For the uninitiated, DAFs are investment funds for charitable donations. You deposit money, get an instant tax deduction, avoid capital gains tax on appreciated assets, get a reduction in your gross estate - and then use that money to fund charities of choice over time. DAFs are set up and managed through commercial funds (Vanguard, Schwab, Fidelity), community foundations, and comment funds (such as Jewish Federations).
Here's the buzz (with 2017 Giving USA stats):
- Contributions to DAFs have increased significantly as a share of total giving over the past decade (10.2% in 2017).
- The number of DAFS increased by an astonishing 60%.
- Grants from DAFs totaled $19 billion, increased 20%, outpaced contribution growth, and were 40% of total funds granted through all foundations.
- Contributions to DAFs are at an all-time high.
- DAF assets saw phenomenal growth of 27.3%.
- DAF grant payout has been 20-22% for the past 5 years, higher than that of conventional foundations.
- A significant proportion of these new DAFs are modestly funded ($5,000 and under).
Here are the issues for the nonprofit sector:
- DAFs are completely private; there is no legal or IRS requirement for any public accounting or public grant process. So, unless you know someone, or your local community foundation connects you, there is no way to even make your case for a grant.
- DAF donors can remain completely anonymous and unrevealed. If so, you don't have the wherewithal to build relationships or cultivate repeat donations.
Here are some cautionary tales:
- John and Laura Arnold made a $120,000 grant to the Police Special Grants Fund under the Baltimore Community Foundation to be used for a massive secret community surveillance project. The CEO and the Board didn’t know about it (nor did the community).
- The Jewish Community Foundation of Los Angeles made a series of grants to Canary Mission on the advice of a DAF donor. Canary Mission spies on students, professors, and organizations it believes are spreading anti-Israel and anti-Semitic ideologies, publishes lists meant to harm job prospects, and shares these lists with Israeli security officials.
- Three groups that promote anti-Arab, anti-Muslim rhetoric, and conspiracy theories received money through DAFs held by the San Francisco Jewish Federation.
- Tech billionaires Nicholas Woodman (GoPro) and Jack Dorsey (Square/Twitter) established DAFs through the Silicon Valley Foundation to great public acclaim. All were funded with significant gifts of appreciated stock. We haven’t heard a word since about either of these supposed charitable funds.
And here are the basic legal and ethical issues:
- As 501(c)(3) nonprofits, sponsoring organizations have a legal and ethical duty to assure that grants made are consonant with their missions.
- At the same time, federations and community foundations have become deeply reliant for assets and fee income from DAFs.
- They also fear losing business to commercial firms that impose no ideological restrictions on the grants they will approve.
- Yet oversight has frequently been minimal, even through IRS rules state that, “once the donor makes the contribution, the sponsoring organization has legal control over it. The donor retains advisory privileges with respect to distribution of funds.”
Here's my take: As citizens, we need to hold our community foundations accountable - and those organizations need to be vigilant in abiding by their core principles, rather than financial needs. As nonprofits, we need to acknowledge that DAFs are here to stay; our job is to do our homework to the best of our ability in connecting with DAF donors to make our case - and to assure them of public anonymity should they desire it. As donors, we need to use this tool in a principled manner, not just for tax benefits - and pledge to actually contribute all of those funds each year to nonprofits that do good work.
The bottom line: DAFs have become a key factor in nonprofit funding, and we need to monitor them - and work with them.
