A Problem or Solution?
Do donor advised funds help or harm charitable giving?
Donor Advised Funds (DAFs) are typically set up by donors who have significant giving potential. The DAF allows donors to give cash, securities, or other properties and receive tax benefits from that gift. The funds are held until such time that specific projects are identified, and then the money is released. The DAF is typically invested in a portfolio fund of some sort. Any interest in the DAF is tax free.
Unlike a private foundation, a DAF can be set up quite quickly and they are low cost. They are not subject to many of the rules surrounding private foundations, particularly an annual giving requirement. Once a gift is made to a DAF, it cannot be taken back. However, the funds can sit in the DAF indefinitely. It is like having a savings account for your charitable giving.
I myself have experimented with a DAF. I opened a DAF and began giving to it monthly, and then gave from that instead of my personal account. Then, the costs went up so I closed it. It was a good experience for me, though, to learn how this world works.
Some people view DAFs as the ultimate giving vehicle. You give the money and get the benefit of the contribution from a tax perspective today. You also get to wield a great deal of control over the money’s ultimate destination. There are limits to this in the law, but from a practical standpoint, DAFs give you the ability to give without fully releasing the money until you are ready to do so.
I think this has led to some issues in funding getting to where it is needed.
We have heralded the upcoming “greatest inter-generational transfer of wealth in human history.” $30 trillion USD is set to change hands. This process is already underway. A great deal of charitable money represented in this transfer is being held in DAFs.
The biggest one out there is The National Christian Foundation (NCF). Their website states that, “NCF givers have supported 70,000 charities with more than $12 billion in grants from their funds.” That is a lot of giving via one organization. In 2021 alone, they oversaw the giving of $1.6 billion dollars.
I do not question the heart of NCF. I have and currently do have a role with foundation boards that utilize NCF’s services in managing the money that they are giving. But there are downsides if you are a recipient looking for funding and there are temptations for givers as well.
One significant problem for grant seekers is that DAFs shield the identity of donors. There is little information about who is funding what. To be certain, if you are a major donor, this is a feature, not a bug. But if you are a person looking for funds, it is a huge liability. You cannot identify major donors or foundations that have the same interests as you. This is because the giver is noted as “donor advised fund organization” on donations, not the one who gave the financial gift to their DAF account.
Another issue is that, in the US, tax incentives are not aligned with giving timelines. Most private foundations have a requirement to give a percentage of their portfolio away each year. This is generally about 5%. With DAFs, there is no such requirement. The money can sit in the account for years and accumulate. Having had a DAF, I can tell you that there is a temptation to build a “nest egg” of sorts.
With the changing generational cohort, this gives me great concern. Imagine a Christian businessperson who accumulates substantial wealth. They open up a DAF and begin putting their funding into the DAF account with a strategy to fund global missions. Their kids inherit the wealth upon their death. Their kids have a different value system and decide to change the charter of the fund. Now that money goes to something completely different, possibly even in opposition to a Christian worldview. Even if the money was originally given to an explicitly Christian DAF, lawyers can construct ways of transferring those funds to other types of charities. Unless there is great forethought about where the money goes, it might end up in things the original donor did not intend.
A final point of concern surrounds the power that these large DAF organizations wield. They publicly tell you that they do not promote any charities, and that they are a neutral party. Again, I don’t doubt the sincerity of this claim at all. I do think they work at this. Yet, when I had a DAF account, I would receive correspondence citing the successful giving of members to specific charities. I remember thinking, “How could I get the charity I work for in this newsletter?" This is a form of promotion, and, with the scope and size of these large DAF account organizations, this is inevitable.
I am not sure what innovation might look like in this space, but I believe it is sorely needed. I am trying to raise some funding for Missio Nexus right now. I have experience and knowledge in the area of funding, and I am struggling. I cannot find donors interested in the big picture of global missions. I believe part of the problem lies with the DAF system. Again, for full disclosure, I participate in this system by virtue of my day job and various board and trustee roles. But I do wonder if the system I participate in hurts, rather than helps, many of those who are seeking funding.
An oft-quoted proverb among givers is “do your givin’ while you are livin’ so you’re knowin’ where it’s goin’.”
That is great advice for DAF investors.
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