Episode 221: How to Better Deal with Donor Advised Funds - Acquisition, Communication, and Retention
Welcome to another edition of Around with Randall, your weekly podcast for making your nonprofit more effective for your community. And here is your host, the CEO and founder of Hallett Philanthropy, Randall Hallett.
It's another great day right here on this edition of around with Randall. We delve into the subject of donor advised funds. I have had, for most of my career a not quite love, not quite hate, but love hate relationship with Dafs. Early on in my career, I had a experience where a very well established relationship, a donor of the institution for which I worked.
Gifted most of their assets into a donor advised fund. As someone who spent three years in law school, understand the legality of it. Understand why they're there, we'll get into some of the benefits of why were established here in a moment. But the negative came out when I was trying to find ways of keeping that relationship alive with that specific donor as they use their donor advised fund.
And I ran into a lot of issues that I really didn't think needed to be there with the community Foundation, for which that that donor advised fund was housed. It led me to an initial thought process, some of which is still prevalent in my mind today. The donor advised funds are a challenge for nonprofit efforts.
That experience many years ago has multiplied exponentially because of the increase. The donor advised funds provide in terms of philanthropy in the United States. Today, we want to talk about the importance of figuring out how to work through these challenges. How do you engage donors through Dafs in a meaningful way? Because the growth of them is enormous. They are not going away.
If you want a conversation about the power structure and why there is a kind of disconnect or a dissonance in foundation's non-profits, however you want to put it in donor advised funds. You can go back and listen to episode where I talk about the power structure. Today, I want to talk about how to do it more effectively because we can't run from this.
Here's why. Let's look at some data that tells us about the importance donor advised funds play within the context of philanthropy in the world we live in today, and it's going to continue to grow. So if we just look at it from the Giving Institute and the giving USA report, which I'm honored to be a member of the Giving Institute, we're the group in partnership with the old school philanthropy that puts this together every year.
We know, based on the numbers, that the greatest growth area in philanthropy is foundations, moving up to about % of all philanthropic gifts being done. But that's a false narrative. If you don't add that the greatest growth inside foundations, inside that particular area is donor advised funds. So if you start pulling out that data, you can begin to see the trends.
So let's talk about some of these numbers. In, according to AMP trust, there were about , donor advised fund accounts in the United States by , there were , approximately. And the last number that we have that we can find in , there were almost million donor advised fund accounts. The growth in the number of accounts is obviously fold from the early part of the th century in terms of charitable assets.
In , the number of dollars or assets that were inside donor funds was somewhere around $. billion in that had jumped to billion. The latest numbers that I can find in that we feel very comfortable with, in terms of being true, is the total assets are $ billion. You're talking about an to fold increase in about years.
When we talk about how much money is going into donor advised funds. It was about just sort of ,,, in . In , then new money going in, new dollars being put into donor advised funds, almost billion. And the amount coming out, which in truth in the episode round with Randall, I talk about maybe some of the things and I've talked about it predicting that there may be some legislation eventually come to bear from probably Congress more likely than anywhere, but maybe a state gets involved putting a time limitation on donor advised funds.
The number of dollars coming out of donor advised funds in was about . billion. In , it's billion. This is all to say that there is more philanthropic assets inside donor advised funds. And if we take that into account and our job is to maximize philanthropic revenue, whether you're an infrastructure, you know, a finance database, prospect research management, or you are leadership, you're leading the organization or you're a gift officer, we're going to have to figure this out because more people are parking money in the donor advised fund system.
And there are good reasons why they do this. Number one is just in case you weren't as familiar with this particular area or subject of philanthropy, that they get an immediate tax donation if they make $ billion. Let's pick a crazy number. Set up a donor advised funds for $ billion in . Let's say they just finished it.
They get a $ billion tax deduction. Now that goes against their income, they can carry it forward. All these things in at one time. But they don't have to distribute the money until they're ready. Number two, it provides immense flexibility that funds can, as we just discussed, be given over time. While the tax deduction and the legal tax issues that are a part of this conversation, for many people, maybe they sold a business or they sold a large piece of property or something of that nature, and they know philanthropy can help reduce that tax burden.
