Donor-advised funds (DAFs) are one of the fastest-growing areas of charitable giving. In fact, $52 billion was granted to nonprofits out of DAFs in 2023, a number that has grown an average of 20% per year over the last five years. More than 3 million people use donor-advised fund accounts for their philanthropy.
Such explosive growth is almost an anomaly in fundraising today, where we’re seeing a decline in both participation and giving. This makes DAFs a hot topic — and a controversial one. Despite how popular DAFs are becoming with donors, nonprofits don’t always share the same warm feelings.
To get to the bottom of this issue, we recently spoke with Mitch Stein, Head of Strategy at Chariot, a donor-advised fund fundraising solution provider. Chariot is working to move more money from DAFs into nonprofits’ hands and do so in a way that enables fundraisers to build relationships with the donors. Let’s dig in.
What Are DAFs, and How Do They Work?
A DAF is a fund where an individual puts money or assets to be donated to a charitable organization. It’s like a 401k retirement account and comes with similar tax advantages. Donations from these funds must be made to 501(c)3 organizations and cannot be given in exchange for value, such as for tickets to a fundraising event.
Many people are turning to donor-advised funds over setting up private foundations because they’re easier to manage. There’s no minimum payout requirement compared to a foundation’s 5%. In addition, there are no costly administrative elements to navigate, such as having a foundation board or conducting regular financial audits.
What’s more, DAF donations tend to be large gifts — nearly $5,000 on average, compared to the average online credit card donation of about $200. This means that, in terms of donor categories, most DAF donors fall in the mid-level and large gift range.
What Are the Top Issues with DAFs?
While donor-advised funds are attractive to individuals, there are a few reasons that donors tend to harbor negative feelings about them. In general, they fall into three categories.
Philosophical Issues with DAFs
Again, with a typical foundation setup, 5% of its assets must be distributed yearly to retain the special tax status. But in a DAF, there’s no timing requirement. So, in theory, an individual could put money into a donor-advised fund, gain tax advantages, and then never actually donate the money to a nonprofit.
Fundraisers think of this as individuals gaming the system. But Stein cautions that people can also misuse other types of donations to nonprofit organizations. So, he says it’s important to understand the scale of the DAF industry and that this is a relatively small-scale occurrence. Still, it does happen, which leads to the next category.
The Practical Reality of Money Movement
According to the IRS, $230 billion in charitable donations have been reported, but that money is still sitting in DAFs. That’s a highly frustrating amount, especially given how hard fundraisers are working in the face of declining giving.
Some of this could simply be people taking advantage of the tax benefits. But Stein said a few other issues may also be at play. For one, no regulation dictates how much money should be moved out of a DAF within a specific timeframe. Also, a DAF gift is notoriously difficult to make. There are often multiple steps involved compared to other forms of giving.
Challenges of Processing the Gifts
A gift from a DAF often comes with no way to identify the donor. For instance, a nonprofit might only see the fund name and a mailing address. This makes it difficult to properly thank the donor and build a meaningful relationship with them.
There can also be a delay in processing the gift that has nothing to do with your organization. Yet the donor will be left feeling like you can’t handle this donation vehicle and may direct their money elsewhere.
Ways To Solve the Challenges of DAFs
It’s easy to see why fundraisers get frustrated with donor-advised funds. But nonprofits must learn how to play nice with DAFs if we want to keep meeting donors where they are.
More regulations on the funds would make a significant difference in getting more money flowing from DAFs into nonprofits. But that’s not something fundraisers have control over. It’s also important to note that the average annual payout ratio for DAFs has been over 20% each year since it started being tracked in 2007. Compare that to the average annual payout ratio of 5% for foundations, which is what’s required and no more.
All that to say, regulations may not completely solve our DAF headaches. But there are some things that fundraisers can do.
Adopt Tools That Show the Account Balance
Chariot has a tool called DAFpay that sits directly on a nonprofit’s website or donation form as a payment option. It makes paying with a DAF quick and easy. More importantly, it shows donors their account balance on the checkout page. Stein said that upon being reminded of the amount of money sitting in their DAF, more than 30% of donors increased their gift.
Educate Your Donors
Be proactive about sharing the pros and cons of DAFs with your donors. For instance, most donors don’t realize that their DAF requires them to name a beneficiary — it’s not part of the onboarding process. This means that if the donor passes away with money in their account and hasn’t named a beneficiary, the funds will pass to the financial institution holding them.
Also, ensure donors know that identifying and attributing DAF gifts can be challenging. Encourage them to add a note to the fund that lists their name and email information. This way, you’ll be able to give them the thanks they deserve. DAFpay automatically provides a donor’s name and email address.
DAF-Giving Made Easy
Donor-advised funds aren’t going anywhere; they’ll likely continue to grow in use. It’s important that you understand how they work so you can guide your donors.
Ensure your website is set up to receive DAFs in a streamlined way. There are several tools that can help, or you can reach out to our team at Allegiance Group + Pursuant to help optimize your website for various forms of online giving. Also, give your donors as much information about DAFs as possible so they know what to expect and can make an informed decision about using them.
By embracing small changes, we can begin breaking down some of philanthropy’s most complex processes and improve the industry for fundraisers AND donors.
This blog post is based on a podcast interview with Mitch Stein. Listen to the full episode of the Go Beyond Fundraising podcast now.
