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DAF: A Giving Strategy That Checks All The Boxes

December 8, 2022 - In a recent blog post, we reviewed the latest donor-advised fund (DAF) growth statistics and considered the charitable giving vehicle’s skyrocketing popularity among donors. It’s true a DAF can help donors maximize their charitable impact. Beyond that, though, flexibility is the main reason the vehicle is so popular. Whatever a donor's needs or charitable goals, it's likely a DAF can check all the boxes. In this series, we highlight the reasons a DAF is a good fit for many donors.

We refer often in this post to the Donor Advised Fund Research Collaborative (DAFRC)’s Donor-Advised Fund Account Patterns and Trends, which includes data from 13,000 DAF accounts collected from community foundations and religiously-affiliated DAF sponsors between 2017-2020.

Is a DAF for individuals or for families? YES.

A DAF can benefit individuals and households alike. According to DAFRC’s report, 42.3% of DAF accounts analyzed had 1 donor advisor, 45.4% had 2 donor advisors, and DAFs with 3 or more donor advisors constituted 12%. On a national DAF sponsor level, Vanguard Charitable reported in 2016 that 38% of their DAFs were advised by an individual, while 61% were advised by couples.

Most DAF sponsors allow the naming of multiple Donor Advisors on a DAF. In addition, HighGround allows the naming of Interested Parties who can make grant recommendations but who do not share the same rights and privileges of the Donor Advisors. DAFs are often opened and advised by an individual or a couple, but some donors choose to involve their families by naming adult children or young adult grandchildren as fellow advisors or Interested Parties. In this way, donors can have philanthropic conversations with the next generation and weave generosity into the fabric of their family. It’s one reason the DAF is sometimes called “a poor man’s foundation.” A family can make charitable grants together for a fraction of the cost of opening and maintaining a private foundation.

In addition to individuals and families, corporations are beginning to use DAFs for charitable giving, and some companies are offering workplace DAFs that enable employees to make contributions to a DAF through payroll deduction.

Is a DAF for older donors or younger donors? YES.

According to DAFRC’s report, the most common age range of the donors of the DAF accounts analyzed was 60-75 years. That report looked only at community foundations and religiously-affiliated DAF sponsors though, not national DAF sponsors. By contrast, the national DAF sponsor Fidelity Charitable reported in 2020 that the average age of their DAF donors is 55, and the opening of DAFs by Millennials doubled between 2015 and 2019.

Older generations tend to be wealthier than younger and may be more strategic with their giving. A DAF is a tax-advantageous vehicle for donors contributing appreciated assets or financial windfalls (more on that in the next installment). Still, the younger generation may be more and more interested in DAFs as a giving vehicle for the following reasons:

  • Some DAF sponsors, like HighGround, allow donors to manage their funds and make grant recommendations online – wherever and whenever it is most convenient for them.
  • If a donor hasn’t finished researching which charities to benefit with their philanthropy by year-end, they are not under a time constraint to do so for tax purposes. Donors are eligible for charitable tax deductions when they make contributions to their DAF, not when they grant the money out.
  • A donor may pull a percentage of their paycheck out each period and put it in their DAF, invest it to potentially grow over time, and then make grants out once they’ve built up the balance. In this way, the donor uses their DAF like a savings account for charitable purposes. And when all of a donor’s giving is streamlined through their DAF, they have just one tax receipt at year-end.

With low initial contribution minimums and fees, the DAF is an accessible giving vehicle for most generations and income levels of donors.

Is the DAF for the ultra-wealthy or for the middle class? YES.

Donors across the income level and net worth spectrums use DAFs as their giving vehicle. This is evidenced by DAFRC’s report, which found that the DAFs analyzed were equally likely to have assets under $50,000 as they were to have assets in the $50,000-$1 million range. The two asset amounts with the greatest percentages (both at around 25%) were $10,000 and $100,000, while 11% of the DAFs had over $1 million in assets.

According to National Philanthropic Trust’s 2022 DAF Report, of the nearly 1.3 million DAFs in 2021, the average asset size was $182,852. As mentioned previously, because DAFs typically have low contribution minimums and no setup costs, the vehicle is an accessible one to many donors.

Should DAFs be funded with cash or with noncash assets? YES.

