Donor-advised funds or DAFs have become a key trend in the nonprofit sector during the last decade. The National Philanthropic Trust reports that donor-advised funds provided grants valued at more than $23 billion in 2018, nearly doubling the $12 billion that was granted in 2014. Additionally, the value of contributions to these accounts has risen nearly $20 billion dollars in that same time period. Theodore Scheifler explains that these funds are particularly popular in the technology sector, which may be particularly important for nonprofit organizations located in the San Francisco Bay Area and other technology hubs.
According to Giving USA, a donor-advised fund is an investment account with a “philanthropic twist” where the owner receives an immediate tax deduction and the organization managing the investment becomes owner of the fund and works with the donor to distribute assets to charity. DAFs are typically held at either a community foundation, such as the San Francisco Foundation or the Silicon Valley Community Foundation, an investment firm such as Fidelity or Charles Schwab, or at a charity itself like the Salvation Army. A key difference between a DAF and a charitable foundation, such as the Bill and Melinda Gates Foundation, is that DAFs do not have an obligation to distribute funds on an annual basis. Foundations, on the other hand, are required to distribute 5% of their net assets on an annual basis.
The DAF donor is responsible for choosing or guiding the charitable and philanthropic goals from their account, but the action and the reporting are the responsibility of the organization investing the funds, often creating confusion at nonprofits receiving these gifts. The check will sometimes be received with sponsoring organization’s name with little clear reference to the donors themselves, making further cultivation and communication challenging. There is also less transparency for fundraisers interested in particular DAF activities as reports by sponsoring organizations reflect the aggregate activity rather than by individual gifts–in fact, Fidelity Charitable Giving was just named the largest charity in the United States due to this reporting practice. It is important to note that the 2020 pandemic has spurred an increase in the distribution of these funds. The San Diego Foundation reports an increase of 75% of giving compared to last year at the same time. Time will tell if this trend continues.
Legislation in the California Assembly last year, AB 1712, has been proposed to compel more disclosure from DAFs in order to understand the flow of money from these funds into the charitable sector. According to the Nonprofit Law Blog, it is “the intent of the Legislature to enact legislation that would relate to donor advised funds for the purpose of improving transparency and accountability through annual reporting requirements, promoting best practices, and requiring minimum annual distributions.” The Internal Revenue Service has also provided new direction on DAFs that may help to ensure more accountability. Because of the complex nature of DAFs, however, and the strength of the stakeholders who hold these accounts, the political debate over new legislation is likely to be long and fierce.
While nonprofits wait for Sacramento and Washington to debate legislation, it is important for organizations to educate their donors, stakeholders, and staff on DAFs. Jessica Chang-Greenman, Philanthropy Officer at a large Bay Area nonprofit, emphasizes in a recent conversation, that donors to DAFs need to work with their sponsoring organizations to ensure that funds are being distributed according to their wishes and on a consistent timeline. Large institutions holding these accounts have little incentive to distribute these assets and, according to Chang-Greenman, receive their commission once the funds are placed in a DAF, not when money is disbursed. Funds with money sitting in the account also receive investment and management fees.
While legislation and regulations are important topics, nonprofit organizations still need to devise strategies to understand this new trend and incorporate DAFs into fundraising plans. A review of an organization’s donor database might help to identify which gifts are coming in through a DAF. These donors should be set aside and assigned to a gift officer or Development Director for increased cultivation and tracking. While the shroud of privacy around a DAF may make cultivation difficult, it is not impossible and is well worth the investment as these gifts may tend to be larger than a typical annual gift or other donation. Staff should also be conversant in DAFs and able to discuss these vehicles both internally for planning purposes and externally from a fundraising perspective.
As the topic of DAFs becomes more common in the philanthropic sector, we will continue to see an increase in the number of trainings, articles, and explanations on this trending giving vehicle. Nonprofits should commit to understanding and advocating around this issue as it appears that this is a trend that will continue to emerge as an important factor for charity for years to come.
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