What is a Donor-Advised Fund?

According to the IRS, a Donor-Advised Fund is “a separately identified fund or account that is maintained and operated by a section 501(c)(3) organization, which is called a sponsoring organization.” In other words, once a donor contributes, the organization takes legal control of the funds. However, the donor or the donor’s legal representative, according to the IRS, “retains advisory privileges with respect to the distribution of funds and the investment of assets in the account.”

What are the benefits of Donor-Advised Funds?

A Donor-Advised Fund (DAF) offers a flexible and convenient way for people who plan to donate more than a few thousand dollars to make charitable contributions:

A dedicated account for making charitable contributions, with some tax benefits.
Acts as a proxy for individuals to make donations to nonprofits.
Usually housed at a community foundation or a fund manager.
Offers the donor convenience, flexibility—and anonymity, if they want it.
A growing area of philanthropy—the number of DAFs more than tripled from 2015 to 2019.

DAFs are usually held at community foundations or fund managers like Fidelity Charitable. Contributions to DAFs represent a fast-growing share of individual charitable giving. DAFs are often a more straightforward way of giving without the need to establish a foundation and oversee institutional logistics.

Donor-Advised Funds can offer immediate tax deductions for donors, such as:

Donor-advised fund tax deduction can be claimed in the year a donor contributes assets to the DAF rather than in the year the contribution goes to the charity.
Lower capital gains taxes.
Reduced estate taxes.
A legacy of giving after someone passes.

According to the National Philanthropic Trust, which publishes an annual report on DAFs, contributions to DAFs, grants from DAFs, and the total number of DAFs have all increased significantly over the past decade—and especially in the last few years. The number of DAFs more than tripled from 2015 to 2019, and as of 2019, more than $140 billion in assets were held in DAFs. More than $30 billion in grants came from DAFs in 2021.

Some donors fund DAFs as an alternative to creating a private foundation because the sponsoring organization handles the paperwork and operating costs, and there are no minimum annual payout requirements. DAFs can also be a way for individuals to make anonymous donations. When a contribution comes from a DAF, it presents as a grant from the sponsoring organization, not the individual account holder. On the other hand, contributions to a DAF are irrevocable, and technically, account holders are only advisors regarding how the money is spent or invested. While it’s rare for a sponsoring organization not to follow an account holder’s recommendation about where to donate, a DAF holder has less control than the creator of a private foundation. Unlike private foundations, DAFs are generally not set up to exist for generations (or perpetuity).

What kind of assets can be contributed to a Donor-Advised Fund?

DAFs offer more flexibility in what kind of assets donors can give. Non-cash assets may be more tax-advantageous than contributing cash; however, there is more red-tape for philanthropic organizations that accept charitable contributions. Donors may contribute different kinds of assets to DAFs, such as:

Life insurance.
Cash and cash equivalents.
Money in IRA or 401(k)s.
Stocks, bonds and mutual fund shares.
Private company stock.
Private equity and hedge fund interests.
Cryptocurrencies.

How do Donor-Advised Funds work?

A donor opens a DAF account at a community foundation or charitable fund manager. The cash, stocks or other funds the donor places in the account are treated as a tax-deductible donation right away—even if the money sits in the account for a while. Those funds are now in the control of the fund manager (the “sponsoring organization”).

The sponsoring organization invests the funds and manages the investment. Any investment income is tax-free to the account holder.

The account holder directs the sponsoring organization to make donations to their preferred nonprofits. The fund manager then makes the donation and handles all paperwork and other administration related to it. (The account holder cannot spend this money in any other way—money in a DAF is specifically held for making donations.)

What are disadvantages of Donor-Advised Funds?

While DAFs offer donors several advantages, there are several draw-backs to keep in mind. Donors who give via DAFs effectively lose direct control over donated assets. While donors can make recommendations about how their donations get used, the final decisions rests with the DAF sponsor.

Many DAFs have administrative and investment management fees that reduce the amount that is being donated. Some DAFs have a delayed impact, as funds sit around rather than get distributed. DAFs may also have minimum donation amounts, and are less cost efficient than direct donations. Increasingly, transparency has become a major concern.

There are further concerns about the growth of DAFs and whether this a good or bad thing.

How do I apply for a grant from a Donor-Advised Fund?

When you see Fidelity Charitable named as the nation’s top grantmaker, it’s natural to wonder how to apply for a grant from them. The problem is, Fidelity Charitable holds this position because it houses more than 150,000 DAFs. And grants from those DAFs are recommended by the individual DAF account holders.

There’s no single process for applying for funding from a DAF. Often, it’s more like major-gift fundraising from individual donors; when an individual says yes to a request for funding, the fundraiser then learns that they’ll be making the gift through a DAF rather than directly. Beyond that, the best way to access grants from DAFs is (as with so many things) networking. Building relationships with community foundations in your area will put your nonprofit on the radar of those who interact with local DAF account holders. If a DAF holder asks their community foundation or fund manager for advice on which nonprofits are doing good work on a certain issue, your organization might get a mention. Sometimes nonprofits are highlighted at events organized by fund managers and philanthropic networks, so the more people and organizations are aware of what you do, the more likely your nonprofit is to get the attention of DAF holders.

Is the rise of Donor-Advised Funds (DAFs) a good or bad thing?

Well, it’s complicated.

On the one hand, people are giving a lot of money to nonprofits through DAFs. Donors gave more than $25 billion in grants through DAFs in 2019. And while there is no required annual payout (meaning a DAF holder could choose to let money sit in their account without giving any of it away for years), DAF payouts have averaged more than 20% every year since 2015, the National Philanthropic Trust reports. That’s significantly higher than the 5% required of foundations. Plus, DAF giving tends to be less restricted than traditional foundation grants, which is a good thing for nonprofits.

On the other hand, there’s little accountability or transparency when it comes to DAFs. The account holder suggests where to make grants, but their name is not attached to the actual grant. Instead, the organizations that house DAFs—whether community foundations or fund managers like Fidelity Charitable—report on where grants were made. With the huge growth in the number of DAFs in recent years, this has the potential to create a “shadow giving system.” In the polarized U.S. political sphere, DAFs can facilitate the movement of “dark money,” or spending that influences politics by organizations that are not required to disclose their donors.

And even short of the specter of “dark money,” anonymity has its issues. A fundraiser seeking grants from Fidelity Charitable, which is currently the largest private grantmaker in the United States due to the number of DAFs it holds, would have a hard time connecting with the people who are actually making grant recommendations—or even finding out who they are.

There are a number of efforts to reform and regulate DAFs through increased transparency and/or payout requirements, including several pieces of proposed legislation currently winding their way through California’s state government. We’ll have to wait and see what comes next. However, rest assured, DAFs are here to stay, one way or another.