What's with Donor Advised Funds?

Donor Advised Funds, as many of you know, have become the charitable vehicle of choice for many donors. However, that term, “charitable vehicle” is a bit fraught and possibly misleading.

Per the recently released Giving USA report, there is at least $110 Billion sitting in Donor Advised Funds in the US. It was in the high $90B range only one year earlier, and that amount seems to be growing exponentially annually. DAFs were created decades ago, but became super popular starting in the 80s and 90s, and even more so in recent years. (You can read about the history and definitions of DAFs here and here).

The reason why I say that “charitable vehicle” may be a tad misleading, is that charities, as such, are not seeing a whole lot of that pile of DAF money getting to their organizations. It’s estimated that between 5 and 15% (at the very high end) of that money is actually getting passed on to any kind of charitable organization annually. Some of the money is in Community Foundations, where a bit of the fees (fees that are a percentage of the balance in the fund!) goes back into the community (which is a very good thing), but most of it is in big financial institutions who have created these funds for their clients. Yes, the organizations housing and managing the funds are charitable in their own respect (otherwise the DAF wouldn’t work), but the funds, for the most part “sit there” until the Donor, who retains advisory privileges, decides where they want the money to go. How long until the money has to be transferred to the charity? Legally — as long as you want. A month, a year, a decade or more — all are kosher in the world of DAFs.

Which might be okay, if you have so much money in your fund, and got a large amount of it so quickly, that it will take you years to decide (in a thoughtful, well-researched, intelligent manner, of course) where you want the funds to go. This is a perfect use of a DAF.

The problem is when you don’t send the money onwards because you just don’t want to deal with it. You don’t want to deal with the fundraisers — the pitches, calls, mandatory lunches, research, etc. You also know that, as a donor, giving to an organization via the DAF (if your name is on the check/transfer, which it generally, but not always, is), means that you now have to manage the ongoing pressure to donate again and again and again to that organization. Many donors just don’t want to get into the slipstream, so it’s better to take the tax deduction and only let the money flow when you’re absolutely ready to to so. (Note that the donor to the DAF, and the amount sitting in the fund, is typically anonymous until the funds are sent to a charity.)

For truly charitably-minded donors, the DAF is a double-edged sword, in that the institution where your DAF is housed has zero motivation to help you choose which charity to support. (Remember, the fees they get are a percentage of the balance in the account.) When I was first participating in a DAF program, I couldn’t understand why the foundation that housed the program wasn’t emailing me weekly telling me about great charities where I could donate my money. I sent my favorite charities to their staff, thinking that they would be matchmakers putting together donors and charities. Turns out that I was a bit naive. Why would they want to help that money leave their coffers? The institutions keep getting their fees, quarter after quarter, year after year, and they’re sitting pretty with that mountain of money getting bigger and bigger. Ka-ching! Kind of feels like a negative feedback loop, no?

For me, the positives greatly outweigh the negatives, and the DAF fits my personal and family’s needs well. The model allows me to quickly and easily donate to charities, to see a full overview (in one easily accessible place) of where my charitable money has gone over time, to be able to donate when I want to without associating the giving with tax deductions, and to have a small percentage of my fees go into the cause (the foundation’s where it’s housed) that I deeply care about. It’s super easy to contribute to, and management costs are tiny. It was also very easy for me to set up funds for my children (starting when they were about 5 years old), so that they can easily contribute to causes that they care about.

But clearly others aren’t using their DAFs the same way as I do. Thinking from the side of the charities who work so hard to raise dollars, the billions sitting doing a lot of nothing in the DAFs, although defined legally as already given to a non-profit (but not passed on to a charity per se), is just depressing.

In the next issue I’ll offer some perspective for fundraisers and non-profits looking to avail themselves of some of that DAF money.

Can't get enough? Read more on Twitter or follow me on Pinterest.

- Lisa