Hello Everyone,
Forget the robot uprising. It’s the DAFs that are taking over.
Donor-advised funds, or DAFs, have skyrocketed in volume and popularity over the past several years, valued at nearly $230 billion in assets in 2022. And for good reason. Donors can easily create an account, fund it, receive an immediate tax deduction, and then recommend grants and donations to specific charities.
The DAF manages all of the operational details of your giving. For high-net-worth individuals, they eliminate the expense of creating and staffing a private foundation. And for the rest of us, DAFs help democratize giving by enabling us to create giving accounts cheaply and quickly (see Charityvest and Daffy).
There’s been plenty of criticism around the explosion of DAFs, namely that they don’t have to play by the same rules as private foundations. There’s no rule stipulating that 5% of a fund must be sent to charities every year, so donors can theoretically dump money into a DAF, receive an immediate tax deduction, but not make a single charitable contribution for years. That’s clearly bad for nonprofits.
But data shows that many DAF donors give far more than private foundations’ 5% requirement. A new report from the DAF Research Collaborative states that 54% of all DAFs granted out at least half of their original contribution within three years. The National Philanthropic Trust reports that the payout rate in 2022 was 22.5% (far exceeding the 5% rule).
The anonymity of DAF giving is another valid criticism. DAFs file an annual IRS Form 990 showing all of the charities that account holders have donated to, but there’s no way to match those charities with individual donors. It allows individuals to exert influence through giving without any corresponding accountability or transparency.
This lack of transparency also means that nonprofits don’t know where or how to ask for those donations.
There’s a major opportunity for technology to help. Tech can match donors with DAF funds, highlight the impact that local nonprofits are making, and enable DAF fundholders to host open calls for applications. Technology can and should help donor advised funds become more equitable, more transparent, and more effective.
It’s time for DAFs to make it simpler for nonprofits to take advantage of those tax-advantaged donations.
