The ABCs of DAFs: What is a donor-advised fund?
If you read any recent reports on philanthropic giving, you’ll likely be confronted by the term “DAFs,” which stands for donor-advised fund. Many experts in the social sector will tell you that DAFs are an increasingly popular way for individual donors to formalize their giving. After all, grants from DAFs to qualified charities in 2021 totaled an estimated $45.74 billion, representing a 28.2% increase compared to 2020.
Talk about some serious FOMO for many of us. If you are not getting money from DAFs, you’d be forgiven for thinking that you’ve missed the boat. Similarly, if you don’t even know what the acronym DAF stands for, you’d be forgiven, as well. In either case, here’s the good news: Although DAFs sound complicated, they’re really quite simple to understand.
There’s much discourse around DAFs, how they operate, and what amount of regulation is appropriate. We’ve provided resources below that delve into these topics further, but for this blog, we are focused on explaining what DAFs are and how they operate. In this first part of our two-blog series on the topic, you’ll get the full lowdown on DAFs and walk away with an understanding that will help you impress anyone who’s not an investment expert. The best part: you also don’t have to be an investment expert yourself!
What is a DAF?
Quite simply, DAF stands for donor-advised fund. A DAF is a fund, managed by an investor, that the donor still has a say in. Or put another way, it’s a way for an individual to make ongoing donations to their favorite charities without the need to start a foundation of their own.
To help you understand what DAFs are all about, consider this example:
I will illustrate this concept using a fictional wealthy person, Bob. Meet Bob.
Bob built (and pays taxes on) a jillion-dollar fortune, and he’d like to put a substantial amount of his money to use for doing good in the world.
Bob wants to donate to charity—specifically, nonprofits that help animals in his hometown.
Bob has many options for this giving, but here are three major ones available to him:
1. He can give the money to the charities directly.
Bob independently chooses who he wants to give to, donates the money, and the charities on the receiving end benefit. Bob feels good and enjoys a tax deduction, and that’s that. The money now belongs to these charitable organizations, and Bob no longer possesses any of it. This first option is basically a one-and-done approach to giving.
2. He can start a private foundation to give money every year.
Bob starts a nonprofit foundation, invests his money into it, and he and his fellow board members retain complete control over how the money is donated. He no longer needs to pay regular federal income taxes on this money, and the IRS only requires that he give 5% of his private foundation’s assets to charities every year. Choosing this second option, he’s still in the driver’s seat of his giving decisions and can give in perpetuity!
However, he’s also now running a nonprofit foundation, which needs to report to the IRS, follow legal guidelines, elect a board of directors, manage its investments, write checks, potentially invite grant applicants, etc. Basically, it’s a lot of work.
So, how can Bob give in perpetuity without putting in a lot of work himself?
3. He can start a donor-advised fund.
Bob can take his jillion dollars to a community foundation, a local financial advisor, or a big investment house, like Fidelity, Schwab, or Vanguard. Bob can open an account with one of these intuitions that’s put into a charitable fund—with the recommendation that his money be given to charities that benefit animals in his hometown. In this scenario, he advises the people who manage the charitable fund for him.
This becomes Bob’s DAF, and the people he trusted with his money now do all the hard work: invest it so Bob’s gifts can be given in perpetuity; manage how these gifts are granted; and write and send out the checks—all while consulting with Bob about who he’d like to give his money to. While he no longer owns his money outright, this third option offers several benefits: less yearly taxes due to income tax deductions; an actual say in how his money is donated; and more time to feel good about giving to the charities he cares about. Not to mention, he doesn’t have to do the legwork to make it happen.
@candiddotorg DAFs or donor advised funds: here's what your nonprofit needs to know (and why donors may like them). #NonprofitStartup #StartingANonProfit #CandidDotOrg #NonprofitsOfTikTok #Fundraising #DonorAdvisedFund #DAFs ♬ original sound – Candid
It’s unsurprising that more and more people are giving through DAFs. If you’re interested in getting in on the action, stay tuned for part two of this blog series to learn how nonprofit fundraisers can tap into this growing source of philanthropic funding.
I hope this blog helps you better understand what DAFs are and why their popularity continues to soar among individual donors. But if the above explanation of Bob’s DAF feels a little too 101-level for you, here are a few million other words written about them to help you learn even more:
- How Donor Advised Funds Work & How Nonprofits Leverage the DAF Ecosystem to Drive Philanthropy from GivingUSA
- Decoding Donor-Advised Funds: From Data to Day-to-Day from GivingUSA
- What is a donor-advised fund (DAF)? from Fidelity Charitable
- What is a donor-advised fund? from Schwab Charitable
- What is a donor-advised fund? from National Philanthropic Trust
- Donor-advised Funds from the IRS
- Donor-Advised Funds Are Essential to Democratizing Philanthropy from the Chronicle of Philanthropy
- DAFs: What They Are, Which Misguided Orgs Oppose Mild Legislations on Them, and Why You Should Care from Nonprofit AF