Donor-advised funds: the good, the bad, and the profitable

by Angel Shi, Strategy Consultant

For many organizations, 2020 so far has been a remarkable year for individual giving, thanks to the collective responses of donors to the COVID-19 crisis. Moreover, many organizations have seen their donor-advised funds (DAFs) donations in the first half of the year exceed all that was raised for all 12 months of 2019.

For those who aren’t familiar with DAFs, they act as centralized vehicles to allow donors to make an irrevocable contribution of personal assetsthat is, once you donate, that money is gone; you can’t touch it again.  Donors receive an immediate tax deduction, then recommend grants from the fund over time. DAFs are the fastest growing form of charitable spending in America, with an estimated more than $100 billion in DAF accounts across the country as of early 2020. Many people set up DAFs through community foundations, which is an important distinction from private foundations because DAFs are not required to have a minimum payout.

Recently, the absence of the minimum payout requirement for DAFs has become a controversial topic amid the COVID-19 crisis. After all, if you were going to donate, now is the time nonprofits are in greatest need. Many charities have been overloaded with work since the onset of the virus in March, and there’s been growing criticism that DAFs aren’t effectively employing their funds as much as they could be to help those in need. In fact, The Nonprofit Times recently reported that people of color have made up a disproportionate amount of serious COVID-19 cases. Yet, relief philanthropies have not focused on these communities with only 14 percent even mentioning these communities when discussing their mission. Headlines like this have been making the rounds across the media.  Even though this has been a record-breaking year for disbursements from DAFS, with over $100 billion still sitting in DAFs on the sidelines, some criticism has emerged on how these funds aren’t deploying enough resources to those in the frontlines of aiding those affected by the pandemic.

One of the critics, a veteran nonprofit consultant, has been very outspoken about how DAFs are heavily subsidized by the federal government, yet their funds aren’t being effectively used to feed people, house people, educate people or save the planet. Moreover, because DAF managers can charge management fees and invest the money and assets in these funds, critics believe they aren’t as motivated as working charities to see these resources put to immediate use.

One fund in particular launched by Nicholas Woodman, founder of mobile camera company GoPro, came under scrutiny in a 2018 New York Times story for declining to disclose how much money in total it has paid to charities over the 4 years since its establishment. Google co-founder Larry Page’s use of DAFs has also raised concerns. Last December, an analysis found Page had donated more than $400 million in DAFs from 2015 to 2017, but the lack of a disclosure requirement has left individuals wondering if any of these funds have gone to actual charities.

The lack of disclosure and payout requirements for DAFs that are present in private foundations has caused both DAF users and outsiders to call into question the lenient system which has made them so appealing to philanthropists.

To combat this lack of transparency, which has become a trend among DAFs, a #HalfMyDAF campaign has been launched, urging donors to spend at least half their money in their funds by September. So far, the founders of this campaign have yet to hear a response from any major national DAFs such as Fidelity, Schwab, or Vanguard.

What are the implications for nonprofits? First, transparency and authenticity are becoming more integral to the giving world. This could mean adjusting messaging or finding new ways to acknowledge DAF gifts more effectively so that the donors and stakeholders are made aware that their funds are being put to actual use. This could even mean nonprofits taking the initiative to urge DAFs to be more open to publicly disclosing their contributions to them to restore public trust. Professionals in the nonprofit industry are already measuring their outcomes in order to emphasize the impact of donor dollars. Now is a more important time than ever for nonprofits to quantify their impact by also employing statistics and case studies that are readily available to the public. In order to capture donations today — to fulfill immediate program needs like feeding the hungry and sponsoring affordable housing for those financially impacted by COVID — nonprofits need to also convince DAFs of the urgency of action.

Second, with DAF giving at a record level, with pressure to give more from media and reform efforts, it’s an excellent time to double down on your efforts to make it easy to donate to your organization from DAFs and acknowledge the people behind the DAFs for their generosity. With the legal structure of DAFs being called into question more frequently now, it’s uncertain as to whether any policy reforms will occur in the future. One thing nonprofits can control now though is how their messaging and acknowledgment of DAFs can provide their stakeholders with peace of mind that their funds are being effectively put to use today. 

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