Donor Advised Funds (DAFs) are the fastest growing giving vehicle in philanthropy. The Council on Foundations defines DAFs as:
“A type of charitable giving fund that is established by a donor with an eligible charitable sponsoring organization (i.e. a community foundation) to support a cause (or causes) that the donor cares about. A donor advised fund allows the donor to remain involved and active in charitable giving by retaining ‘advisory privileges’ to recommend how the sponsoring organization should make grants from that fund.”
A DAF is like an investment account dedicated to the purpose of supporting charitable organizations. Cash, securities, and/or other assets can be contributed to a public charity, otherwise known as the sponsoring organization. This allows the donor to be eligible for an immediate tax deduction. Those funds can then be invested for tax-free growth while the donor retains the right to recommend how the public charity that is sponsoring the DAF should make grants from that fund. Any IRS qualified public charity is eligible to receive a grant from a DAF.
Generally, contributions to a DAF are treated as contributions to a public charity, providing some advantages over the more traditional private foundation structure. Primarily, donors can claim a higher charitable deduction to a public charity than a private foundation (50 percent vs. 30 percent of adjusted gross income). Additionally, DAFs, unlike Private Foundation endowments, are not subject to a 5 percent IRS minimum annual payout or the annual 2 percent excise tax on investment income that private foundations pay. These advantages make DAFs an attractive option to manage and grow philanthropic resources and explain much of their growing popularity.
According to the Chronicle of Philanthropy, giving to colleges and universities grew 4.6 percent in the academic year that ended in June, with DAFs showing significant growth as a source of gifts. Data from the 2018 Council for Advancement and Support of Education (CASE) Voluntary Support of Education survey reported that for college and universities, the number of grants grew by 19 percent and the dollar value of DAF grants received grew nearly 66 percent in the 2018 fiscal year.
Many colleges and universities, including Stanford, Yale and Dartmouth, have set up DAFs to allow alumni and others connected to the institution to put their philanthropic dollars to work. The college or university, as the sponsoring organization, can set a minimum investment of cash or stock with annual fees typically ranging from 1 to 5 percent. Although alumni and their families can recommend other charities to receive distributions, the school will typically request and encourage a certain percentage of giving from the DAF go to the school. Also, for many institutions that have a religious affiliation, they will build in gift guidelines to ensure that those using the school’s DAF support charitable causes aligned with the school’s mission and religious views. As DAF’s continue to grow, especially for colleges and universities looking to use it as a key resource development tool, here are three things to consider:
Expertise and Expense. Any college or university considering establishing a DAF program should understand the expertise and expense to run a program of this nature. If the fundraising benefit does not exceed the cost, institutions can still take advantage of DAFs by targeting fundraising efforts to individuals who already have DAF accounts.
Investment Policy & Performance. Colleges and universities that utilize DAF’s typically invest those pools alongside the endowment and in accordance with the investment policy set forth by the college or university’s investment committee. Having a thoughtful, strategic, mission-focused investment policy statement coupled with return-based performance metrics will be that much more important to alumni and the broader community of prospective donors.
Evolving Regulations. Broadly, as DAF’s continue to grow, the advantages they provide—the lack of a standard minimum payout percentage as well as the tax advantages for wealthy individuals— will receive intensified scrutiny from a regulatory standpoint. It will be important for nonprofits that have DAF platforms to continuously monitor the discourse and policies addressing how DAF’s are regulated.
DAFs are an important and evolving aspect of philanthropic giving and the Commonfund Institute will continue to research and monitor the usage and impact that DAFs have on nonprofit institutions.