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DAFs: Black Box or Magic Bullet?

Donor Advised Funds (DAFs) are in the spotlight this past week in the United States. The IRS held a public hearing to discuss its plan to regulate the tax-free philanthropic giving vehicle, and Goldman Sachs is facing securities fraud accusations for its giving through its affiliated DAF, one of the largest, Goldman Sachs Gives.

The appeal of DAFs

The National Philanthropic Trust calls donor-advised funds the most popular, tax-efficient way to make charitable donations and philanthropy. Donors choose DAFs for several reasons, including immediate tax deductions, tax-free growth of assets, stocks, real estate, and even cryptocurrencies, saving thousands if not millions in capital gains taxes. They can subsequently recommend grants from the fund over many years, while the assets continue to grow. This way, tax benefits and charitable giving are decoupled in time. Crucially, DAFs give donors control over where they donate and give to charity. Many view DAFs as an effective and flexible way to democratize philanthropy. Setting up a private foundation is far more complicated. Additionally, unlike private foundations, which are required by law to payout at least 5% of their assets annually, DAFs may give as little or as much as they please.

Small person reading on stack of coins

Growth and impact of DAFs

DAFs have grown manifold in recent years, with most newer ones set up after 2010. In 2022, DAFs received 27% of all individual giving, and held $228.89 billion across over 2 million individual accounts. About half of all DAFs hold less than $50,000 in assets. This is not only almost double its 2018 assets, it is also a significant portion of all philanthropic holdings in the United States, with the other philanthropic giving vehicle, private foundations, holding $1,158 billion.

From healthcare innovation to climate, DAFs can enable the flow of critical catalytic capital to underfunded areas, and do it fast.

Institutional DAFs and accessibility

Many of the largest DAFs are associated with major financial institutions, like Fidelity Charitable, Schwab Charitable, and Vanguard Charitable. For example, Fidelity Charitable held just over $56 billion in total assets in 2023. While Fidelity Charitable asks for no minimum initial contribution and $50 in minimum grants, Vanguard requires an initial contribution of $25,000. Elsewhere, a movement to increase access and lower barriers to entry for smaller dollar philanthropists is emerging. Daffy, a Silicon Valley startup founded by Adam Nash in 2020 wants to bring DAFs to everyone. In 2023, contributions by members on Daffy crossed $100 million, and, according to their website, Daffy donors have given over $1.7 Million in donations to charities, schools, and religious institutions. Another startup, Y-combinator backed Charityvest requires $15 in minimum contribution.

Hands holding coins and Make a Change sign

Fundraising through DAFs

While some want to increase ease and access for donors, others want to influence where the donations go. The most obvious on that list are non-profits. More and more nonprofit organizations count DAFs as a part of their fundraising strategy. In 2023, organizations that promoted DAFs to their donor bases raised more than twice the funding from DAF grants than those that did not. The Stanford Social Innovation Review says DAFs may even provide a “smoothing function” to charities during economic downturns.

Impact investing and DAFs

Hot on the heels of donations to non-profits are impact investments. 62% of Millennials say that impact investing has far more potential than philanthropy in creating lasting and positive change. In November 2023, Social Finance launched the Social Finance Impact First Fund, receiving grants from Boston Foundation, Fidelity, Vanguard Charitable, and a Combined Jewish Philanthropies’ DAF. The open-ended fund aims to raise $250 million by 2025, and has, to date, deployed $7.5 million to Blackstar Stability Distressed Debt Fund and Candide Group’s Afterglow Climate Justice Fund. CapShift, another leader in the field, facilitates access to impact investing opportunities to DAF donors, while ImpactAssets operates a DAF with its own impact investment platform.

Hand holding dollar bill

Emerging players and innovations

Founded a few months ago, Neta Foundation hopes to fund early-stage, pre-commercialization healthcare innovation. CEO Danielle Capalino says of their focus area: “This is where the most innovative ideas exist and where funding is hardest to come by”. She sees it as an area of opportunity to make impactful philanthropic investments where non-dilutive funding is slow, and technology too early for institutional investment. “We chose a DAF as a platform because it offered the flexibility that we needed in being a vehicle that could make investments, recoverable grants, and donations allowing our donors to have a diversified way of contributing to the philanthropic causes they care about,” Capalino said in an email.

Social Finance estimates an annual pipeline of $24 billion in impact investment opportunities. From healthcare innovation to climate, DAFs can enable the flow of critical catalytic capital to underfunded areas, and do it fast.

Challenges and criticisms

Important to address are wide criticisms, for with DAF’s flexibility comes its issues of transparency and accountability. DAFs are advertised as anonymous and tax free, allowing non-profits to have little clarity on where the funding came from. Critics say DAFs are potentially being used to fund culture wars and hate groups. The lack of mandatory payout rates also means some DAFs don’t pay out, sometimes ever. 37% of DAFs do not distribute any funds in a given year. Some argue that 84% of funds meant for charities never leave DAFs. When funds do leave DAFs, they sometimes simply go to other DAFs, and not to charities or impact investments. This inflates the reported payout rate, while keeping precious dollars from pressing social needs.

The writing on the wall is reform

In November 2023, the IRS proposed new regulations to clarify definitions and taxable distributions related to DAFs. While this is a step forward, more may be needed. Potential ways to move the needle may include joining or starting a collective, pushing forward the Accelerating Charitable Efforts Act, or storming Twitter with #HalfMyDAF. As more DAFs become the norm, the goals of these reforms and initiatives should be to retain and maximize the positive impact of DAFs on communities while planning for the future of people and planet. We are in a critical decade, a point of inflection even, and likely need the whole vault.

Rohini Manyam Seshasayee, an Impact Entrepreneur correspondent, works in Social Impact and Climate, leveraging her extensive experiences in investing, research, and stakeholder engagement.
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