Donor advised funds (DAFs) no longer represent the future; the giving vehicles very much embody the present of philanthropy. At the same time, many nonprofit leaders and donors lack a thorough understanding of DAFS and the potential that exists as a result of their growing popularity among middle and higher income households.

DAFs are a vibrant charitable vehicle allowing people to set aside philanthropic dollars that earn income in a fund managed by a third party, but that will ultimately be used to support legitimate nonprofits. The Fidelity Charitable Gift Fund is the second largest nonprofit today in the U.S. and has been in existence for more than 25 years. Numerous community foundations, including most Jewish federations, have created the resources to offer DAFs to their constituents.

For donors, creating a DAF is easier and much less costly than it is to open a private foundation. The donor receives an immediate tax deduction for giving to a DAF and the dollars can grow tax free. Many donors like to grow their funds for years or even decades until they are a position to make a transformative gift. One other major difference between a foundation and a DAF is the minimum dollars required to create the entity (most DAFs can be started with an initial check of $5,000 while most foundations generally require at least $1 million to justify their creation.)

Foundations are legally mandated to make annual payouts of 5% and the reporting requirements are significant while far less paperwork is required for DAFs.

According to a 2015 study by the National Philanthropic Trust (NPT), giving from DAFs increased nearly 30 percent between 2013 and 2014: from $9.83 billion to a record $12.49 billion. This tremendous increase signals donors’ active commitments to supporting the causes that mean the most to them. At the same time, giving to DAFs grew 7.6 percent, totaling $19.66 billion.

As a result of the rapid growth of DAFs, philanthropists, academics, and policy makers are asking probing questions such as:

  • Do the government and the public get its money’s worth out of the tax breaks associated with giving to DAFs?
  • Should the law require DAFs to have the same kind of payout and reporting requirements as private foundations?

These and many other questions were explored during a multi-faceted November program sponsored by the Giving Institute, a prominent 80-year-old organization that “actively champions thought leadership that empowers philanthropy.” (Our firm is a longtime Giving Institute member, one of only 48 leading fundraising consulting firms.) The Chicago program, live streamed around the country, was called “The Future of Donor Advised Funds: How Can Charities Adapt to Donors’ Shifting Giving Behaviors?” Panelists included an economist, a law professor, and a fund manager. It was organized in response to questions from many donors and nonprofit executives who lack a sophisticated understanding of DAFs and why they have grown exponentially in the last two decades.

In my view, the most interesting panelist was Shawn M. Donnelley, who is president of Strategic Giving, a Chicago-based consulting firm on philanthropy. But it was her thoughts as a donor and not as a consultant that really sparked my interest. Granddaughter of Gaylord Donnelly, the chairman of the R.R. Donnelly Company, she is a major patron of the arts in Chicago, serving on boards such as the Chicago Community Trust and the American Associates of the National Theatre. About a decade ago, she made the transition to conducting nearly all of her personalized giving via a DAF, even though her family makes significant gifts from its $200 million foundation that was started primarily as a tax benefit in the early 1950’s by her grandfather.

According to Donnelley, DAFs allow her the opportunity to give strategically and to keep an accurate record of her personal philanthropic choices. Since opening a DAF, Donnelley added that she is giving away more money than she had before, even though there is no legal requirement to make gifts out of DAFs on an annual basis. One reason, she said, is that her DAF, operated by the Chicago Community Trust, has a minimum gift dispersal of $250. That means, rather than write a $25 or $50 check to support an acquaintance running a race for charity or seeking support for a small effort all gifts must be at least $250. (Other DAF’s have different requirements about the minimum size of charitable gifts.)

Her message to her friends and other philanthropists is that they should explore creating a DAF. Her message to nonprofits: focus on the donor, not the giving vehicle.

“Focus on what my needs are, how you are going to communicate with me, and how you are going to follow up with me,” she said during the lively program.

I generally agree with her statement. She is right that when nonprofit leaders try to understand DAFs, many are losing sight of the fact that these vehicles are not rewriting the rules of donor cultivation. To get a contribution from a DAF, you still have to reach and inspire an individual donor. In fact, nonprofit execs should really consider DAFs as representing the philanthropic interests of individuals, couples, or families rather than compare them to private foundations.

But nonprofits cannot ignore the giving vehicle itself either. When a nonprofit receives a gift via a DAF, it absolutely must flag the gift. Donors who give via a DAF are likely to be strategic donors with long-range philanthropic goals: exactly the kind of people with whom a nonprofit should establish a long term relationship. Also, many of the prominent DAF administrators, e.g., Fidelity Charitable, New York’s Jewish Communal Fund, or Smith Barney, employ advisors who assist donors in making smart charitable gifts. It behooves nonprofits to know those advisors as well as to woo them.

When it comes to some of the controversial questions surrounding DAFs, it is clear that we are just beginning to collect reliable information about how giving through DAFs is impacting the charitable sector and the broader society. I am not a tax policy expert and see no reason to weigh in on whether the tax code should be changed. I do believe that DAFs are stimulating giving and empowering donors to invest strategically. Rather than trying to change the laws, we should be celebrating philanthropy. And nonprofits need to practice smart donor cultivation and record keeping.

The charitable landscape is shifting, but many longstanding rules still apply. Nonprofits must inspire, cultivate, and thank their donors and then begin the process all over again. That is the proven method for raising the resources to improve the world.