Cute title right? Thanks.
So What is a DAF?
That's a great question, one of import considering the growing role of Donor Advised Funds (DAF) in the modern landscape of philanthropy.
A Donor Advised Fund is an investment fund maintained and operated by a 501(c)(3) nonprofit organization, which enables individual donors to make a charitable contribution to the fund and receive a full tax deduction up front. The money is invested by a fund manager, and it grows tax free over time. The donor then recommends grants to disburse the money to various nonprofit organizations over time.
Donating to a DAF rather than directly to a nonprofit is favorable for those who prefer long-term giving. Let's say you want to commit a portion of your paycheck for donations. You can donate to a DAF, receive the full tax deduction and let the money sit in the fund where it can be invested and grown over time. As your contribution grows, you can take time to develop a giving plan and disburse money to qualified charities at your leisure.
Why Should I Care?
According to nptrust.org, total contributions to DAFs rose to $23.27 billion in 2016, representing 8.3% of total individual giving- nearly doubling from 4.4% in 2010. Generally speaking, any shift in behavior of this scale shouldn't be ignored. Let's take a quick look into what makes DAFs so appealing to donors, as well as a few drawbacks that should be considered before deciding whether or not a Donor-Advised Fund is right for you.
Are DAFs for Me?
Here are a few points to consider before committing money to a DAF:
Funds take management fees. They typically range from 0.6-1% annually, so make sure you do your homework before selecting one fund over another.
Anonymity. Often, nonprofits receiving money from DAFs are not given individual donor information, making it impossible to thank individuals for gifts and encourage repeat donations in future fundraising campaigns. This might not be a problem for the donor, especially having received their tax-deduction up front, but it is worth considering if you want a more personal relationship with your nonprofit.
A donor surrenders all control of funds contributed to a DAF in return for immediate tax deductibility. While DAFs commit to use funds according to their donor's wishes, they are not legally obligated to do so. As such, it is incumbent on the donor to be diligent in communicating with the DAF so that funds are used to support the charity of their choice.
There have been instances of DAFs defying donor wishes, but it is extremely rare. DAFs are driven by the invisible hand of donor satisfaction, and a DAF with any history of breaking this trust will soon earn a damaging reputation and find itself without donors.
There you have it. Donor Advised Funds are a great option for individuals who want to make charitable gifts to multiple organizations over time without juggling multiple receipts come tax season. If you plan on making a lump sum donation to a particular nonprofit, you're probably better off saving the management fees and writing them a check off the bat.