They offer immediate tax benefits to donors, avoid some of the more onerous compliance requirements associated with operating private foundations, and provide anonymity in a way that private foundations often cannot. Those advantages are precisely the same issues around which an emerging chorus of DAF critique has emerged. Critics accuse DAFs of facilitating tax write-offs for the wealthy without requiring actual disbursements to charitable organizations, while simultaneously allowing donors to shield their true philanthropic intent from public view.
With the likelihood that other large wealth managers and banks will follow Fidelity’s decision and lower their respective bars to entry for DAFs to no-minimum, what does this shift potentially mean for the broader giving space moving forward? Will the net effects be positive, with thousands of new everyday donors rushing to establish DAFs and unlocking greater giving at an aggregate level? Or will DAFs remain the purview of only the truly wealthy? Our experience building and running Growfund, the world’s first no-minimum DAF, suggests that the answers are more nuanced than a simple “good” or “bad” take.
The Appeal of DAFs to (Everyday) Donors
Among its most important aspects are the ability of donors to reap immediate tax benefits once they shift capital to a DAF while still taking as much time as needed to decide on actual disbursements to charitable organizations; the ability to “brand” one’s DAF with an impressive sounding title (e.g. “The Nathaniel Heller Charitable Foundation”); and the ability to give with greater anonymity relative to traditional private foundations (DAFs are not subject to public disclosure requirements reporting whose capital funds the DAF, so the “Nathaniel Heller Charitable Foundation” might actually be funded by Melissa’s wealth!). Depending on your perspective, those same advantages can be cause for concern: opponents argue that many DAF dollars go into accounts but never go out to charitable organizations, and anonymity is viewed by some as a way for the wealthy to shield their giving from public scrutiny. See the #HalfMyDAF initiative as a good example of the emerging push to ensure that more dollars eventually flow from DAFs to actual charitable organizations.
Based on what we’ve seen during the past several years building Growfund, as well as work with other partners and clients, our hunch is that the market’s move to a no-minimum standard for DAFs is likely a net positive – but this may only go so far in guaranteeing an influx of new philanthropic dollars to charitable organizations’ operating accounts.
Taking Advantage of a No-Minimum DAF
Do no-minimum DAF options encourage and potentially motivate increased giving? In our experience, yes, and particularly for the cohort known as the “mass affluent.” These are wealthier families and individuals with a material amount of discretionary giving power but also distinct from High Net Worth (HNW) and Ultra High Net Worth (UHNW) donors. The mass affluent may give in the thousands or tens of thousands, while donors in the (U)HNW categories tend to cluster closer to the six-figure range.
For the mass affluent and their Giving Circles (another new giving innovation that encourages family and friends to give together in a pooled fashion), we do expect the lower bar of no-minimum DAFs to encourage greater philanthropic investments. Whereas (U)HNW donors are likely less sensitive to a minimum bar of $5,000, getting rid of that hurdle will absolutely help the next tier of donors think more strategically and proactively about their philanthropy. Put another way: if you were on the fence about establishing a DAF because of a minimum initial investment, the shift towards no-minimum DAFs could very much incentivize you to pull the trigger. We thus expect the volume of DAF accounts to increase in the coming years while the average assets in those accounts to potentially decrease as small-dollar DAF accounts come online. The trend in lower account values for DAFs has been well documented by organizations like Giving Tuesday and the National Philanthropic Trust (NPT), whose research shows that the average size of DAF accounts has decreased by 30% year over year from 2017 to 2018. This, coupled with a 55% increase in the total number of DAF accounts, suggests that there is indeed an appetite for lower minimum option DAFs.
Do More DAFs = Greater Giving?
The million-dollar question, of course, is whether the lowering of the bar to DAF entry will actually stimulate a greater outflow of dollars from DAF accounts to charitable organizations. Here, we’re not as certain that the shift to a no-minimum DAF marketplace will affect actual disbursements. The core appeal of DAFs has less to do with facilitating the actual act or moment of giving. The advent of philanthropic technology platforms in the past decade that offer near instantaneous donations to almost any credible charitable organization has meant that giving is, in a word, easy for most donors. DAFs don’t necessarily accelerate the act of giving or offer anything unique relative to clicking on a “donate” button on an organization’s website, choosing a pre-vetted charity from DonorsChoose or GlobalGiving, or using Benevity or Salesforce Philanthropy Cloud to help your employees give to causes.
The big difference between DAFs and all of those other options is the immediate tax benefit that donors reap as soon as dollars are transferred (irrevocably) into a DAF. If you need or want a tax write-off right now or would rather “pay a charity than pay the government [in taxes],” you’re wise to move funds into a DAF rather than have them sit in your checking account while you decide which charity listed on an online charitable platform is the right one to support. So again, DAFs work to tee up the potential for greater giving and in some cases provide unique incentives for triggering that greater giving (e.g. their ability to accept non-cash assets and contributions, which otherwise would have little potential philanthropic benefit). But the establishment of DAF accounts doesn’t automatically translate into actual greater giving; the donor still needs to separately commit to moving funds and assets out of the DAF and into the hands of charitable organizations.
Looking ahead, it’s this last-mile challenge that intrigues us the most. If indeed the rush to a no-minimum DAF ecosystem primes the charitable pump with a significant influx of mass affluent dollars into DAFs, how do we get them out in greater volume to maximize the potential for positive social impact? Here, the discussions around a minimum annual DAF spend/disbursement percentage strike us as valid and important. At the same time, we wonder whether changes to the way tax benefits are afforded to DAFs should also be part of the discussion. What would happen if donors received 50% of their DAF tax benefit upon contributing to their DAF with the other 50% coming only after dollars have been disbursed to charitable organizations, for example? While we don’t trivialize the complexity associated with potential changes to the tax code, some sort of shift in incentives towards greater giving to charitable organizations out of DAFs – while still supporting the existing incentive structure that encourages moving dollars into DAFs to begin with – feels important.
This is where collective giving might be a bridge. Preliminary data from Growfund suggests that donors engaged in Giving Circles have a higher payout rate than the average. Growfund’s Giving Circles pay out in the range of 70%+ on average; this compares with an average payout rate of DAFs at national charities of 22% (according to NPT). In the absence of any changes to the tax code, it may be that collective giving, or Giving Circles, may be a way to encourage donors across the philanthropic spectrum to give more out of their DAFs. This is the sort of positive peer pressure we can get behind.
This post was co-authored by Nathaniel Heller, Vice President and Managing Director at Geneva Global, and Melissa Cortes, Director of Collective Giving at our parent company, Global Impact.