I want to share a bit about a financial product that has jumped into the spotlight of charitable giving in the United States called a Donor Advised Fund (DAF). I’m a big fan, but there are several aspects of Donor Advised Funds that are problematic for donors and charities.
Advantage and Scope
“One-third of monthly giving to Friends of Kijabe now happens through Donor Advised Funds, in excess of $100,000/year.”
Because Donor Advised Funds are sponsored by 501 (c) 3 charitable organizations, they can offer tax benefits to donors. A donor can make a charitable gift to a DAF, receive an immediate deduction for tax purposes, then recommend a grant later on to her charity of choice. Many DAFs are able to receive cash and more complex donations like gifts of securities, real estate, precious metals, royalty rights, precious metals, or even cryptocurrency.
The National Christian Foundation, one of the oldest Donor Advised Funds, has granted $14.2 billion dollars to charities around the world.
Now the product is so popular that traditional brokerage services like Vanguard, Fidelity and Schwab have created DAF charities.
One-third of monthly giving to Friends of Kijabe now happens through Donor Advised Funds, in excess of $100,000/year. This is a huge deal for charities like ours!
From a donor perspective, DAFs offer several major benefits over traditional giving:
- Give now, pay later. The charitable deduction is immediate, which can have a benefit for tax purposes, and grants can be made at the time of the donor’s choosing, to the charity of her choice.
- Keep it simple. Say a person makes a donation to ten charities in the course of a year. In the past, she would have to pull receipts from each of the ten to calculate deductions for tax purposes. Now, a Donor Advised Fund can keep all giving organized in one place, generally an online dashboard. No more changing credit cards across accounts or resetting passwords, all giving is in one simple online dashboard.
- Make your accountant happy. Again, for tax savings, DAF’s are great. Gifts of appreciated stock can avoid capital gains tax, and Donor Advised Funds can even allow for accumulation of charitable money in savings, like an endowment.
- Option for Anonymity. In some circumstances a donor wishes to be anonymous, which is easy to do with a gift from a Donor Advised Fund.
If you open a donor-advised fund, you deposit money into your fund and personally recommend grants. The DAF manager, however, has custodial obligations over money deposited/invested, so grants must be made according to IRS guidelines.
What does this mean in practicality?
You can direct a grant from a Donor Advised fund to any registered charity in the United States and to many international organizations without issue.
You cannot grant from your Donor Advised Fund to your cousin’s Go-Fund-Me campaign or to a charity where a close relative works. You won’t be able to direct the funds into a business venture or send them to an organization with ties to terrorism.
In short, you can only use a Donor Advised Fund for traditionally charitable purposes.
Problems with Donor Advised Funds
- No spending requirement. The first, often-cited problem with Donor Advised Funds is that, unlike Foundation Endowments, DAF’s don’t have a required minimum distribution. So, a donor can give into her Donor Advised Fund, receive a real-time tax advantage and a dopamine hit, while the money could sit for years or even decades. How this money gets deployed to do good, quickly is an important issue, but honestly one I’m not too concerned about for Friends of Kijabe.
- Grant renewal and reporting. A Donor Advised Fund may look like a one-stop shop for charitable contributions: just set it and forget it. But many Donor-Advised Funds have renewal periods for grants which are not communicated adequately to the contributing donor and not communicated at all to the receiving charity. Some Donor-Advised Funds do not have an appropriate mechanism for informing the donor if his/her gift lapses.
What happens in the real world? When a credit card or ACH donation fails, Friends of Kijabe receives an immediate notification from its payment processing system: one email for three consecutive days, then for three consecutive months. The online donation platform, Kindful, has a big, red “failed transaction” warning. Importantly, the donor also receives these same email notifications. It’s not impossible to miss, but the multiple warnings are effective.
When a donation lapses with a Donor Advised Fund, Friends of Kijabe doesn’t know for weeks or months, and even then, we don’t know the cause of the problem. Maybe the donor wanted their gift to be for a finite time period. Maybe the check was lost in the mail. Or maybe the grant lapsed without the donor’s knowledge.
What does this cost? In the past year, two donors had unintentional lapses in their DAF grants. The missing amount? $50,000. Thankfully, the donors were able to make grants for the missing period, but a loss of this size could have been catastrophic to our organization.
No solution is perfect, especially in the charitable space where resources are limited. Donor-Advised Funds are a tremendous tool for donors and provide undeniable benefit for charities like Friends of Kijabe as they are able to mobilize massive amounts of money for good.
But I am concerned about the limitations, especially when donor intent in giving is not followed.
What is the way forward? Communication and stewardship.
First, Donor-Advised Funds should provide regular reports to their donors, especially if something changes in the donation process. Communication should include a regular donation report, monthly or quarterly, to show giving progress over the year.
Communication could be sent by email or snail mail to donors about a recurring gift that needs to be renewed so that it doesn’t unintentionally lapse or renewal periods could be eliminated altogether.
The DAF manager could send a grant reminder: “you gave a one-time gift to charity Z last year, is that something you would like to do again?”
The National Christian Foundation sends fantastic weekly emails with inspirational stories about generous donors and how gifts help charities around the world. NCF is brilliant at using communication to stimulate generosity, encouraging by example.
Second, Donor Advised Fund managers should send grant information to charities. One DAF I’ve been very impressed with, The Signatry, emails Friends of Kijabe about pending grants, including a report with year-to-date grant totals each month. If something is amiss (like a missing check) or exciting (like a unique gift), we know immediately and can take action.
Most DAFs require charities to register in order to receive the first grant. Sending regular notifications is a logical, helpful next step.
Third, Donor-Advised Funds should be stewards of charitable money, not permanent holders of it. Amounts granted to charity through these vehicles should be the measure of success, not the sum of assets under management.
Donor-Advised Funds should serve both donors and beneficiary charities by ensuring funds are distributed efficiently and used to do good in the world. One day this will likely be enforced by regulation, but until then, improvements should be enacted in a spirit of goodwill.