How Donor-advised Funds are Changing Philanthropy

Daffy, a company founded during the pandemic by Silicon Valley entrepreneurs Adam Nash and Alejandro Crosa, created workplace-giving accounts last year and landed tech companies like OpenAI as clients. It’s also fashioning funds as giving vehicles for almost every occasion — as presents, as vehicles for family bonding, and as the backbone of personal fundraising campaigns for a charity or cause. Unlike most DAF sponsors, Daffy doesn’t charge fees based on account assets. Rather, account holders with $100 or more in a fund pay a membership fee that’s as little as $3 a month.

“I think this is actually the start of what’s going to look like a decade or more of these types of features spreading throughout the industry,” says Nash, who has worked for such consumer giants as Apple and LinkedIn.

DAF popularity — and the nearly $230 billion stashed in them — has attracted for-profit entrepreneurs who want to expand or tap into the market. It’s not likely that all the new enterprises will survive a shakeout, but “it’s something that the venture-capital community is paying a lot of attention to right now because there is so much momentum behind DAFs,” says Brad Saft, founder of DonorAdvisedFunds.com, which is building an algorithm-based consumer ranking of DAF sponsors.

At least two DAF-related companies — Chariot and Charityvest — have launched from Y Combinator, the famed Silicon Valley start-up incubator. Chariot created a payment system for nonprofits so that their donors can make online DAF contributions in three clicks. Charityvest sponsors accounts tailored for average Americans who want to set aside cash each month to meet annual giving goals. “Anyone can create a donor-advised fund in 90 seconds,” says co-founder Stephen Kump.

In August, Charityvest created the option for individuals or charities to open “community funds” to raise money for a cause. Account holders include a bride and groom with a charity-themed wedding as well as such nonprofits as Giving Gap and GiveDirectly.

DAFs vs. Foundations

DAFs also are adding new twists to traditional modes of charitable giving, often touting the funds as a more flexible and versatile tool than private foundations.

Impact investments. Community foundations such as the New Hampshire Charitable Foundation encourage their DAF holders to loan their assets through impact investment funds to support small-business expansion and affordable housing, among other projects. The loans don’t generate a market return, but some money does flow back to the donors’ DAFs when they are repaid.

Community foundations can roll up small grants from lots of donors, says John Weeks, a wealth-management adviser and former board member at the foundation. “They can rally them all together to get a scale that can be meaningful.”

Social Finance is recruiting DAF donors to put idle assets into impact investments such as college loans for undocumented immigrant students. The nonprofit, which launched in 2011, originally sought to finance its work solely through program-related investments from foundations. Few grant makers, however, are eager to sign on, co-founder Tracy Palandjian says.

“It’s expensive. You’ve got to hire lawyers, and it’s complicated,” Palandjian says. “The donor-advised fund structure makes it much easier for individuals to participate.”

Endowed funds and planned giving. With $100,000 or more, donors to Fidelity Charitable, the DAF arm of the finance-management giant, can establish an account to support as many as six charities in perpetuity. “For wealthier families who might have also considered setting up a foundation, that could be an especially attractive option,” says Amy Arnott, a portfolio strategist with Morningstar, a financial-services and analysis firm.

The National Muslim Planned Giving Council — a group of finance professionals working with the American Muslim Community Foundation — is encouraging donors to create wills that pair DAFs with a charitable trust. If the DAF is established as the trust’s beneficiary, donors can change the nonprofits that will benefit upon their death without restructuring the trust, says Muhi Khwaja, a co-founder of the foundation. “It’s just a much easier process.”

Big philanthropy. Major philanthropists often use DAFs as a complement to their foundation or political-giving apparatus. “It’s part of the infrastructure and part of the toolbox for high-net-worth individuals,” says Alison Powell, a partner with the Bridgespan Group, a philanthropy consultancy.

Donor collaboratives use DAFs to pool money efficiently. The Partnership for Safe and Peaceful Communities — which has awarded more than $145 million from more than 70 donors toward gun-violence prevention in Chicago — established DAFs at the Chicago Community Trust for each of its priorities, including street programs, police reform, and research. Partnership donors can give to the fund that aligns with their mission and interests.

Grantees, meanwhile, benefit from funding from a single source. “Our aim is to create or remove barriers so that they’re not filling out the multitude of applications or reports,” says Esther Franco-Payne, the partnership’s executive director.

2 Million Accounts

It’s not clear whether these new DAF uses will gain broad acceptance. But they could fuel what’s already white-hot growth for the industry. The number of accounts has nearly doubled, to almost 2 million, since 2018, according to the annual survey by the National Philanthropic Trust, one of the largest hosts of DAF accounts. The reach of DAFs is so extensive that more than one out of every four dollars that individual Americans donate to charity goes to a donor-advised fund, according to an analysis by the Institute for Policy Studies, or IPS, a DAF critic.

IPS and other DAF detractors view these numbers with alarm. Contributions to the funds are considered gifts to a charity by the Internal Revenue Service, which means donors are eligible for a bigger tax break than if they gave to a foundation. The government, in turn, loses tax revenue needed for public services, critics note.

Also, gifts to DAFs yield an immediate tax break for the donor but may take years to be put to charitable use. Critics say that by emphasizing endowed funds and DAFs as IRA-like accounts, sponsors indirectly encourage donors to pile up cash in their funds rather than make grants to charities. Like with a traditional endowment, the principal invested in a DAF endowment is not intended to be paid out to charities; to ensure funds last, sponsors of endowed DAF funds typically cap payout at 4 percent to 6 percent, according to research led by Daniel Heist, co-founder of the Donor Advised Fund Research Collaborative.

DAF contributors are encouraged to think like investors, not charitable donors, says Helen Flannery, an IPS researcher. Flannery and Ohio State accounting professor Brian Mittendorf completed research indicating that some of the biggest sponsors promote investment choices and tax advantages to donors but focus little on charitable impact. Vanguard Charitable, for one, now offers 36 investment portfolios, including more than two dozen focused on a single asset class such as real estate or European stocks.

“You have a few at the top that are very slick in their appeals to donor advantages,” Flannery says.

Legislation to encourage DAF holders to disburse assets has failed to advance in Congress, but advocates say to expect a new bill in 2024. Details are still being worked out, but “it will be a little bit bolder charity reform” than previous bills, says Chuck Collins of IPS. The institute in December launched a “donor revolt” campaign that calls for funds to disburse assets within five years of receipt. The proposal also targets foundations; it advocates raising the minimum annual payout from 5 percent to 7 percent. Grant makers with more than $50 million in assets would have to give away 10 percent each year.

IPS aims to rally big-name and everyday DAF holders to push for the new legislation, Collins says. “There are people who care about racial justice and democracy and tax fairness who are also constituencies for charity reform.”

Donor activism might draw nonprofit leaders into the fight, many of whom, he says, “have been on the sidelines.” Why? They fear alienating donors, Collins says.

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