They can shove that money in now. But again, there is no time limit for when they can distribute that money out. And on top of that, number three, it's tax free investment growth. If you put $ billion in today or let's say in and the market goes up %, that's $ million. Well, that grew tax free because it's inside a charitable entity.
And then they get to distribute more advise. But just really distribute. Now they're not going to give $ billion to charity over time. That one year growth gives them $. billion to give. It creates more power so that growth is not only tax free, it's also greater influence. Number four is it simplifies the record keeping. For the most part, donors have donor advised funds in the Community Foundation or now fidelity and other places are doing it.
I've even seen individual nonprofit do it, and they people can distribute it to various parts of the nonprofit. But no matter what's done, the record keeping is kept by the by the entity that took the money. So for the donor, really easy. In that same context, simplified recordkeeping is also the simplicity that goes along with the investing, the management, the record keeping, the way to donate.
All they have to do is send an email or have a meeting or whatever communications appropriate with the entity holding it, community Foundation, fidelity, or someone else and be able to talk about, well, this is what we want to do right now or in the future or over the next six months, or makes it very simple to distribute the money because they don't have to cut the check.
There's also number six, privacy and anonymity that comes from this, which is part of the problem that I've got a number of clients and friends who are trying to figure out they get a a check from Community Foundation, and they have no idea who it came from. How do they steward that? How do they thank them? Because the Community Foundation backed episode puts up restrictions and legally should.
But it's disconnecting the donor from the organizations they want to support. Number seven, it allows for multigenerational giving without having to set up your own family foundation. You can put your kids, your grandkids into the conversation very easily with your advisor at the entity that's holding the dollars to help them better understand the legacy role that falling through it might play for a family.
It also reduces the need for year end, giving pressure because if you get the tax deduction, let's say you put it in in January. You give it out any time. I don't have to worry about my tax situation. I'm not under pressure to give the money away. Fascinating way to look at this because it eases the pressure for the donor.
And then last one number nine is is there's immense estate benefit estate planning benefits because you're moving money out of your estate, particularly if you have more than the exemption . or just below . million per person. What you end up with is an opportunity to reduce your taxes and create a philanthropic legacy. All of these are reasons why donor advised funds are advantageous.
The question is, what are we going to do about it to overcome the challenges? There are seven things that I think are important. Seven things that I recommend. We move into the tactical for our last or minutes together. What are the things that we can do as a nonprofit to elevate the options for our donors of utilizing, connecting to us, being a part of their donor advised fund strategy?
And this is where I've changed, because I just was mad early on in my career that there were people between myself and this multimillion dollar donor. What I failed to realize and maybe age a little wisdom and we'll tread on the tire has allowed me to see is it's really not about me. It's about them. We talk about gift getting, relationship building that it's all about figure out what the passion of the donor is, meeting them where they are.
Well, then we should be doing more of that on our side, even though there are a lot of challenges in this particular circumstance. Seven things. Number one, promote donor advised, fund giving options. We need to probably make adjustments in how we communicate. Whether it's your web page and having a section says we take donor advised funds, here's a couple of examples.
Or fundraising material providing it as an option. Maybe it's on a pledge card. Maybe it's on a up a gift proposal. Maybe it's in the literature we produce. Maybe it's in the stories we tell in publications. We have to be willing to talk about this, that we are open to donor advised funds, even though they may cause us a little issue or challenge.
We want those dollars to become part of what we're trying to do and to meet our mission. On that same vein, we have to retrain major gift officers, annual fund officers, plan giving officers any gift officer who's building personal relationships with people. We have to retrain them to talk about donor advised funds as an option for the gifts that are being given.
And most importantly, to ask our donors, do you have them? Is this something you would like to talk about? We are not going to get through the legal battles of getting information from fidelity, Schwab, Community Foundations. Whomever is holding the donor advised funds that they have responsibilities legally and ethically, sometimes not to share unless the person says it's okay.
