Contributions to DAFs were up more than 20% last year and DAF giving was 10% of all giving in the US last year.
Back in 2015 there were 260,000 donor advised funds. Today, there are over a million, and the growth in the number of DAFs between 2020 and 2021 alone was over 16%. That’s a lot.
This is a trend that’s been growing year on year. And why? Why are donors putting their money into – and giving money from – donor advised funds instead of, say, setting up a foundation or just giving their money directly to a charity?
We took a look at academic research from the DAF Research Collaborative, white papers from Giving USA, National Philanthropic Trust and NPT-UK, and the American Enterprise Institute to learn why.
Planning purposes
Well, first of all, if you’re a donor who has all of a sudden gotten a windfall from an IPO, etc., you probably want to do a bit of planning with that excess money that you’re planning to donate. You might not want to give it all to one nonprofit, and you and your significant other might need to do some negotiation. Putting money in a DAF allows you to take that tax advantage now, and make charitable decisions at your leisure.
DAFs take what donors want to give
Let’s say that that the donor’s windfall came from cryptocurrency. Not many nonprofits accept crypto yet. Some still struggle with accepting appreciated stock, and none that I know of accept private company shares, restricted stock, or limited partnership interests. DAF sponsors do. DAF sponsors are acting like Travelex, converting one form of asset into another, so that’s a big reason why donations are going into DAFs and not directly to charities.
In fact, sixty-six percent of donations to Fidelity Charitable last year were non-cash donations. Fidelity reported that they received $331 million in cryptocurrency alone last year to donor-advised funds, which was almost twelve times the amount it received in 2020.
Convenience
Commercial sponsors like Fidelity or a bank just make giving super easy and super convenient for the donor. They’re already managing money for clients in their private wealth banking department, so it’s a completely seamless move for donors to walk down the hall and open up a DAF at Fidelity or their bank. The money managers know when their clients are going to have massive tax liabilities because of positive financial events and they can proactively help them with that problem.
International giving
If the donor wants to give across borders, the DAF sponsor handles all of the due diligence and any paperwork that needs to be done. That’s a major benefit, because tax-efficient charitable giving across international borders has always been nearly impossible unless the charity has a support foundation local to donors. DAF sponsors make it easy for people who want to give internationally.
Help with vetting nonprofits
For clients who don’t have favorite charities, the DAF sponsor will also provide a portfolio of pre-vetted nonprofits for their client to consider donating to by interest area, geography, and more.
Administrative ease
Administratively they’re a breeze for donors; especially for people who aren’t multi-billionaires, it’s like having their own family office for philanthropy. If the donor set up a foundation instead of a DAF, they’d need accountants, lawyers, and other administrative staff to be sure that they filed their 990s and other paperwork annually to the federal and state governments. They’d need to ensure that they were keeping track of donation amounts to hit the required 5 percent minimum. With a donor advised fund, the sponsor takes care of all of the paperwork, including sending the actual check to the recipient.
Supporting multi-generational philanthropy
If a donor would like to bring their family into the process, setting up a DAF is a great way to do it. DAF sponsors have classes, workshops, and lots of infrastructure to help families engage in philanthropy together. It helps the sponsor down the road, too, because all of this education means that the fund’s next generation is informed and ready to become the fund advisor when the founding donor passes away.
That warm glow
It’s interesting when you look at the psychology around DAFs, too. Normally every donor has a ‘warm glow’ feeling when they make a donation to a charity. It’s that burst of endorphins that makes you feel super good about what you’re doing.
However, with DAF donors they get that warm feeling multiple times: when they open up the DAF; when they discuss what they want to do with the DAF with their advisor, family, and others; each time they allocate a donation to be sent; and when they receive a thank you note from the recipient and any other public acknowledgment. That’s a lot more endorphins than just with a one-time gift.
Donation flexibility
Let’s say a donor decides to create a foundation with their money. The foundation has set interest areas and not a lot of flexibility to move from one funding interest to another. With a donor advised fund, if the donor wants to give to a priority one year and something entirely different another year, they can decide to do that.
Ability to give anonymously
There’s also the flexibility to give completely anonymously, which we explored in more detail in an article on The Intelligent Edge back in March, so please don’t miss that article. The reasons for giving anonymously via DAFs is a lot more interesting than we’d thought, and not at all for the reasons we thought it would be!
The number of donor advised funds and the assets in funds are growing on a sharp curve. Assets in the sponsors have essentially doubled in the last five years, but giving from DAFs has more than tripled. DAFs are an important philanthropic vehicle that nonprofits need to not only be aware of, but actively understand and work toward building relationships with these important donors.
