One of the most educational things I have done as a nonprofit professional is to become a more intentional and thoughtful donor. This has helped me better understand the perspective of donors, which in turn makes it easier to build strong relationships with them. One of the biggest steps on my path to being an “intentional donor” was to open a Donor Advised Fund, or DAF.

 

What is a DAF?

According to Investopedia, “A donor-advised fund [or DAF] is a private account created to manage and distribute charitable donations on behalf of an organization, family, or individual.”

In one sense, they are sort of like a miniature version of a family foundation. The donor, or fund holder, makes a charitable gift to the sponsoring organization, such as a Community Foundation, and receives the immediate tax benefit. The donor then “advises” the organization on how to grant out the balance of their fund. In practice, the fund holder can direct the grant go to any qualified 501(c)(3) organization. These are an increasingly popular way to manage philanthropic activity. There are lots and lots of sponsorship organizations for DAFs.

In another sense, a DAF is a little bit like a Flexible Spending Account (FSA) or a Health Savings Account (HSA). For the donor, it is a tax-advantaged way to set aside money for charitable giving, and there are restrictions on how the money can be distributed once it has been set aside. Similar to FSAs and HSAs, a DAF may make great sense for some donors but be totally unnecessary for others. DAFs all ‘roll over,’ so there is no need to grant out money within a set time period. This is one cause of criticism for DAFs, as some people feel that too many charitable assets are being set aside but not disbursed.

Why I opened a DAF

I first encountered Donor Advised Funds when I became an Executive Director. DAFs need to be understood by development professionals, but they also have implications for record keeping, cash flow, and accounting. I wanted to understand how they worked, so I opened my own. I wanted to understand the process from the donor’s perspective and see what the entire life cycle of the gift was like.

I chose Charityvest as a sponsoring organization and platform, because it has no minimum account balance. Other platforms have minimums of $5,000.

Pros for me as a donor

I initially opened a DAF to understand how they worked, and doing so was very helpful for me. I recommend that anyone working in development set up their own DAF to see how they work. What surprised me is that it has since become my primary means of giving, because I like the convenience.

DAFs allow me to budget for philanthropy. As I have tried to be a more intentional donor, I have set goals for my own giving. With a DAF, I can deposit money monthly and then make grants whenever I like. This makes it easier to set and meet an overall giving goal. DAFs also make it easy to set aside a portion of a windfall or inheritance forcharitable giving.You can setthe money aside irrevocably for philanthropy, but take your time deciding how to distribute it.

DAFs are a great vehicle for anonymous giving. After my father passed away, I wanted to honor his memory by donating to an organization he supported. However, I found their fundraising techniques too aggressive, and I didn’t want to get on their mailing list. Using a DAF allowed me to make an anonymous donation in his name, ensuring his legacy was honored without sharing personal information or committing to further support.

DAF funds can be invested, and DAFs have the flexibility to hold complex assets. While this hasn’t been a significant focus for me personally, I appreciate that DAF funds have the potential to grow through investment. I’m making an effort to set aside more each year with the goal of leaving a meaningful legacy to support the organizations I care about. In this way, a DAF can also play a role in planned giving. Additionally, some DAFs are capable of handling complex assets, such as royalties, real estate, or cryptocurrency. Although this feature is more of a theoretical benefit for me, it can provide donors with a way to contribute without placing the burden of managing complex assets on the receiving organization.

DAFs can make giving convenient, secure, and easy to track. With just a few clicks, I can send $100 to support my favorite charities—some of which I’ve “favorited” for quick access. When I want to donate to a new charity, I simply log in and search for them. There’s no need to write checks or enter credit card details online, which adds an extra layer of security. By sharing my financial information only with the DAF organization, I don’t have to worry about trusting multiple entities to safeguard my data. Additionally, DAFs simplify record-keeping. All my donations are neatly tracked in one place, making it easy to review my giving history. At the end of the year, I can quickly check if I’ve already supported a group, streamlining my giving process.

Limitations for the Fund Holder

Of course, nothing is perfect, and there are a few cons I can see as a fund holder. The first one is the only one that has really been an issue for me, but the other limitations are certainly there.

DAF giving has its limitations. DAF funds are usually distributed as checks or electronic payments. This makes it impossible to use them to make credit card donations, which means it can be difficult to impossible to participate in certain giving days, events, and peer-to-peer fundraising. But if DAFs continue to grow in popularity, I expect charities to find a way to fix this issue eventually.

Gifts to DAFs are irrevocable. Once the money has been contributed, you cannot get it back. It has passed through the tax deduction barrier, and that’s a one-way trip.

DAFs cannot pay for tickets. DAF grants can only be used for purposes where the gift is tax deductible. So they may not be able to be used to purchase gala tickets, sponsorships, or other items where there is a tangible benefit to the donor. However, you may be able to use DAF funds for the tax-exempt portion of such events.

DAFs can only give to 501(c)(3) organizations.  If you want to give to a 501(c)(4) or a 501(c)(6), or an organization that has not yet received its status, you most likely will not be able to do so from a DAF.

You may not get recognized properly.  When I first made a gift using a DAF to one of the organization I support, I got left off of their annual list of donors. They’d received the gift, and I had asked for my information to be shared with them, but for one reason or another, they didn’t connect the gift to my record. I dropped them a note to let them know, and the problem was quickly fixed. But DAFs do add an extra step to recognition and record-keeping, so there are opportunities for mistakes.

On balance, I have found lots of benefits as a fund-holder, and very few limitations. What began as an experiment has quickly turned into my primary vehicle for charitable giving.