Donor advised funds and their impact on the nonprofit sector

Introduction

Donor advised funds (DAFs) have become a major force in philanthropy, growing rapidly in popularity and asset accumulation. Since 2018, total assets held in DAFs have nearly doubled from $127 billion to $256 billion. Today, DAFs account for 5.3% of the charitable sector's total investable assets of $4.8 trillion. More donors are choosing DAFs over traditional giving methods, such as direct donations and grants made through private foundations, due to their flexibility and tax benefits. But what exactly is a DAF, how are they being used, and how can charities adapt to this new giving trend?

What are donor advised funds?

Donor advised funds are philanthropic giving accounts operated by public 501(c)(3) sponsoring organizations that allow donors to contribute assets (cash, stocks, real estate), receive immediate tax benefits, and later recommend grants to nonprofits. DAFs allow donors to spread out contributions over time with no minimum annual disbursement requirement (unlike private foundations), while funds held in DAFs grow tax-free. This means that donor funds can increase over time, allowing for larger grants to nonprofits in the future. There are many different kinds of organizations that sponsor DAFs, including:

Community foundations — These organizations manage DAFs to support specific geographic areas and are a popular choice for donors who want to focus their giving on local causes. Examples include Omaha Community Foundation and the Greater Washington Community Foundation.

Financial institution DAFs — These are large, national charities affiliated with financial firms, making them widely accessible to donors who already bank and invest with these firms. Examples include Bank of America Charitable Gift Fund and Raymond James Charitable Endowment Fund.

Universities — DAFs are an increasingly important source of funding for universities. Examples of universities operating DAFs include Columbia University, Northwestern University, and Stanford University.

Hospitals — Some hospitals sponsor DAFs through their own charities, such as Seattle Children's Hospital and Albany Medical Center.

Cause-specific charities — These organizations operate DAFs and focus on particular issues, like the environment, international development, and religion. Examples include Sierra Club Foundation and World Vision.

Although the end result is the same (providing funds to charitable organizations), DAF donations aren't like normal donations and can be a little tricky to understand. Let's break down a typical DAF donation into steps:

1. A person (donor) makes a contribution to a nonprofit that sponsors DAFs, such as a community foundation.
2. The community foundation holds the donation in an account (fund) belonging to the donor.
3. The donor advises the community foundation which nonprofit charity they want to support and how much they'd like to give.
4. The community foundation disburses funds on behalf of the donor — often anonymously — to the recipient nonprofit.

DAFs are essentially pass-through entities for a donor's charitable giving. However, once a donor contributes to a DAF, the donation is irrevocable and the donor can't reclaim these funds. While donors can advise grants to charities from their DAF accounts, these are just recommendations. The nonprofit sponsor is under no legal obligation to follow the donor’s wishes, though in most cases they do. Ultimately, the nonprofit sponsor has the final say over the distribution of funds.

Nonprofits choose to operate DAFs not only for the administrative fees they collect, typically 0.25% to 1.25%, but also to build relationships with donors who might not otherwise contribute to them. Managing DAFs can create opportunities for future giving, even if donations aren’t always directed to the sponsoring nonprofit.

The main advantages of DAFs for donors are that they enable donations to grow tax-free within the DAF account, they provide flexibility to make donations quickly when natural disasters or humanitarian crises occur, and they allow donors to maintain privacy if they prefer to give anonymously.

Do all DAFs operate the same way?

No, they don't. Some charities were created solely to operate DAFs, while others operate DAFs in addition to their primary activities. Cause IQ refers to organizations whose sole purpose is to operate DAFs as "DAF-focused nonprofits", which are defined as organizations with at least 80% of their total assets held in donor advised funds.

Here are the top ten DAF-focused nonprofits, based on assets:

A few examples of organizations that operate DAFs outside of their primary activities and aren't considered DAF-focused nonprofits include the University of Pennsylvania, Mayo Clinic, and The Ocean Foundation.

Analyzing DAF organizations and assets

DAFs have grown significantly in recent years. According to the National Philanthropic Trust's 2023 DAF report, contributions and grants both grew by 9% in 2022, with a total of $52.16 billion grant dollars awarded. With DAF-held assets exceeding $250 billion, the Cause IQ team analyzed two types of organizations: nonprofits dedicated solely to DAFs (DAF-focused nonprofits) and those operating DAFs alongside other activities. Our analysis looks at each type’s number of sponsoring nonprofits, the number of DAFs they operate (with many nonprofits operating thousands of DAFs, sometimes one per individual donor), and the assets they hold.

Our analysis reveals a few key insights:

Wealth is concentrated in DAF-focused nonprofits — Despite making up less than 5% of organizations with DAFs, DAF-focused nonprofits hold the majority of DAF assets with $200 billion out of a total of $256 billion.

Wider reach among nonprofits also operating DAFs — Nonprofits that operate DAFs outside of their primary purpose significantly outnumber DAF-focused nonprofits and they hold a much larger number of DAF accounts. While these organizations have fewer total assets, this may indicate that they serve a wider, more diverse base of donors.

