I’ve spent a lot of time during the pandemic fixing up our house. Maybe my perspective is skewed. When I read the excellent paper “Tubs, Tanks and Towers: Donor Strategies for DAF Giving” from the Romney Institute for Public Service and Ethics from Brigham Young University, it simplified and clarified the giving strategies within the donor-advised fund (DAF) world, rather than the ins and outs of home renovations. I stand corrected.
As giving to DAFs continues to grow (up 16.3% in 2020) and become more common (70% of nonprofits have received DAF gifts, per the IUPUI Lilly Family School of Philanthropy), we are learning more about how individuals use them to facilitate their charitable giving.
The Romney Institute report is insightful because it moves beyond the hard statistics of giving to find out how and why individual donors timed their gifts with DAFs. They interviewed nearly 50 donors, equally split amongst gender. Their funds were primarily at nationally-based DAFs, though some were community funds. The minority were single issue funds. Five of these individuals even had multiple DAFs! Approximately half of the donors’ funds had assets less than $1 million. Eight of the interviewees did not disclose their asset amounts. From these interviews, the authors found three outstanding strategies:
- Tubs: These donors moved their donations through on an annual basis, donating to the DAF and distributing the money within one to two years. Many of the subjects in this description gave on an annual basis, with approximately half giving at the major gift level. The majority of these donors gave through securities and at the annual gift level, though some did contribute towards a major gift.
- Tanks: This approach took slightly longer; donors gave large amounts of money to DAFs and gave the money away after two to ten years, while still considering the full account holdings for possible grants. Nearly all of the subjects in this category gave their donation as a lump sum in a mix of cash, securities and other methods. They also gave at both annual and major gift levels.
- Towers: These strategic donors worked closely with the DAF to stretch their giving out over the long term (over a decade). These types are often more likely to be endowed accounts. Nearly all of the subjects donated in a lump sum, with several also giving in other ways that were not disclosed, comprised of cash, securities and other methods. Donors in this category were more likely to give bequest gifts.
At the moment, there is no time restriction on when to move money through a DAF. Although the Senate is currently considering the Accelerating Charitable Efforts Act, which would give donors a maximum of 15 years to make their gift, the decision on when, as well as where, is still up to the donor. The Romney Institute report cited a recent study that noted that endowed DAF accounts (which preserve the principal and use earned interest for giving) gave gifts at a lower annual rate than spendable accounts. Likewise, tax savings was of more interest to those in the tank and tower groups than in the tub group.
Additionally, there is no restriction on who can be involved in the giving decisions, allowing a donor to involve as many or as few people as they wish, including family or friends, as advisors. Similarly, DAFs’ allowance for successor advisors after a donor’s death give the donor flexibility and freedom to share their wishes with as many people as they’d prefer. Most of the paper’s subjects in the tank and tower categories chose to involve family in their decisions.
Another helpful point in the report was a number of key reasons when and how DAF donors give.
- Liquidity events: When a donor receives a large sum, such as a stock or property sale or a payout at a job. Donating at this time would reduce the individual’s taxable income. The report also noted that it would be convenient for a donor who does not currently have the time to dedicate themselves to philanthropic giving.
- Bunching: This tax strategy is when a donor contributes a large sum to the DAF in one year to exceed the standard deduction, then distributes it over a period of time within the standard deduction framework.
Many of us give in response to significant events, like the pandemic or a disaster. Although donors can give at any level or frequency through a DAF, the authors of the paper coined a new term, episodic giving, to describe a donation based on these short-term or singular events. Interview subjects in every category gave donations towards episodic events.
A commonality amongst all three giving categories, no matter how long the money stayed in the account, was their attention to making sure that they contributed on an annual basis. Some interviewees made maintenance contributions, to meet demand or the minimum balance required by the DAF sponsor.
Why do these types give the way that they do? That’s another question investigated by the authors. They found that tub donors give more quickly because they already have their plans in place. The DAF is a convenient outlet for those plans and the tax benefits thereof. Alternatively, tank donors were found to have less of a clear-cut plan to use their funds quickly and often had several years’ worth of donations in their accounts, either from regular contributions or a liquidity event. The authors described them as “in the middle of a decision-making process that may involve more time.” They also carefully considered the tax implications of any DAF distributions and were more flexible in their grant making. Interestingly, tank donors were the largest major gift and episodic donors of the three groups, which may stem from their traditionally flexible approach to grant making.
Tower donors were the least common group from the interviewed subjects. While they were active donors, many intended to preserve their assets for future giving and spend it down throughout their lives. Others suggested that they will use their assets as a bequest or for their family members to distribute after they are gone.
All were funded through lump sum giving. Some DAF holders even noted that they timed their contributions with company matches or a life event (in lieu of gifts, please contribute to…). They often contributed to episodic events while maintaining their account balance.
Not every DAF donor fit easily into each category. Yet even hybrid individuals provided insight into the differing opinions and strategies regarding DAF giving. The Romney Institute’s report is useful for fundraisers, researchers and development professionals when reviewing a prospect’s philanthropic giving. Tub, tank, or tower donor? Either way, every dollar counts. Using the DAFinitive™ database, you can gain further insight into DAF sponsors and donors to see who and what can help your organization meet its goals.