DAF Contributions Outpace Those From Foundations – Is Your Fundraising Team Prepared?

Philanthropy has traditionally been an activity many consider to be the purview of foundations and high-net worth individuals. In contrast, most Americans typically give a few hundred dollars a year to charities and take the standard tax deduction. But the rapid growth of donor-advised funds (DAFs) is changing the giving game, allowing more givers to donate when, how much and to whom they want – which could have an impact on foundation giving. 

Today, nearly two million individuals support charities through donor-advised funds. The reason: The tax advantages of DAFs result in more of their gifts going to charity. 

“The 2023 Donor-Advised Fund Report” from National Philanthropic Trust found DAFs held more than $228 billion in assets and are outpacing the growth of foundations. The number of individual DAF accounts rose 2.9% from 1,893,762 in 2021 to 1,948,545 in 2022. The compound annual growth rate for the number of DAFs from 2018 through 2022 was 22.6%. And grants from DAFs increased 9% to $52.16 billion — a new high for grant dollars, which have increased every year since 2009 and more than doubled in the past five years. This demonstrates the commitment of DAF donors to supporting nonprofits operating in challenging environments. 

As more donors learn the advantages of DAFs, they have become a preferred method of giving from a wide range of demographics, from middle-class families up to ultra-high-net-worth individuals and are outpacing donations to foundations. Part of the reason for this is how straightforward it is to create and contribute to a DAF. It only requires one to open an account with a sponsoring organization, contribute assets and make grants. The sponsoring organization handles much of the necessary administration, including investment management, record-keeping and due diligence. With low administrative fees and the ability to streamline giving, it’s no wonder DAFs are appealing to such a wide variety of individuals. 

Immediate Benefits With Long-Term Giving

Direct investing in DAFs provides an immediate tax deduction on the contribution, but donating long-term appreciated securities also allows donors to avoid capital gains taxes they would incur if they sold the asset. This can enable donors to contribute more than they initially planned when considering the double tax savings not available when directly donating cash to a charity. 

DAFs also provide donors with flexibility in their grant recommendations — allowing donors to recommend grants to multiple nonprofits as long as they are recognized charities. There is no minimum yearly distribution requirement, so donors can allow their assets to grow as they wish and then donate when compelled or when the need arises, such as a natural disaster or mass casualty event. This can make donors feel more connected to their donations and support their long-term philanthropic vision. 

Today's DAF accounts often have no or low minimum account opening requirements, making them an attractive avenue for people just starting their philanthropic journeys. These donors may have previously made small donations in times of need or to charities to which they felt connected, but the long-term nature of DAFs means building relationships with these donors can help nonprofits support their fundraising goals. 

DAF Regulations: Potential Pitfalls for Charitable Giving?

Of note, the IRS proposed new regulations for DAFs in late 2023 that would place an additional excise tax on distributions made by a sponsoring organization from a DAF. Specifically, the tax would be imposed on fees paid to an independent adviser to a fund.

The DAF payout rate is already four times higher than private foundations without a federally mandated requirement. Private foundations typically grant the legally required 5% of their assets yearly, but DAFs have a historical payout rate of more than 20% for the past decade. Imposing new payout requirements on DAFs could force donors to make grants they do not believe in or that are unsuitable for the organization. Additionally, smaller community foundations or religious organizations that do not have the additional resources to comply with extensive regulatory requirements and stipulations currently sponsor many DAFs.

This is not the first time regulators have tried to impose such restrictions on DAFs, but attempts in the past have been unsuccessful. There was a proposal in 2022 to set a 15-year deadline for DAF contribution distribution to charities, and failure to meet that requirement would have resulted in a 50% excise tax on the undistributed amount. That proposal would have had major consequences on charitable giving, depriving philanthropic organizations. Fortunately, it never came to fruition.

Many nonprofits struggle each year as fundraising efforts ebb and flow due to economic conditions. The current structure of DAFs makes them attractive to all parties involved: the donor and the nonprofit. DAFs provide a relatively stable source of funding with donors who tend to have a long-term philanthropic mission and want to create a legacy. 

Nonprofits now have the option and ability to identify new and creative ways to attract DAF donors and their contributions to better support their fundraising initiatives and ensure they do not solely rely on foundations or ultra-high-net-worth individuals. The onus is on nonprofits to educate their donors on the value of DAFs and ensure every donor conversation highlights how using a DAF would help these philanthropists donate more to the causes near and dear to them. 

The preceding post was provided by an individual unaffiliated with NonProfit PRO. The views expressed within do not directly reflect the thoughts or opinions of NonProfit PRO.