So we're gonna have to go directly to our donors, which means we got to shift the conversation and address it head on. Number one, promote it. Number two is educate and engage donors where they are. We're going to have to lean into this. We might actually be ones that want to set up donor advised funds. Let's say you're a large university.
Could you set up a donor advised fund system where they can make the gift to the university now, but distribute it to different parts of the university? Maybe they a family has multiple degrees in different colleges. Are you making that recommendation? If you're sitting down in an estate giving plan in situation, all of a sudden they're trying to figure out, I don't know what to do with all this money.
Are you recommending donor advised funds and being the answer to their problem, thus deepening the relationship? Are you helping them understand the value? Yes. It's putting roadblocks into some of the things we do. But this is not growth isn't going to stop. So we're going to have to figure out how do we promote them while promoting ourselves at the same time.
You're donor advised fund will give you that tax structure. Now. Then you can allocate those resources to us whenever you want. And I'll stay in contact with you about these options. You can have to engage and educate. Number three, we're going to have to build better relationships with financial advisors and those housing sponsoring donor advised funds, community foundations and others.
That is not meant to say that we're trying to overcome what they legally can and can't do. What they can share. But the more we foster a relationship with entities, people, organizations that are involved in these discussions and decisions, the more trust we build with them, where they'll share what they can or maybe advocate to donors. Why don't you let us tell the nonprofit they're really a good group?
I trust them, they would love to know you're making this gift.
This is not meant to change the legal elements. This is meant to change the relational pieces of trust that we should be building with those who are involved outside of the donor. That's number one. Always start with them. But my experience is there are usually other people, attorney, financial advisors, and certainly whoever's housing, we're going to have to make sure that we have a stronger series of relationships to get the maximum information that's allowable, both legally and ethically.
Number four is to highlight projects and how those initiatives are making a difference, and how donor advised fund contributions can make a tangible impact on what we're trying to accomplish. This goes back to the storytelling element. Can you tell stories of where donor advised fund usage was brought to bear to make something come to fruition in philanthropically, giving it as an example?
In some ways, it's no different than playing giving. We do a lot of articles and communication about planned giving, because we want to show others that they could do it as well. Similarly, here you can have to highlight those times that donor advised funds brought things to completion or made a big impact on them being developed for your nonprofit.
Number five, we're going to have to learn how to differentiate our stewardship and acknowledgment of donor advised funds. Get a lot of questions. Donor advised fund from Bob and Cindy Smith gave a gift of $, to the nonprofits, obviously through the entity Community Foundation. Let's say the nonprofit got the gift. What do they do with it? Well, there is no legal requirement to recognize the gift because there's no tax deduction or tax implication.
Bob Anthony Smith got a tax deduction when they gave the gift to the Community Foundation. The $, is no more than just a financial transaction.
That's from a legal perspective. From a philanthropic perspective, we got to treat that gift not like it was $, gift, but that that was like a $, gift. And we think there's another million coming. How do you steward them? This is more than just writing. And by the way, I had this conversation with a colleague like, well, we're not legally required.
I'm like, this isn't a legal conversation. This is a relational, Bishop based stewardship conversation. You got to go all in in thanking them. If you can find out who they are, treat them like the donor they actually are. Even though there isn't a legal donation that came to you, you need to go above because if they gave you $, out of their DAF, they did not empty that DAF to do so.
I will almost bet my wife on it, which means there's more money there. Which means we're back to the conversation. , five, % of the people making % of the difference in philanthropy. There's more money there. I'm going to take that person who's now said they believe in what we do and advocate for them to do something else through their own personal assets, through another eight deft distribution.
We got to steward them. You're gonna have to get as much as you can in terms of information from the check, from the entity who gave it or passed it through, so you can build a relationship with them individually. Number six, we're going to have to include much more heartily, much more readily. Daph conversations with plan giving efforts.
