Smart Philanthropy in the Age of COVID-19: Donor Advised Funds

As COVID-19 continues to wreak havoc on economies and lives, it has also brought out some of the most extraordinary philanthropy in human history. People are giving more than ever before in amounts, both large and small and in support of efforts at the most local level to those on a global scale. As the worldwide battle against the virus rages, human spirit’s goodness is showing up as philanthropy on steroids.

This profound growth pattern in charitable giving has given rise to many questions among those who are giving. Having headed a community foundation, many of these conservations with donors turned to not just what should be supported, but the “how.” And the most significant growth in the “how” is the explosive expansion globally of what are called Donor Advised Funds or DAFs for short.

So, in a bit of a departure from this column’s coverage of the fabulous ins and out of philanthropic activity, this month’s column is more of a “how-to” in accomplishing your giving goals.

Philanthropy at the level of the individual or family comes in many forms. It can be a retired person living on a fixed income and donating their time in volunteering for a food pantry. It can be a youth group doing a cleanup of a city park. It can be dropping off clothes at a homeless shelter or taking the haul from a good house purging to the Goodwill.  And when it comes to giving away money, the diversity is huge. From contributing a few dollars to a GoFundMe effort to writing checks from one’s checkbook to favored nonprofit organizations, to establishing one’s foundation, quickly emerging among these many options for contributing money are DAFs. 

DAF’s are far from new. The first was established in 1931 at the New York Community Trust and, for decades, remained largely within the domain of large community foundations, like the New York Community Trust, that could create scale and manage them efficiently. DAFs are now part and parcel of the model for most community foundations, have become behemoths within well-known banking and investment institutions, spawned boutique firms for exclusive clients and are even finding traction within more traditional nonprofit organizations. 

DAFs are also now a larger part of the global philanthropic ecosystem.  According to the trade publication Business Wire, “DAFs have become one of the fastest-growing giving vehicles, used by philanthropists in the U.K., Europe, Middle East and Asia.” 

So, what is all the buzz about?

The benefit of a DAF is that it allows a donor to take advantage of moving a greater amount of charitable money into an account, taking the full tax advantages of that move in a single year, but then allows the donor to decide on exactly how to disburse that money over a longer time period.

For example, let’s say that you had decided to make a $25,000 commitment to support nonprofits in 2020, but were not quite sure which organizations you wanted to back with that full amount. Opening a DAF would allow you to account for that gift in the current tax year. Still, you could have a virtually unlimited amount of time to decide which nonprofits eventually received those dollars. And in nearly all instances, DAFs can grow with additional contributions from the donor and from earnings on the host institution invests those dollars.  

The key to all of this working legally in the U.S. is that host institutions for DAFs are themselves nonprofit, 501(c)(3) public charities. So, when the donor opens a DAF, they are essentially making a gift to a nonprofit, that in turn, allows the donor to recommend grants from that account to other public charities. Note I said “recommend” – legally, the money no longer belongs to the donor, but rather to the nonprofit, host institution. As a result, the donor “recommends” that grants are made to another nonprofit from their DAF, and the host institution approves that recommendation. 

Most host institutions of DAFs have a minimum balance to open an account, which can vary widely.  One large charitable arm of an investment firm, for example, allows you to create an account online with an opening balance of at least $5,000 USD. Many community foundations have a higher opening minimum.

Fees are also a consideration. The larger financial firms, with much greater scales, can offer lower fees. But fees are also often a reflection of the services provided. Community foundations, for example, may have slightly higher fees on a DAF, but the donor will likely be able to unlock the local expertise of that community foundation to engage in more impactful and leveraged grantmaking. However, the DAF holder may often know exactly what they want to give to and need no assistance beyond transactional efficiency.

There are other considerations in opening a DAF as well.  For example, host institutions may set a minimum for the amount in which a grant can be made. Grants from DAFs can also not be utilized to pay membership dues, fulfill a pledge and the donor can receive no gifts for the grant. There is also typically an “inactive funds” policy maintained by host institutions that require some minimal distribution be made to keep the fund “active.” 

One final point that frequently pops up in speaking to larger dollar philanthropists is whether they should open a DAF or create their own foundation. There is no easy answer to this question as each approach has its own benefits and drawbacks. The advantage of a DAF is that the burden of paperwork shifts nearly entirely to the host institution. A DAF also provides the donor an ability to be entirely anonymous should they choose to do so (something much more difficult to achieve for the benefactors behind a private foundation). A simple internet search will yield dozens of references that explain the differences between a DAF and a private foundation. Read several and compare as most want to lead you down a certain decision path.

Whatever vehicle one chooses to accomplish their charitable giving, it’s clear that DAFs have come into great favor. And the ease and flexibility they provide is paying off – for nearly a decade, according to the National Philanthropic Trust, grants to nonprofits from DAFs have grown year over year. That’s philanthropy in action.

By: Bill Smith