In a previous post, I discussed some of the concerns that fundraisers and donors have about the as-yet still largely unknown impact on the philanthropic economy of donor-advised funds (often referred to as DAFs). In this post, I’ll discuss some of the advantages that DAFs offer.
Donor advised funds are charitable accounts established by donors and managed by public foundations, such as a community foundation or a foundation set up by a commercial brokerage. When a donor contributes money, stock, or other liquid assets into a DAF, the foundation takes ownership of the deposits and invests them. The assets in a DAF can be used only for charitable purposes, and a donor recommends or advises on their disbursement to nonprofit organizations of their choosing. In turn, the foundation provides value-added services such as due diligence on recipient charities and investment advice, and allows the donor to claim a full charitable tax deduction upon deposit of assets into the fund. Unlike private foundations, public foundations in the United States are not legally required to distribute a minimum portion of their assets every year.
Donors may choose to set up advised funds for any number of reasons. Malcolm D. Burrows, the head of Philanthropic Advisory Services at Scotia Private Client Group in Toronto, has identified four:
- Convenience. Public foundations handle day-to-day administrative and management burdens, freeing up donors to focus on other things.
- Tax benefit. By turning over control of deposited assets to the foundation, donors can take the charitable tax deduction right away and make disbursement decisions later.
- Support for causes, not charities. Donors who support causes such as land conservation or inner-city education can use advised funds to take a long-term view with their giving.
- Flexibility. If a donor’s charitable interests change, the fund can be used to support more, fewer, or entirely different organizations right away.
Another selling point of DAFs is their low initial contribution, explains Jo-Anne Ryan, vice president of Philanthropic Advisory Services at TD Waterhouse Canada Inc. and executive director of its Private Giving Foundation. This is particularly appealing to young, early-career professionals who are looking for ways to engage in philanthropic activities with their own growing wealth.
Ryan points out that the wealth of two-thirds of her foundation’s clients is self-made, whereas just a decade ago the majority of the wealth had been inherited. Furthermore, savvy young donors are more familiar with how finances work and are comfortable using investment vehicles like DAFs. “They want to be more hands-on, and they want to engage more in their giving,” explains Ryan of a typical advised-fund user. “The more options they have, the wider the net is, and ultimately that’s going to represent more money going to charity.”
Like their parents, Generation X and Millennial donors are values-driven, but they are also deeply interested in strategies that are hands-on, innovative, and the result of due diligence. “If donor-advised funds make it easier to be a donor now, and without the administrative requirements of a foundation, then I can see how they would appeal to that kind of mindset,” says Moody.
Jeffrey M. Gorris, a partner at the Wilmington, Delaware, law firm of Friedlander & Gorris, P.A. — and a Millennial — uses a DAF to manage his philanthropic activities. He says that DAFs offer several advantages for early-career professionals like him. Because of their lower financial thresholds and ease of use, DAFs appeal to young donors who want to support their favorite charities but for who traditional foundations are not a feasible option. The low threshold allowed Gorris to establish the fund and start giving in meaningful amounts earlier than if he had had to wait to set up a foundation. Another advantage of the fund is that it helps even out his giving over time. “In certain years, the tax deduction may be worth more to me as my income fluctuates,” he explains. “If I’m going to contribute to a charity, I’d rather not have the gift fluctuate up and down too.”
Gorris says that his donor advised fund suits his giving preferences, which may differ from those of others, and he considers that another advantage. “I think it makes me more willing to give to a charity that I like,” he says.
This post was adapted from “Deciphering DAFs: How the Simplicity of Donor Advised Funds May Be Creating Complex Issues for Fundraising Professionals,” by Paul Lagasse, Advancing Philanthropy, Summer 2015 (reprinted with permission). You can read the whole article here.