DAFs can be funded with cash, checks, and noncash assets like securities, real estate, mineral interests, and cryptocurrency. By contributing a noncash asset to a DAF, a donor is able to avoid capital gains tax on the appreciation of that asset. DAFs are popular vehicles, then, for donors with appreciated assets, especially if their charity of choice is not equipped to receive those assets. Additionally, a donor who experiences a financial windfall, whether an inheritance or the proceeds of the sale of a business, can ease their income tax burden by directing that windfall to a DAF, prefunding years of charitable giving.

For these reasons, it’s common for donors to make large, lump-sum contributions to DAFs. DAFRC’s report found that 21% of contributions to the analyzed DAFs were in the $100-500k range. Still, the highest range for contributions reported was $10-50k, at 34%. Cash made up 74.4% of all contribution transactions but only 38.2% in terms of dollars contributed, whereas noncash contributions made up at least 61% of all dollars contributed. So, DAFs receive more frequent, smaller cash contributions as well as high-dollar, noncash contributions.

If a donor isn’t using their DAF for the tax benefits associated with larger, noncash contributions but, instead, is contributing smaller cash amounts, they still enjoy the benefits of streamlining their charitable giving and the potential tax-free growth of their contributions.

Is a DAF for short-term giving or long-term giving? YES.

The National Philanthropic Trust’s 2022 DAF Report noted that the payout rate for DAFs in 2021 was 27.3%. According to the DAFRC’s report, of the DAFs analyzed, 13% had a payout rate of over 50%, and after a period of 4 years, 42% of the DAFs opened in 2017 had granted out their entire opening contribution. So, we see that many donors are using their DAFs as a revolving door of contributions in and grants out.

On the other hand, 10% of the DAFs the DAFRC report analyzed were formally endowed, while still others were managed by an informal endowment strategy. In those cases, donors granted out only the investment income earned each year, taking full advantage of their assets’ tax-free growth while keeping the principal contribution amount intact for future investment growth.

Donors can use a DAF to actively respond to the needs around them by giving in real time, and they can make the DAF part of their long-term strategic giving plan. For example, donors can support the charities of their choice for generations to come by electing to establish an endowment with the DAF balance that remains upon their death.

Is a DAF for recommending large grants or small grants? YES.

According to the DAFRC’s report, 24% of the DAFs analyzed granted $50,000-100,000 annually, so DAFs can be advised by major-gift level donors. At the same time, 35% of the DAFs granted $10,000 annually and 30% granted in the $1,000-10,000 range. So, DAFs are also used for making smaller donations.

Is a DAF for supporting one charity or many? YES.

Over a 4-year period, 38% of the DAFs analyzed by the DAFRC granted to only 1-3 charities, while 49% granted to 4 or more, some up to 20 charities. DAF donors may choose to focus their grantmaking on a single charity that is important to them, or they can use their DAF to support many charities, with grants of various amounts.

Is a DAF for public giving or anonymous giving? YES.

DAFs provide donors with the opportunity to give anonymously, and many donors appreciate that the option is available to them. Still, the American Enterprise Institute reviewed grant data from the five largest DAF sponsors and reported in their Anonymous Giving Through Donor-Advised Funds that only 4.3% of grants were actually given anonymously.

Is a DAF for recommending designated grants or undesignated grants? YES.

According to the DAFRC, of the DAFs analyzed, designated and undesignated grant dollars were nearly equal, with 54% restricted by DAF donors to specific purposes or programs and 46% granted with no restrictions.

HighGround-specific: Can a DAF donor recommend grants online or can they contact someone at HighGround? YES.

HighGround DAF donors can manage their DAF, at any time and from anywhere, with their online DAF portal. The portal allows donors to check balances, review contribution and grant history, download statements, make changes to their fund, and recommend grants. Additionally, every HighGround DAF has a dedicated Account Manager, and DAF donors may contact their Account Manager or the Client Partner Communications Specialist directly for any DAF needs they may have.

The DAF is an incredibly flexible giving vehicle, and that flexibility is one reason it has grown in popularity among charitable donors. We've considered other DAF benefits in this previous article, and we've highlighted DAF donor case stories in this one. If you'd like to open a DAF, contact our Client Partner Communications Specialist today at 214.978.3303 or visit https://highgrounddafs.org.