Recently, I’ve noticed that the nonprofit space is vexed by three ominous letters: D.A.F.
We have to discuss and demystify Donor Advised Funds. What are they, and why are nonprofit leaders, fundraisers, and donors so wary of them?
Here’s a concise explanation of a Donor Advised Fund and why someone would want to open one. Author and NYU Professor of Philanthropy Jason Franklin writes in Nonprofit Quarterly (July 25, 2020 issue) that, “Donor-advised funds are essentially charitable savings accounts, which enable a donor to make a single contribution and receive an immediate tax credit on the gift distributing smaller grants from that pool over time to a range of nonprofits.”
Donors like them because they enable immediate tax deductions without dictating a timeframe or specific organization for donation. Nonprofits should understand and like them because they are growing like wildfire – DAFs have over $160 Billion in them today, and they resulted in $35 Billion in contributions to nonprofits in 2021, in the United States alone.
But even with those staggering numbers, the nonprofit sphere retains a strong distrust of DAFs. A social media post I saw recently summed it up: “I hate DAFs and I accept that they’re here to stay.” And to be fair, I understand the nonprofit world’s frustration. The balances in these funds are kept private, the names of many of the fund contributors (“advisors”) are often withheld, and the amount of money in them at any given time isn’t accessible. Neither is information on what organizations the “advisor” has given to via their DAF. As a board member, advisor and donor, I am certainly acquainted with the frustration of the unknowns DAF’s present – they leave nonprofits in the dark when they’re trying to reach out to potential donors. To fundraisers, DAFs represent a big, mysterious, inapproachable pot of gold.
There are many steps fundraisers can take to work with DAF donors. The problem is, however, that fundraisers are so daunted by the opacity of these funds that they’ve thrown in the towel on trying.
Anyone on the fundraising side should work to better understand a donor’s motivation for using DAFs. They are great for someone interested in donating money but not yet sure of where to contribute. DAFs are great for people with appreciated stock, or someone who has experienced a recent windfall, like an annual bonus – anyone who wants to put a chunk of money into an account, get a tax deduction, and not feel rushed to decide which charity to give to.
I’ll add another reason for someone to have a DAF — they’re incredibly easy to use. Their online tools allow you to make gifts from a computer or phone in minutes and give you instant visibility on the gifts you’ve given. My DAF allows me the flexibility to give to nonprofits whenever I feel like it (i.e. in the middle of the year, when many charities most need it). Another wonderful benefit is that they streamline tax reporting, saving me the end-of-year tax panic and making for a much more peaceful holiday break with my family.
Of course, DAFs are not without their drawbacks. One of the biggest negatives (one that has even Congress concerned) is that there is no minimum amount that must be forwarded on to nonprofits once money is deposited into the DAF – nor is there a required timeframe by which it needs to be donated. For foundations, a minimum of 5% is required to be granted out annually, but that requirement doesn’t exist for the DAFs of individual donors. Some have called this “warehousing” money and claimed that DAFs are an instrument for those more interested in a tax deduction than putting their money to charitable use. In fact, in 2021, philanthropist John Arnold claimed that 10% of DAF holders made zero distributions in the past four years — a time when much of the world was in crisis. However, this isn’t the norm. About 20% of DAF funds make their way to charities every year.
Having said that, Congress and various state legislatures have been trying to pass legislation that would require DAF holders to distribute their funds within a specified period of time, and even at a specific minimum amount. I support this. I think parameters around the timeframe by which DAF money goes to nonprofit hands is important. And I think most DAF holders would agree.
I have a bit more trepidation about public calls to make the identities of DAF donors public. Making their names public would create a list of high priority targets for fundraising teams. The floodgates would open and outreach to DAF donors would be unceasing, causing irritation that could make donors turn away from giving entirely.
It’s critical that today’s fundraisers understand how DAFs work in relation to their organization’s fundraising strategy. DAFs are becoming more common every day. Recent reduction of fees and the elimination of minimum deposits by some Donor Advised Fund programs have made DAFs an option for a much larger segment of the population. (Growfund and Fidelity Charitable are two examples of these).
So whether you’re a fundraiser, donor, or board member, do yourself and your organization a favor. Learn as much as you can about how DAFs actually operate, and you’ll quickly realize that DAFs are a terrific tool, with minimal downsides. For fundraisers and board members, welcoming DAFs can dramatically boost your nonprofit’s revenue generation efforts. For donors, DAFs are a great way to give strategically and to track your giving. Remember, they’re here to stay.
Read more about DAFs from my previous articles:
I’m Saving Giving by providing a clear path to success, supported by data, statistics, and interviews. You can find more great newsletters like this one here on Philanthropy 451, in my bestselling book, Philanthropy Revolution, or on socials at Twitter, Facebook, and LinkedIn to learn more.
- Lisa
$160B Opportunity —Demystifying DAFs
Thank you for describing DAFs with accessible language. From the nonprofit point of you, I agree with you completely. That includes keepings donors confidential. What I hope is much more of those funds are allocated and with a deadline. I also appreciate you naming and acknowledging that nonprofits need funding mid year. We most certainly do. I am up at night a lot lately (and it’s not just the hot flashes!).
This is great information Lisa. It was nice to read a proactive and constructive piece on how Donor Advised Funds can be a tool for both philanthropists and fundraisers alike.