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  • Writer's pictureDrew Schneider

DAF Giving Ethics: Resolving Complex Scenarios for Nonprofit Success

DAFs are an incredible opportunity for nonprofit fundraising, but they do come with strict rules that a nonprofit needs to carefully adhere to. 


 


Authors:

Mitch Stein, Head of Strategy at Chariot

Mike Esposito, Director of Growth & Strategy at Hudson Ferris


Donor-Advised Funds (DAFs) have become a popular giving vehicle for philanthropic individuals. However, when nonprofit organizations accept DAF donations, it's important to understand the compliance requirements associated with these funds. In this article, we'll explore the ethics of DAF giving, with a focus on transparency and compliance, and discuss how to respond when faced with potential issues.


 

Understanding the Risks 


When someone contributes money to a Donor Advised Fund, their entire contribution qualifies for a charitable tax deduction in the same year. That is why there are strict regulations on what type of gifts can be made out of a DAF: only to 501(c)(3) organizations (with limited exceptions, i.e. houses of worship) when no “benefit” is received in exchange for that gift. Benefits include auction items, tickets, gala tables, and even reaching binding minimum requirements for a peer-to-peer fundraising event.** 


While this article will focus on unintentional misuse of DAF donations, it’s important to note that donors sometimes do intentionally and explicitly encourage a nonprofit to violate these strict restrictions. A common approach is to ask for “comped” tickets or tables to an event because they made a large gift. Under pressure from a major donor, it’s hard to push back on these requests, but it’s critical to do so because of the risk involved. 


While the donor is certainly at risk for making this kind of donation and encouraging this kind of benefit, the nonprofit also faces dire consequences for knowingly violating the restrictions around DAF gifts. If discovered in an audit, these actions can put a nonprofit’s standing with the IRS in jeopardy, which means going forward, they can’t receive any DAF gifts whatsoever.


Unintentional Misuse of DAF Donations:


Beyond the clearly inappropriate use of DAF giving, a more challenging ethical dilemma is the possibility of unknowingly accepting funds that are being used for fundraising events, galas, or auctions. This can happen when the donation processing within your organization is not set up to capture critical information about the designation of DAF donations.

Imagine your organization's team is responsible for handling DAF gifts as follows:


  • The Development Coordinator receives the DAF check donation, logs it in the donor database, and sends out a gift acknowledgment letter.

  • The Development Manager sees the gift designation and sends tickets to a Board Member.

  • The Development Director receives an update that the gift came in, thanks the donor over the phone but does not hear about the designation split.

In this scenario, there may be gaps in information sharing that prevent the Director of Development from knowing the specific designation of the DAF donation. Additionally, the Development Coordinator may not fully understand the rules governing DAF giving or your organization's Gift Acceptance Policy.


Compliance with National Philanthropic Trust Guidelines:


The National Philanthropic Trust provides important guidance on DAF usage, stating that DAFs cannot be used to pay for tickets to fundraising events, galas, or auctions if the cost of the ticket is not fully tax-deductible. Specifically, DAF grants cannot be used to pay the tax-deductible portion of a ticket if the full cost includes both a tax-deductible and non-deductible portion. Furthermore, grants may not be used to pay for items or services purchased or won at a charity auction.


[National Philanthropic Trust is also the source for the most informative data and trends related to DAF giving. Check out a full analysis of their 2023 DAF report]


Responding to Ethical Dilemmas:


Now, what should you do if you present this information to your manager or the Executive Director and they respond by saying that a Board Member has always used a portion of their annual DAF donation to cover their gala tickets? The Board Member may even argue that the additional tickets are for their friends and will bring more revenue to the organization.


  • Educate: Start by educating your manager or Executive Director about the IRS guidelines regarding DAF usage. Explain that compliance with these guidelines is essential to maintain the organization's integrity and uphold ethical standards. Chariot also provides robust resources on DAFs specifically tailored for nonprofit fundraisers through the DAF Academy

  • Discuss Alternatives: Suggest alternative ways for the Board Member to support the organization's gala, such as making a separate personal donation to cover the cost of additional tickets for their friends. This approach ensures transparency and avoids potential legal and ethical issues.

  • Review Gift Acceptance Policy: If the issue persists, it may be wise to review and potentially revise your Gift Acceptance Policy. By clarifying the policy regarding DAF donations and event usage, you can establish clear guidelines, ensuring ethical and compliant practices. Engage with legal counsel and your board to align the policy with best practices and prevent future dilemmas.

  • Transparency: Emphasize the importance of transparency to the Board Member. Explain that maintaining trust with donors and adhering to ethical guidelines is crucial for the long-term sustainability of the organization.

  • Explore Technology Improvements: Chariot offers DAF fundraising solutions for nonprofits that improve the donor experience and keep fundraising teams aware of all DAF gift details immediately when they’re made. See how DAFpay™️ could improve your team’s DAF fundraising and processing in this overview video.


Ethical DAF giving is about ensuring transparency, compliance, and maintaining the trust of donors. By educating your team, discussing alternatives, and reviewing your gift acceptance policy, you can avoid potential dilemmas and uphold the highest ethical standards in managing DAF donations for your nonprofit organization.


**Note: If someone is participating in a peer-to-peer fundraiser and they agree to a legally binding & enforceable fundraising minimum (e.g. they will get a charge on their credit card if they don’t fundraise enough), they can not support THEIR OWN fundraiser with their own DAF until their minimum is met. Some DAFs can be even more strict and not allow DAF gifts until the minimum is met, but that is not the norm. From Fidelity "Please note that Account Holders cannot support THEIR OWN fundraising commitments when there is a legally enforceable financial obligation."



About Chariot: Chariot is the only Donor Advised Fund (DAF) fundraising solution for nonprofits. DAFs are the fastest growing funding source in philanthropy and hold $230 billion that’s waiting to be donated. The problem is that DAFs are impossible to use in the places donors are most inspired to give (donation forms, peer-to-peer campaigns & live events) and create a processing nightmare for nonprofits to manage. Chariot unlocks more DAF gifts faster by integrating 3-click DAF giving into any digital donation experience with DAFpay™️. Chariot also enables real-time capture of DAF donor name & email for effective stewardship and fully electronic processing for seamless payouts. You can try a demo here and learn more at www.givechariot.com


About Hudson Ferris: Hudson Ferris is a boutique fundraising consulting firm based in New York City. Established in 2011, Hudson Ferris has partnered with 185+ nonprofit organizations across the United States and globally on strategies to help them problem solve, grow, and achieve sustainability.


You can learn more about Hudson Ferris at hudsonferris.com

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