Though the first Donor Advised Funds, or DAFs, appeared nearly a century ago, these tax-advantaged accounts for strategic charitable giving have grown significantly in popularity over the last ten, or so, years. DAFs provide a different way for donors to give—especially those with unique assets, like stocks and real estate. These types of accounts present pros and cons alike for both donors and nonprofits, but one thing is clear—they seem to be here to stay. So, let’s dive in and consider a bit more about what DAFs are, their rise in popularity and use, and how they might change the fundraising landscape for nonprofits.
What, Exactly, is a Donor Advised Fund?
In essence, a Donor Advised Fund (DAF) is a charitable investment account, where individuals can contribute cash, securities, and other assets. When an individual contributes to a DAF, they receive immediate tax advantages (they can deduct the amount contributed—even if it hasn’t been given to a nonprofit yet). The funds in the DAF will, ideally, grow through the investments—eventually allowing the donor to contribute even more to the organizations they care about.
Eventually, the donor is able to make a grant recommendation to their respective DAF, suggesting where they would like the funds to be given. Donors are able to recommend a grant to virtually any IRS-qualified charity. And, although DAF managers are not required to heed a donor’s recommendation, they almost always do.
The Rise of DAFs
The last decade has shown a significant increase in the use of Donor Advised Funds, as they have become more readily available and accessible to individuals. In fact, grantmaking from DAFs has increased four-fold in the last ten years. There has been, however, particularly notable growth in their use even in just the last one to two years.
Consider just a few statistics about the significant growth of DAFs from 2019 to 2020:
-
The number of DAF accounts in the United States grew 16.3% between the two years to just over 1 million accounts (the greatest year-over-year increase on record).
-
Contributions to DAFs also reached an all-time high in 2020, with $47.85 billion contributed—a 20.6% increase from 2019.
-
Charitable assets under management grew 9.9% year-over-year to $159.83 billion.
-
And, lastly, grants reached a record high in 2020—up 27% for a total of $34.67 billion.
All of these statistics demonstrate that DAFs are on the rise and make up a significant portion of charitable giving in the United States. So, what does this mean for nonprofits?
Pros and Cons for Nonprofits
There are both pros and cons for nonprofits as it relates to the increased use of DAFs. One notable positive is that the funds contributed to a DAF are irrevocable. So, once a donor has given any amount of money, they are unable to remove it from the fund. This becomes particularly relevant in times of economic uncertainty. Though some donors may not otherwise be inclined to give, there is no real reason to not grant a gift through their DAF. This provides just a bit of extra security for nonprofits in otherwise ambiguous times—regardless of what else may happen, there is money set aside for charitable donations.
Additionally, another aspect that fundraising organizations should view as an advantage is simply the ease of giving through a DAF. Using a DAF simplifies the tax implications significantly for the donor, which increases the likelihood of continued giving. And lastly, the annual payout rate for DAFs hovers around 20% (compared to an average payout rate of 5% from a traditional foundation). All things considered, this is a fairly high rate of giving coming from DAFs. So rather than seeing this different way of giving as solely a risk or threat, it would be wise to see some of the potential advantages for organizations.
With all of that in mind, however, there are a couple of significant drawbacks. The first and seemingly main concern from nonprofits it’s the potential delay in actual donations to their organizations. When a donor gives to a fund, although they receive immediate tax benefits, they do not have a time limit on when they must make grants to nonprofits. So, this money that is set aside for eventual giving may sit idle for an indeterminate amount of time. The concern for nonprofits is that the potential to receive this money years down the line does little or nothing to help them meet their more immediate needs. Now, there is a bit of good news in what is an otherwise frustrating circumstance for fundraisers—because these funds grow over time, it’s not necessarily an “a dollar now or a dollar then” situation, but rather “a dollar now or more than a dollar then.”1. But still, this concern of delayed donations remains a valid one for organizations looking to fund their causes now.
A second and potentially even more significant problem for nonprofits when thinking long-term is the anonymity of these donations. There’s no requirement for donors to identify themselves, which then makes it next to impossible for a nonprofit to know who it is that is giving to their organization and then cultivate that relationship. This is an essential function of fundraising, and without it, it leaves organizations guessing and feeling as if they’re at the mercy of their anonymous donors.
What, Then, Should Nonprofits Do?
Though in many ways DAFs present challenges for nonprofits, the best path forward is to adapt and develop new strategies, rather than resist this change.
First, we know that some people contribute to funds knowing exactly to which organizations they intend to grant donations. This is something that nonprofits can take advantage of. For instance, many of your high net-worth donors likely already use a DAF. So, ask questions around this and see how those who are already looking to give significantly to your organization can get even more out of the dollars they’ve set aside.
On the other hand, though, many give to DAFs primarily with the immediate tax advantages in sight, but without any idea of where they will eventually grant donations. In these cases, DAF managers are often doing research and making recommendations to donors based on the information they have about their values and the types of organizations they’d like to support. With this in mind, a new strategy for many fundraisers may be to begin focusing not just on cultivating relationships with potential donors themselves, but also with DAF managers. Though this is not the traditional way of fundraising, trends do suggest that there will be an increased return on this relational investment.
Lastly, it’s important to make sure your organization’s technology supports (and even encourages) giving through a DAF. It is good practice to include a button on your giving page that allows donors to give directly from their DAF. So, perhaps it is worth completing a technology audit to make sure you are up-to-date in the necessary ways to take advantage of this significant change in giving strategy.
Atticus Can Help
With all of these changes brought on by DAFs in mind, at Atticus, we believe we can help. As mentioned earlier, because of the increase in DAFs, we know there to be plenty of funds ready to be given but they are sitting idly due to the uncertainty of the donors in terms of which organizations they should choose. With our technology, however, we can help your organization build the relationships needed to tap into these funds. Through our platform, we match donors based on their personal mission, vision, and values with those of your organization. So, when you partner with Atticus, we’ll help you find those donors who are ready and able to give but may simply not have known that your organization is a perfect fit for their donation.
We’ll end with this—Donor Advised Funds appear to be here to stay, and if you’re a nonprofit fundraiser… that’s not all bad news. Certainly, there are drawbacks, but there is also significant potential to capitalize on this change. How can you and your organization make the most of this shifting moment to fuel the organization and causes you care most about? Don’t shy away from it—learn about, adapt to, and embrace this new way of giving.
Stanford Law School Policy Lab on Donor Advised Funds. (2020, October 1). Are Donor-Advised Funds Good for Nonprofits? Stanford Social Innovation Review. Retrieved February 2, 2022, from https://ssir.org/articles/entry/are_donor_advised_funds_good_for_nonprofits#National Philanthropic Trust. (2021, November 12). The 2021 DAF Report. NPTrust. Retrieved February 2, 2022, from https://www.nptrust.org/reports/daf-report/Grigsby, T. G. (2019, May 31). Donor Advised Funds: “Do’s” and “Don’ts” for Nonprofits. Nonprofitoregon.Org. Retrieved February 2, 2022, from https://nonprofitoregon.org/sites/default/files/uploads/file/Donor-Advised-Funds-Article-NAO.pdf