DAFs Provide Benefits For Givers Who Aren’t Ultra Wealthy

When Netflix Netflix cofounder Reed Hastings recently disclosed that he would donate a whopping $1.1 billion in company stock to the Silicon Valley Community Foundation, celebrations of his generosity were countered by complaints. The funds would be deposited into donor-advised funds, commonly known as DAFs, rather than given to nonprofits directly serving communities.

Reporting on the donation, the Wall Street Journal wrote that DAFs give donors “an immediate tax benefit and more privacy than through some other philanthropic efforts” and have come under criticism “because giving to them can generate an immediate tax deduction, while the donated funds can sit for years.”

Yet a few weeks later, a major academic study concluded DAFs are “extremely flexible philanthropic vehicles that support a wide range of giving patterns” and are especially popular and convenient for “mid-range” donors giving between $10,000 and $50,000 per year.

Enticed by those attractions, the number of individual DAF accounts in the U.S. grew to 1.9 million in 2022. That’s more than double the 861,000 that existed in 2018, according to the National Philanthropic Trust.

So, are DAFs dodgy loopholes that help the rich get richer while diverting money from doing good? Or, are DAFs laudable innovations that help people be more generous and direct more resources to the social sector?

The vexing but accurate response is, both. But the vast majority of people considering a DAF as a vehicle to give their money to charitable causes are not billionaires. For them, DAFs have a lot of compelling benefits.

The most ardent criticisms of DAFs concern how they are leveraged by ultra-wealthy givers. When billionaires like Hastings, Elon Musk, or Google Google Cofounder Larry Page direct mega-donations to DAFs, they get huge tax deductions right away. Yet, there are no minimum financial obligations for how much those DAFs must distribute to charity each year and no reporting requirements. So, it’s difficult to know when or where wealthy donors are making charitable gifts and whether the money is having a positive impact.

A 2021 study of DAFs at Michigan community foundations exacerbated those concerns. Researchers found that on average, 37 % of the funds they looked at made no distributions each year.

Still, the February report from the Donor Advised Fund Research Collaborative confirms DAFs are soaring in popularity. Millions of committed, engaged givers value the convenience and simplicity of both contributing to DAFs, and making charitable gifts from the accounts.

Among the findings of the DAFRC report:

• Half of all DAFs had assets valued at less than $50,000, and only 1% had assets of more than $10 million – affirming that billionaires are not the primary users.
• In the most recent three-year period, 78% of DAF accounts made at least one grant, and the average annual payout rate for DAFs was 18% — indicating most DAF holders are putting their resources to use rather than letting them sit idle.
• 96% of grants from DAFs disclosed the identity of the fund or donor, and only 4% of DAF gifts were anonymous – suggesting DAF holders are not using the accounts to hide what they are doing or avoid transparency.

The DAFRC findings are backed by data from Fidelity Charitable and Schwab Charitable, which are now among the largest providers of DAFs.

Fidelity Charitable granted $11.8 billion to charity in 2023, with more than 322,000 donors making grants through its DAFs to 199,000 nonprofits. Schwab Charitable distributed $6.1 billion to more than 127,000 organizations in 2023 from its DAF accounts. For both Fidelity Charitable and Schwab Charitable, the dollar amounts granted and the number of DAF holders have been growing steadily for several years.

Why Are DAFs So popular?

Convenience and simplicity are major draws. DAFs are easy to open and usually do not require a minimum initial investment. They accept a wide range of donations, from cash and appreciated stocks to non-traded assets. DAF accounts also streamline tax reporting and reduce the need to corral and disclose every donation to every non-profit in a given year.

At a time when the public is increasingly angry about wealth inequality and the concentration of power in the hands of the rich, there are problematic aspects of DAFs that policymakers could and should address – particularly when it comes to funds holding $100 million or more.

Requiring an annual minimum payout and disclosures of major gifts from large DAF accounts are logical steps, and legislation has been floated at the federal level to make such changes.

But in 2022, there were close to two million DAFs, the vast majority of which held less than $10 million. Those DAFs received about $86 billion in contributions, according to the DAFRC, and paid out about $52 billion in grants.

That makes DAFs one of the largest and fastest growing sectors of philanthropy.

At a time when overall giving is stagnating, and a declining share of U.S. families are participating in philanthropy, the popularity and vitality of DAFs is a bright spot.

And for individuals or families interested in expanding their generosity, DAFs are giving vehicles worth exploring.

Even — or, maybe, especially — if you are not the co-founder of Netflix.