In 2016, Congress created a new kind of philanthropic vehicle – a donor-advised fund – commonly known as a “DAF.” Before DAFs, giving was largely limited to public charities, which gave the donor little say over programs, and gifts were only deductible in the year the money was donated, but with relatively little regulation. Giving was also limited to private foundations, which provided the donor with the ability to take a deduction whenever it made sense and spend it later – even years later – with the donor retaining a lot of control but also a lot of regulation and compliance obligations. The DAF was created as a kind of hybrid, as the gifts are held by public charities, without much regulation, and the DAF can hold the funds indefinitely, so contributions can be made when they are convenient for tax purposes, even if they won’t be spent right away. Additionally, the donor can direct the use of the funds where and when they are needed (well, technically they are merely advising, but let’s not quarrel over that). All that is required is a simple agreement between the charity and the donor.
The DAF is, therefore, extremely flexible, and compared to starting a charity from scratch, it is fast and easy to set up. It operates under a set of rules and restrictions that assure the funds can only be used for charitable purposes. It can accept almost any form of contribution, and donors can direct when and how the funds are used.
In normal times, these features make the DAF controversial. Critics say they aren’t forced to spend their money (legally true but in fact, DAFs spend at a much higher rate than foundations), they aren’t transparent, they aren’t well-regulated, and they’re able to avoid the kinds of prohibitions, like self-dealing or lobbying, that apply to private foundations.
In times of crisis, however, DAFs are an extremely useful tool. Just in the past few years, DAFs have been created in response to hurricanes, tsunamis, fires, and earthquakes. Pandemics such as SARS, MERS, and Ebola benefitted from DAF money. Donors used DAFs to fund treatment for AIDS and other diseases that became important in the wake of sudden dislocation and suffering. Human rights and refugees also receive a lot of help in times of crisis. All these DAF funds are donor-directed and fully tax-deductible at the time of the gift, with a minimum of cost and time.
Because decisions can be made quickly, it is almost as if DAFs were designed for rapid response philanthropy. For example, GlobalGiving just launched a COVID-19 relief fund that is funded in part by DAF money. They know how to do the paperwork, and the money goes where it is intended.
Creating a DAF
Creating a DAF is easy, and is done with a fairly standard agreement. The charity agrees to hold the money and consult with the donor on its use. The donor simply specifies how much is going into the fund, the purpose of the fund, and who has the advisory privileges, and… voila! The XYZ Family Fund is born. Community Trusts, financial firms, and specialists like the National Philanthropic Trust create, hold, and administer DAFs frequently, and they provide all the legal, administrative, tax, and grantmaking support the donor needs. It’s a big business – last year, DAFs and their donors gave away $23 billion, and total contributions to DAFs were $12 billion. That’s a lot of cabbage.
DAF sponsors (the charities that hold the DAF funds) report all their activity to the IRS, and they screen all gifts to make sure they are proper. These sponsors also maintain books and records and provide other kinds of support. They typically charge a fee for this service, ranging from half a percent to 15 percent, with an average of around 6% of funds contributed to the DAF.
In times of crisis, like today’s COVID-19 pandemic, when donors want to move quickly with minimum cost and aggravation, but they also want to be thoughtful about where the money goes, DAFs may be the perfect solution.