5 Things About Donor Advised Funds

Question: Which charity saw 89% growth in contributions in 2012 and now ranks as the 2nd largest nonprofit organization in the United States? If you guessed Fidelity Charitable then you win the prize (I’ll give it to myself for now and send to you later, that joke will be way better after you read this post…). Much of the boom experienced by Fidelity Charitable, and foundations/funds like it, are built on the backs of the Donor Advised Fund (or DAF).

Donor Advised Funds In A Nut Shell

A Donor Advised Fund allows a donor to give right now, receive a tax benefit immediately, and then “advise” or “recommend” which registered charity to grant funds to from their account (advise and recommend are in quotes there because at law the funds given are to be used at the discretion of the foundation facilitating/sponsoring the Donor Advised Fund and they do not have to comply at law with the advisement or recommendation of the donor).

In the past, Donor Advised Funds have been mainly accessible by larger donors with more significant wealth but as the DAF has risen in popularity and technology has improved, you can now get your own Donor Advised Fund from community and public foundations for $5,000. Some like Chimp, are offering online accounts built on the DAF model for as little as $5 (Disclosure: I work for/with Chimp).

In addition to Donor Advised Funds being a beneficial way to give there are some other great advantages/uses of the DAF including

• reducing costs and administration of private foundations (by not setting them up or possessing greater scale and efficiencies),
• allowing groups or families to more easily set up a fund in memory of a loved one that can give out over a longer period of time (like a mini-endowment) and
• reduce costs on charities who can report back to one entity, the foundation, but have it disseminate to hundreds of donors.

With Donor Advised Funds there’s a lot to like.

There are however some grumblings that perhaps DAF’s are too heavily in favour of the donor and not the charity and cite the fact that over $9.64 billion came into DAFs in the US in 2012, only $7.7 billion came out. Building off this, I read an interesting article yesterday on the Chronicle of Philanthropy surrounding Donor titled Charities, Not Donors, Should Get Big Benefits From Advised Funds where the author, Ray Madoff, outlines 5 myths of Donor Advised Funds.

1. Donor-advised funds have increased overall charitable giving.

In reality, charitable giving has remained constant, in the United States, sitting around 2% of the GDP for the past 40 years. Even with mega money players like Fidelity getting involved with offerings like Fidelity Charitable showcasing the donor centered power of a DAF, by and large, North Americans are no more charitable in terms of financial giving today then we were four decades ago.

2. Advised funds do not need payout rules because they already give a higher percentage of their assets than private foundations.

While public and community foundations that offer Donor Advised Funds may have a reported higher disbursement quota, 16% according to Madoff, that is in aggregate for the foundation and not from the DAFs alone making it nearly impossible to know what the true payout is and can allow some DAFs to not payout for long periods of time.

3. Donor-advised funds do not need payout rules because they are no different from endowments.

Endowments were established to allow nonprofits to build for the future and have investment income help insure their long-term sustainability. Endowments are associated with a clear charitable purpose yet Donor Advised Funds are typically not, but merely accounts that can house charitable dollars while not helping sustain organizations (unless disbursed).

4. Payout concerns do not apply to community foundations.

Madoff points out that while community foundations may be more likely to want and encourage their fund holders to make more payouts than their corporate counterparts yet, according to the latest research, they simply do not.

5. Any payout rule should be imposed on the sponsoring organization and not on the basis of each account.

The current 5% payout rule that applies to foundations in the United States applies to the entire organization (or sponsoring organization) but not the individual Donor Advised Funds themselves. The end result is a great benefit to the donor and DAF holder while also providing them with more flexibility around disbursement rules. Madoff argues that the greater the tax benefit to the donor, the more stringent the rules around disbursement should be.

If you read the entire article, or Tweet with her, you will see that she is not against the DAF but rather for finding ways to find a balance between benefitting the donor and their giving and the charity and their receiving.

In summary…

Donor Advised Funds aren’t going anywhere anytime soon (other than up and to the right) and as technology continues to improve and donors are continuing to look for more effective, efficient ways to give and support charities, the DAF model stands to only grow in importance.

It is especially important then that we as fundraisers, donors, consultants, etc. look at how the DAF can be a great tool that can benefit the sector before we start damning it as another way the wealthy win and charities lose and we look at the downsides and ramifications of such a donor centric product before we start hailing it as the charitable saviour product.