DAFs Shift Conversations from Capacity to Philanthropic Priority

DAFs Shift Conversations from Capacity to Philanthropic Priority

Donor Advised Funds have been around for a long time, getting their start as community chests over 100 years ago. Big financial institutions began to promote DAFs, as we think of them now, in the 1990s. And they really boomed in late 2017 during uncertainty about the final provisions of the Tax Cuts and Jobs Act of 2017. By the end of that year there were over 460,000 DAFs in the US, and the assets in those funds topped $110 billion for the first time.

DAFs are similar to foundations, in that grants are made out of funds that have already been contributed for charitable purposes. But there is a major difference. DAFs are relatively unregulated, whereas foundations must pay out at least 5% of their corpus each year. As DAFs grew in popularity, some of us wondered whether they would become holding accounts for wealth, or whether donors would use them as intended, and spend them down in payouts to charity.

The good news is DAF payout rates have exceeded 20% every year. And the National Philanthropic Trust’s recent report on 2020 DAF activity showed that donors increased their distributions by 30% in the first half of 2020 over the same period in 2019. Based on assets held, the charitable sector can expect over $20 billion in grants from DAFs every year.

What does this mean for your organization? How can you tap into this massive resource?

 

Recognize DAFs for what they are.

A deposit to a DAF is a gift in the eyes of the IRS. But to the donor it’s merely a financial decision about where to hold their charitable nest egg. Most donors have not finished their philanthropic thought process when they make this “gift.” View the DAF as one component of the donor’s philanthropic budget, just as you would view their other capital assets.

 

Find out who uses them.

The key to the payout from these funds is the donor who established the fund, not the financial institution that holds it. The best way to find out if a donor has one is to ask. Add questions about DAFs to your qualification repertoire: Do you and your spouse use a DAF for your charitable giving? If so, what are your strategies for your DAF? How does giving from your DAF fit into your overall philanthropic investment plans?

 

Include DAF qualification in your portfolio reviews.

It’s a healthy practice to review all development officer portfolios on a regular basis. During this review, in addition to the basics – What is your strategy for this prospect? Have you qualified this prospect for planned giving potential? – add a DAF check: Have you asked this donor about DAFs?

 

Steward the donor, not the bank.

While the grants from DAFs come to your organization as gifts from the financial institution, and should be receipted as such, the real donors are those who established the DAFs. Sometimes they choose to remain anonymous, but for the most part you can find out who designated the gift by asking the financial institution. Reach out to the DAF donor with a thank-you in addition to the formal receipting of the financial institution. Steward these donors as if they had given directly to your organization. And don’t spend significant resources on stewarding the financial institution. They’re mostly implementing instructions from their customers, not making charitable decisions themselves. Consider them to be a valued business partner and treat them accordingly.

 

Remember that for the donor, this is free giving.

They’ve already let go of the assets and taken the tax deduction. Using a DAF changes the order in which decisions are made. With traditional gifts, donors choose an organization, a designation, and an amount, and then they make the gift. With DAFs, they make the gift and can then take their time deciding about organizations, designations, and amounts. As you talk with them about a potential gift, neither you nor they need to worry about whether they can afford to give, because they already have!

 

Include DAFs in your conversations about gift planning.

With the level of wealth that continues to move into DAFs, there will certainly be many cases where there is corpus left in the DAF after the donor’s death. As you explore planned giving options, remember that the remainder of a DAF can be used in an estate gift, just like the remainders on retirement funds and life insurance policies. Explore whether your organization could be a beneficiary of the DAF remainder.