Donor Advised Funds, Part One: The History and Growth of Donor Advised Funds and How to Reap the Benefits for Your Organization
This is the first article in a 3-part series on Donor Advised Funds (DAFs). We’ll start with an overview and then go on to talk about how to manage DAFs, whether you are a nonprofit receiving gifts from DAFs, or you are cultivating donors to create DAFs and managing distributions. Throughout, we’ll share how Salesforce technology can make your business processes more efficient so you can focus on your donors.
Overview
A Donor Advised Fund (DAF) is a charitable giving vehicle established at a public charity that pools funds from multiple donors. The public charity or “sponsoring organization” has legal control of the funds once they are donated, allowing a donor to recognize an immediate tax benefit; however, the donor then advises the charity on the distribution of funds from the account. It is generally understood that the organization will always follow the advice of the donor unless something prohibits them from doing so.
The tax benefits of donor advised funds make them an appealing charitable vehicle, especially for wealthy donors with more assets because:
- A donor can deduct a larger percentage of their income (typically up to 60%) when giving to a DAF because they are considered public charities by the IRS. In contrast, there is a limit (typically 30% of income) for gifts given to private foundations.
- They are part of an investment fund that continues to grow in value.
- They are not required to make annual distributions unlike private foundations that must distribute 5% of their assets annually.
Growth of Donor Advised Funds
The accelerated growth of DAFs in the last few decades can be mostly attributed to the rise of commercial DAFs being made available by financial services firms like Fidelity Investments, who created the first commercial DAF in 1991. The appeal of a commercial DAF is three-fold:
- The sponsoring organizations have more experience in managing complex assets, so gifts of stock for example, are much easier to make with a commercial DAF than they might be when working with a DAF run by a nonprofit organization.
- The fees are typically lower for commercial DAFs. Fidelity, for example, is allowing a zero minimum deposit to open a DAF so this giving vehicle has become available to a broader base of donors.
- Commercial DAFs allow for more diverse charitable opportunities in contrast to single-issue DAFs, like those held by colleges, and community foundation DAFs that are typically restricted to supporting one community.
Current State of Donor Advised Funds
Some of the advantages of DAFs that benefit donors have also become sources of controversy in the nonprofit community. Many argue that donors are “parking” their assets in DAFs and less is being distributed to charities in need. According to the National Philanthropic Trust’s 2019 Donor Advised Fund Report, DAFs payout rate is just over 20% (this includes transfers between DAFs so actual payout could be lower). While this is better than the 7–14% distributed by private foundations according to Foundation Source’s 2019 annual report, that means that nearly 80% of the gifts made to DAFs are not being actively used for charitable purposes.
Just last month, the Accelerated Charitable Efforts Act was introduced. One of its goals is to incentivize spending down DAFs by limiting the number of years they can sit without being paid out to 15 years. The donor may also choose a limit of 50 years, but in doing so, they are not eligible for the immediate tax break offered by a donor advised fund.
The other often cited issue is the worry that charities don’t receive information about the donors who give through DAFs and they have less of an opportunity to build a relationship. According to Fidelity Charitable, only 3 percent of their donors request anonymity. Further, a recent report by the Indiana University Lilly Family School of Philanthropy, shares the results of a three-year study looking at nonprofits and their experience with DAFs. It shows that nonprofits with more experience with DAFs expressed fewer concerns in this area.
Summary
Donor Advised Funds have become an important and controversial giving vehicle in philanthropy sector. We’ll be keeping an eye on the proposed legislation and the trends impacting DAFs now and in the future. You may be wondering how to improve your cultivation and management of DAFs now though, so you can be one of the many experienced nonprofits who are seeing good results from Donor Advised Funds. We’ll share some great tips in part two of our series next week!
