Is Your DAF More Like a Checking, Savings or Investment Account?

People prosper when communities prosper

Many families with significant wealth set up Donor Advised Funds (DAFs) because they work on many different levels: the upfront tax deduction, privacy in how the DAF money is distributed, and (at least for now) all the time in the world to figure out how to distribute DAF assets to charity. So is not surprising that annual contributions to DAFs currently rival contributions to private foundations (although U.S. foundations are seven times bigger when it comes to total assets).

DAFs are often created after a major liquidity event, such as the sale of a company or other major asset. So it is not surprising that what is contributed to DAFs is usually not cash but instead donated securities or shares in a business prior to a sale to avoid capital gains taxes and qualify for tax deductions. According to the 2022 Giving Report of Fidelity Charitable, the largest DAF operator, roughly 67% of DAF contributions were recently non-cash, which can range from equities to undeveloped land, all sorts of real estate and cryptocurrencies.

Yes, all these assets and more can stay comfortably parked in a DAF appreciating in value or drawing interest until they eventually go to charities. But that is no reason to put off coming up with a purposeful distribution strategy.  Creating your own DAF giving strategy can be tremendously fulfilling, allowing you to forge deeper or new connections with nonprofits whose work you value, even if you opt to keep your contribution anonymous. That is especially important for new nonprofits doing important work, which may not be included in the usual DAF giving lists.

Toward that, it might be useful to think about your DAF in bank account terms. Is your DAF more like a checking account, savings account or investment account? The difference is the timeframe in which distributions are made. Theoretically, a DAF can be all three, with certain assets earmarked as “short-term checking,” others as “medium-term savings” and others as “long-term investment.” Being strategic about DAF distributions usually means deciding on the timeframe that is best aligned with your goals and those of the recipient nonprofits.

DAF as checking account — Do you see your DAF making annual or bi-annual distributions until the assets are used up or replenished?  To use a DAF as a checking account, you would have to either know which nonprofits you want to support, or you designate a general category for the DAF provider to disperse funds under.  If your DAF distributions go to the same nonprofit(s) each year, they could provide reliable support and become part of the nonprofit’s annual planning. A “checking account” DAF mentality can also make it easier to distribute funds during crisis years such as 2020.

DAF as savings account — Would you prefer to build up assets in your DAF to disperse in five to 10 years? This allows for researching, gaining conviction, and getting involved perhaps as a volunteer with a nonprofit you want to support.  The distributions to charities are likely to be bigger, so there is more of a need to name specific charities and to find out how the donations are likely to be used. It’s also possible that you could fund a new venture or something that does not currently exist in the nonprofit world.

DAF as investment account — Do you want to use your DAF as part of your estate plan and to define your legacy? If funded by the oldest generation within a family, a DAF can be inherited by children and grandchildren to carry out a purpose that the entire family has agreed on and to honor the family elders as individuals. This could be a major gift to a nonprofit that has close connections to your family and which you want to support so it continues to thrive over many more generations.

At LNW, we help clients incorporate DAFs into legacy and philanthropic planning to support family impact goals and aspirations. There are many ways DAFs can be used to enhance impact, including to fund strategic partnerships with nonprofits, coupled with a charitable trust, a foundation, or outright gifts to charity. Each element serves a purpose and can be used together for maximum benefit. The important thing is to start thinking strategically about your DAF(s), which is what we are here to help you do.

More on DAFs:

LNW’s Brian Whitaker on DAFs during Covid and beyond.

LNW’s Kristi Mathisen on DAFs (Puget Sound Business Journal subscription required)