Donor-advised funds (DAFs) are a hot topic these days, so much so that they now have their own chapter in Giving USA 2017. A powerful giving vehicle that has grown in popularity for the past six years, the largest DAF sponsor, Fidelity Charitable, just overtook The United Way on the Chronicle of Philanthropy’s 400 list. For nearly 30 years, this list has ranked the amount of donations received by nonprofit organizations. Fidelity Charitable’s rise marks the first time a nonprofit has displaced the United Way at the top of the list since 2006 and the second time since the list was created. What’s more, Fidelity Charitable is the second largest grant-maker behind The Gates Foundation and is poised to surpass them in the next few years.
Recognizing the activity and interest around DAFs, here’s a quick guide to understanding the debate and lingering questions.
What are Donor-Advised Funds?
DAFs are unique personal accounts wholly dedicated to charitable giving. Instead of directly donating to a nonprofit organization, account owners make contributions to their DAFs and make “recommendations” to the account manager (called the sponsoring organization) that a donation be made to a specific nonprofit. Cash, securities, real estate, and other non-cash assets can be contributed to a DAF with the donor receiving the tax-deduction at the time of contribution.
Why So Popular Now?
Donor-advised funds haven’t always been this popular. The first DAF program was established in 1931 and launched in 1937 by the New York Trust. It was not until the Tax Reform Act of 1969 that DAFs received Congressional recognition. Following the Tax Reform Act of 1986, stringent obligations were imposed on private foundations causing DAFs to become an attractive giving vehicle. In 1992, when Fidelity Investments established the Fidelity Charitable Gift Fund, DAFs entered the financial mainstream and gained greater attention and accessibility.
The Pros of DAFs
- Due diligence. Since donors are recommending where their funds should be directed, DAF sponsors ensure recommended organizations are legitimate 501(c)3 organizations.
- The funds can grow. Many donors use their DAFs as a charitable savings account. Through this tool they can set aside funds for future philanthropy while receiving a tax deduction at their point of contribution. DAF funds are typically invested by the sponsor thereby increasing the donor’s giving capacity and impact when they are ready to recommend a grant.
- More options, simpler transactions. DAFs offer immense flexibility for donors as cash and non-cash assets are accepted. This is particularly helpful as some nonprofits do not accept certain non-cash gifts. Additionally, gifts from DAFs spare nonprofits from complex financial transactions as assets are distributed simply.
- Low barrier to entry. Before DAFs became mainstream, wealthy donors looking to make a long-term plan for philanthropy needed several million dollars to start a private foundation. This was costly as many start-up and maintenance costs are required. Thanks to DAFs, anyone can open an account and grow their philanthropy with as little as $5,000.
The Cons of DAFs
- An intermediary between donor and grantee. Because funds are transferred from donor to DAF to nonprofit, giving can seem more transactional and less personal than when individuals donate directly.
- Unregulated payout rate. Unlike private foundations, which are obligated to distribute at least 5% of their donor funds annually, DAFs have no such regulations. At the donor’s discretion, funds can sit unused for years. While some DAF sponsors impose fees for accounts that do not disperse grants, and others report inconsistent giving, most accounts average an annual distribution of 20%.
- Tax benefits without making a gift. Individuals using a DAF receive a charitable deduction upon contributing to their fund. No additional deduction can be taken when a distribution is made from the DAF to a charity at a later date. While critics argue that donors receive tax breaks for putting their philanthropic dollars into a holding account without providing immediate benefit to a grantee, DAF proponents argue that nonprofits were never promised the funds in the first place so the timeline of their arrival is irrelevant and simply an unexpected bonus. Some also say that, since funds are invested and growing, DAFs encourage and enable donors to give more than they otherwise would.
- Not a replacement for long-term pledges. Because funds in a DAF are not owned by the advising donor they cannot be used to commit to a multi-year pledge. While the donor may intend to fulfill a pledge over multiple years via a DAF, pledges cannot be booked as such. Many nonprofit organizations do not recognize gifts made via DAFs as a personal pledge.
Should DAFs be more tightly regulated and subject to distribution requirements? What will be their long-term philanthropic impact? Will they sustain their popularity?
Given the swift rise in DAFs, the nonprofit world is watching to see the efficacy of how these funds support the sector. Most nonprofits have yet to develop policies regarding gift recognition, crediting, and acknowledgement for grants from DAFs, and many remain unclear on how to cultivate and engage the donors behind the DAF. Luckily, like all philanthropy, DAFs simply represent a different way for an individual to support the organizations, causes, and initiatives that matter to them. Instead of writing a check, paying by credit card, or transferring stock, donors recommend grants.
The Fundamentals Remain the Same
While there is still much to learn, DAFs currently represent only five percent of total philanthropic giving. The long-term effect of DAFs remain to be seen, but it is apparent they are here to stay, and fundraisers must be ready. Bearing that in mind, you should still make an effort to:
- Track which donors give through DAFs. Give them the right paperwork and employ tried and true donor stewardship practices. Keep their preferred giving method in mind when requesting gifts as they may not commit to multi-year pledges.
- Identify DAF sponsors (such as local community foundations) and know their policies. Community foundations often have strong relationships with local nonprofits and advise DAF holders where to give.
- Train all development staff on DAF policies to ensure compliance. Keep clear records of all intents to recommend, recognition opportunities, and communications with DAF sponsors.
It is important to remember that people give to people. Donor-advised funds are merely a facilitator of individual generosity. There is no substitute for employing best practices in donor stewardship and fund development as donors often give in relation to the individual asking.
About the Authors
Anna Lee is a Vice President with CCS. Anna led the successful completion of a $300 million campaign to build the Smithsonian’s National Museum of African American History and Culture, which opened in September 2016 on the National Mall. Anna’s experience with CCS includes driving capital campaigns, working with boards and volunteer leadership, and conducting strategic assessments and feasibility studies. Her work has spanned the secondary and higher education, arts and culture, and social services sectors. Anna is on the board of the Senhoa Foundation, a nonprofit combating human trafficking in Cambodia.
Meg O’Halloran is an Executive Director with CCS. Meg has significant experience in capital campaigns, major gift solicitation, grant writing, volunteer, and prospect management. While with CCS, she has worked in the environmental, education, and religious sectors. Meg is a volunteer author for Giving USA: The Annual Report on Philanthropy and a member of the Association of Fundraising Professionals (AFP).