We're going to have to discuss how we use DAF funding for naming opportunities for beneficiaries of Das if they want to sunset them about completing pledges. What is it that we need to do? I would also add one other element, particularly if we mentioned a few moments ago about the idea of multi-generational giving, legacy giving.
The way it works legally is, is that the community Foundation only takes advice from the donor as to their donor advised fund and where it goes. Now, in real world, the donors making the decisions. But what happens when the donor passes or a couple passes? What happens is that money. This is where and I've executed this a couple times, and the Clinton Foundation didn't really like it.
But the donor left a very specific letter that this nonprofit needs to be the number one priority of this fund going forward. My nonprofit or working with the kids. To have a relationship that they continue to give through the donor advised fund to us. If you're not thinking about what happens after the donor's gone, after they no longer influence the decision making process, you're leaving money on the table.
Because I think the greatest challenge will come someday is when a lot of donors have passed and there's not a next generation or somebody of interest or doesn't care that that community foundation sitting on assets that they can make decisions that may not align with what that donor actually wanted in the first place. I'm not saying degrees different, but your nonprofit loses.
Get a letter of statement from the donor that they want you to be their primary or amongst their primaries. Building relationship with those kids is critically important. It has to be part of a larger plan giving discussion. The last thing I will advocate for in working in figuring out dafs and donor advised funds is we got to leverage data that we have to identify potential donor advised fund donors.
What is the profile in your database of a donor advised fund donor? Are there others that look like them? Are we coding them correctly so that when there's turnover and gift officers change or leadership changes, we know who the people are that are doing this. Are you creating personalized outreach to encourage them to think about this? How are you leveraging data that you currently have that can either identify new or make sure we don't miss opportunities?
I'm advising clients in their database and their CRM to tag create an attribute whatever specializing donor advised, get donor advised fund gifts because we can run reports on that if it's in there. If all we do is say, well, we got a check from the community Foundation and soft credit, the donor, well, that's going to be hard to find in terms of reporting.
What we have to do is make it easy on ourselves. So code it correctly. Look for others like that. Ask questions of your donors. Are there others that you know that have donor advised funds? Can we talk to them about these kind of options? Create some ease in that process and as well as creating more pipeline. So whether it's promoting, educating, engaging, building better relationships with those people who are a part of the donor advised process, financial advisors building foundations, others highlighting specific initiatives that donor advised funds make a difference in acknowledging and being more stewardship oriented in the right way with donor advised funds, incorporating them into appropriately into plan giving conversations, or leveraging and tracking data. Those seven things are going to make donor advised funds more available for you. I still have the same power problems I did years ago. But the realization is, is that either I'm going to be stubborn and lose out, or I'm going to be open to change and engage. I'm advocating for being open and engaging.
Changing the way you look at this, changing the way we embrace it. It's not going to get smaller. It's going to get larger. And if we want to do what we need to for our nonprofits, we're going to have to find a better way of working with this type of gift. Don't forget to check out the blogs at Hallett philanthropy.com.
Just things that I think of c read think are interesting. Some personal, some professional. And if you'd like to get Ahold of me that's podcast Hallett philanthropy.com. As we move into I think we're still in for some, as I predicted, some financial discourse, which is going to make the work we do, the work you do in the nonprofit world, in philanthropy, even more important.
Don't forget my favorite saying some people make things happen, some people watch things happen. Then there are those who wondered what happened. Philanthropy is all about people making things happen for those people, families, entities, organizations. We're wondering what happened. I can't imagine a better career of being a difference maker. That's what you are and in some way, shape or form today and every day.
I hope you find a little bit of that value. To overcome some of the challenges we have to deal with every day. It's not perfect, sometimes messy, but boy is it worthwhile. That's what nonprofit philanthropy level work is all about. Embrace it and enjoy those moments. Put them in reserve so you can overcome the challenges, because your community and your nonprofit needs you now more than ever.
I'll look forward to seeing you the next time, right back here on the next edition of around with Randall. And don't forget, make it a great day.