The DAF landscape is complex — It's important for grant-seeking nonprofits to understand that not all DAFs are the same. DAF-focused nonprofits likely have fewer donors overall, but with each one having larger individual accounts, while nonprofits also operating DAFs have higher numbers of donors with smaller accounts. Nonprofits may need to adjust their development strategies accordingly, engaging DAF-focused nonprofits for higher-value grants, and local cause-specific nonprofits to access smaller grants and a wider pool of donors.

What differentiates DAFs from private foundations?

DAFs and private foundations are both vehicles for charitable giving, but they differ in terms of structure, tax benefits, and management. A DAF is simpler and less expensive to set up and maintain, enabling donors to contribute assets, receive an immediate tax deduction, and advise grants without additional administrative work. DAFs are also more flexible as they don’t require minimum annual distributions.

Private foundations, on the other hand, are standalone legal entities established by individuals, families, or corporations with full control over grants and other investments. However, they're more expensive to setup and come with strict compliance and annual reporting obligations. Private foundations must distribute at least 5% of their assets annually to maintain tax-exempt status.

For grant-seeking nonprofits, acknowledging donors and researching new ones is quite different when it comes to DAFs and private foundations. DAF grants are often made anonymously, which makes it hard for nonprofits to properly thank donors and steward them for future grants. Furthermore, DAF-sponsoring organizations sometimes pool grants on their IRS Form 990s, making it impossible to see individual grants or identify the names of specific donors.

Meanwhile, private foundations are in close communication with their grantees, allowing nonprofits to build relationships with their funders and ensuring there is no doubt over where a grant came from. Private foundations also disclose grants in their annual filing of the Form 990-PF, enabling nonprofits to discover new potential funders with research tools like Cause IQ's foundation search.

Given the differences between DAFs and private foundations, the Cause IQ team was curious to see how their overall giving patterns compare to each other. The graphs below analyze the types of nonprofits supported by DAFs and private foundations, based on the number of grants made in the most recent year.

Interestingly, while DAF donors appear to prioritize grants to religious organizations higher than private foundations, there's a lot of overlap in their giving behavior. The fact that they support similar causes suggests that DAF donors want the flexibility and other advantages DAFs offer, versus having vastly different philanthropic goals.

What this means for nonprofits seeking grants from DAFs

Considering the substantial assets held in donor advised funds and the tendency of DAF donors to support all different kinds of organizations, including DAFs in a nonprofit’s fundraising strategy can be highly worthwhile. Even so, it's important to recognize that DAFs present both opportunities and challenges for nonprofits seeking grants:

Opportunities for growing nonprofit funding with DAF grants

• DAFs are the fastest-growing giving trend in philanthropy with the pool of donors increasing each year.
• Gift sizes are also bigger with DAFs. According to Fidelity's 2023 Charitable Giving report, individual DAF donations average $5,000, while one-time direct donations average $121.
• DAF donors are loyal. The same Fidelity report found that 80% of DAF grants in 2023 went to nonprofits donors had previously supported.
• Most DAF donors make unrestricted gifts, giving nonprofits the flexibility to disperse funds where they're needed most.

Challenges nonprofits face in finding and managing DAF grants

• Unpredictable and postponed grants. Unlike foundations that must distribute at least 5% of their endowments in grants annually, there is no such requirement for DAFs. This means that a signification portion of DAF assets remain unused each year, making it difficult for nonprofits to predict when, and if, they will receive grants from DAFs.
• DAF donations can be made anonymously, making it hard to engage and build ongoing relationships with donors.
• Sponsoring organizations don't always provide an easy way for nonprofits to introduce themselves to DAF managers.

Fundraising development strategies for nonprofits seeking DAF grants

• Let your local community foundation know that your organization exists. Their advisors are often looking for nonprofits to recommend — make sure your nonprofit is on their radar!
• Make it known if your nonprofit accepts DAF donations. This is something you can advertise on your website's donation page and in other donation materials.
• Use an online search database like Cause IQ to look up which DAF organizations have a presence in your community and make grants to organizations like yours.
• For smaller organizations operating DAFs, conduct in-depth research into their grantmaking activity, explore their websites, and check for any staff or board member connections that could faciliate an introduction.
• Networking isn't really feasible with large DAF-focused nonprofits (e.g., Fidelity or Schwab), whose donors are anonymous. Instead, work to increase your organization's visibility in your community through events or social media, boosting the chance of being noticed by anonymous DAF donors.

Conclusion

Donor advised funds represent an opportunity and a challenge for the nonprofit sector. Their rapid growth gives nonprofits access to larger, often unrestricted grants and a steadily growing pool of donors. However, the lack of disbursement requirements and anonymity of DAF donors can make it difficult for charities to rely on DAF income and build long-term donor relationships. Through proactive outreach and tapping into local networks, nonprofits can jump on this charitable giving trend to secure essential funds for their organizations.