Donor-advised funds

The number and size of donor-advised funds (DAFs) have grown exponentially over the last decade, fueling what Urban Institute fellow Eugene Steuerle describes as the “democratization of philanthropy.”[1] A DAF is in effect a bank account, where a donor can set aside charitable funds while deciding on specific beneficiaries. Individual DAFs range in size from $1,000 to more than $50 million.[2]

When you deposit money, stock, or property in a DAF, the account represents an irrevocable, tax deductible donation to the organization that manages the account—most commonly, a community foundation or a financial services provider. Funds from the account are then paid out to nonprofit organizations at a later date upon your recommendation. Meanwhile, the money is invested so that it can continue to grow (tax free).

A broad array of nonprofit organizations offers a DAF option, including community foundations,[3] universities, professional organizations such as the American Bar Association, religiously-affiliated charities such as the Jewish Communal Fund, and even other nonprofits organized to support a specific cause or interest, like the progressive-oriented Tides Foundation. Among for-profit financial services providers, the nearly $4 billion[4] Fidelity Charitable Gift Fund (run by Fidelity Investments) is not only the biggest DAF provider but also America’s fifth largest charity in terms of assets held.[5] The Vanguard Charitable Endowment Program and the Schwab Fund for Charitable Giving are also quite large, with assets of $1.63 billion and $1.54 billion respectively.[6]

How a DAF Works

In all cases, the board of your DAF host technically has the last word on which charities receive grants – the board of that organization is legally responsible for your funds once you put them into a DAF. As a practical matter, though, most DAF hosts allow their donor fund advisors free reign in directing their funds to legitimate charitable organizations. Some reject only those organizations that fail a basic due diligence process, although more issue-oriented foundations may limit or turn down grants to nonprofits that are outside their interests. Give2Asia, a program of The Asia Foundation in San Francisco, provides expertise, administrative support, and a variety of other services to support donors who want to give to nonprofits located or working in Asia. Grants from DAFs held there must, however, be made to projects in Asia. Financial service providers and community foundations, on the other hand, typically have few restrictions.

All DAF hosts must verify the charitable status of the recipient organizations to which you recommend a grant. This is because they are restricted to distributing their funds to tax-deductible 501(c)(3)s registered with the IRS or their equivalents overseas.[7] While this imposes no significant barriers to giving to U.S. nonprofit organizations, many DAFs lack the capacity to determine whether foreign organizations are “equivalent” to U.S. nonprofits, or to engage in an “expenditure responsibility” process to ensure that a donation to an overseas organization is deductible.

While financial service providers serve primarily a transactional purpose for donors who are fairly clear about their philanthropic objectives, many community foundations have staff members available to advise individuals with DAFs, helping them think through their philanthropic objectives and methods, scout out grantmaking opportunities, and actually make grants. The staff may also offer a wide variety of other services, to highlight a few examples:[8]

• The Saint Paul Foundation periodically provides a newsletter with brief descriptions of the organizations and programs that the foundation is supporting through its own unrestricted funds. It lets donors know about local nonprofits that the foundation’s staff have vetted and deemed worthy recipients, allowing donors to leverage their funds with the foundation’s.
• The Boston Foundation hosts informational events on the nuts and bolts of philanthropy covering topics like “International Grantmaking,” “Giving to Medical Research,” and “Models for Family Giving.”
• Silicon Valley Community Foundation organizes donor visits to local nonprofits or government agencies working on particular issues ranging from girls in the juvenile justice system to art as therapy to implications of human genome research. The nonprofits are explicitly prohibited from soliciting donors on the trips, but the experience does expose participants to organizations and fields they might be interested in giving to on their own.
• Greater Houston Foundation offers a week-long, summer day camp designed to help children ages 10-14 learn about the importance of giving. The children raise a modest amount of funds before the program and, after a week of sessions, hold a board meeting to decide individually and collectively where to donate the money to.
• The Community Foundation for Greater Atlanta assists donors with DAFs of more than $250,000 by setting up their family meetings, helping them write mission statements and grantmaking guidelines, providing customized reports about nonprofits in their areas of interest, and assisting with grant applications and post-grant evaluations.

DAFs vs. Unstaffed family foundations

The DAF is an attractive alternative to establishing a family foundation. Economies of scale eliminate the overhead costs of a separate foundation, and community foundations can provide access to expertise—at least involving a community’s charities, and sometimes beyond—that a small foundation may be hard-pressed to find. And donations to DAFs can be deducted at higher percentages of adjust gross income than those to private foundations, and the assets avoid the 1-2% excise tax levied on private foundations. A DAF can, therefore, be an efficient – and strategic – way to maximize the time you spend on philanthropy by limiting the time and money you have to spend on administrative, legal, and financial concerns.

In sum, whether it’s held at a foundation or a financial service provider, a DAF is first and foremost a financial instrument. How much impact you have through a DAF will depend on how strategic your grantmaking is.