Even if you don’t follow the news in philanthropy daily, you are likely to have heard about donor-advised funds (DAFs). After all, they are playing an increasingly significant role in how people in the U.S. formalize and distribute their charitable giving.

As more donors embrace DAFs, it’s important to understand what they are, why they’re on the rise, and how this growing trend may affect fundraising and sector-wide issues, such as funding transparency, accountability, access, and equity.

At their core, DAFs are investment accounts that can only be used for charitable giving. While the money in the fund is owned and managed by a financial firm, DAF donors still have a say in how and to which nonprofits its assets are distributed.

In the past, individual donors tended to write checks and give directly to nonprofits. If they were giving at scale, high-net-worth individuals might also have established a foundation, which takes time, resources, and effort to form. DAFs now often represent a philanthropic middle ground between these two approaches.

But donor-advised funds are not new. For example, the New York Community Trust began providing such accounts as early as 1931. Today, however, what’s novel is the meteoric growth in their popularity amongst donors.

In fact, DAFs have only recently begun to make a significant mark on the overall philanthropic landscape, increasing by 400% in the last decade alone. A 2022 report found that giving from DAFs was up 28% year-over-year, amounting to $45.74 billion. Even more notably, contributions (i.e., new money) to DAFs jumped by almost 50% to $72.67 billion—and the value of those assets increased nearly 40% to $234 billion in a single year.

While convenient and advantageous for donors, DAFs also create sector-wide challenges that will only become more acute as the number and value of funds continues to climb.

The biggest obstacle posed by DAFs is a lack of transparency. While we can most often see when high-net-worth individuals direct funds into DAFs, there is no obligation to reveal how that money is distributed. Certainly, DAF providers—given they’re nonprofits—must report aggregated distributions via their annual Internal Revenue Service (IRS) Form 990. That said, unless the DAF owner or the nonprofit recipient makes the source of the gift known, DAF gifts land in something of a black box.

Read the full article about donor-advised funds by Daniel X Matz at Candid.