter template that’s specifically used for this purpose. Keep the following in mind:
- Do express your appreciation of the grant made through the donor-advised fund. This letter is your opportunity to thank and steward the person who recommended the grant.
- Do not include tax deductible language—the supporter received a tax deduction when they put the money into the donor-advised fund.
Here’s a quick example:
Thank you for recommending that we receive a generous grant of $1,000 through your donor-advised fund at XYZ Foundation. We have received the grant, and the funds will make a profound difference in the lives of homeless children in our community.
Thank you again for caring so deeply about the mission of ABC Organization. We are grateful for your support.
With donor-advised funds on the rise, it’s important to establish procedures to record and acknowledge these gifts and the supporters who are recommending them.