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Published December 11, 2023 Reading Time: 5 minutes

This blog was written in collaboration with Mitch Stein. Mitch is the Head of Strategy for Chariot, a donor-advised fund solution for nonprofits to solicit, maximize, manage, and steward DAF donors and their gifts.

Donor-advised funds (DAFs) have experienced an unprecedented surge in popularity within the philanthropic landscape over the past decade. However, despite this exponential growth, nonprofits still face challenges accessing the full benefits of the $229 billion sitting in DAF accounts.

This article explores the reasons behind the rapid rise of DAFs, addresses the opinions of proponents and opponents, and provides insights into how nonprofits can optimize DAF funding to support their missions.

What Are DAFs and Why Are They So Popular?

Donor-advised funds serve as a triple tax-advantaged vehicle for charitable giving, allowing donors to contribute appreciated assets and avoid a capital gains tax.

Like a 401(k) or health savings account, DAFs enable active management of investments for tax-free growth. This provides flexibility, ease of management, and automatic contributions to help donors stay accountable to their philanthropic goals.

For donors who haven’t yet found a connection to a cause, DAFs can serve as a temporary holding ground for their assets. These individuals want to donate but haven’t yet found a cause that speaks to them.

DAFs are also incredibly beneficial for those who experience a large liquidity event (like the sale or initial public offering of a business). These individuals can lower their tax liability upfront by putting those dollars into a DAF, then drawing down on that DAF over time by making donations directly from their accounts.

Tracing the Rise of the DAF Market

​​Though gaining immense popularity in recent years, seeing a more than 500% increase in accounts since 2016, with nearly 2 million accounts by the end of 2022, DAFs are not new.

Increased accessibility (1,151 providers as of 2022), competitive pricing, improved features, and fewer restrictions all contribute to the surge in DAF popularity. The stock market boom, resulting in highly appreciated assets, has also fueled the growth of DAFs.¹

Learn more about these trends in an interview with leading philanthropic advisor Daniel Greenspon.

What Do Opponents and Proponents of DAFs Have to Say?

The meteoric rise of DAFs has not been without controversy. With billions parked in DAF accounts that have generated tax benefits for donors but haven’t yet benefited nonprofits, many have called for increased regulation and restrictions.

This frustration has spurred movements to encourage DAF holders to disburse their accounts more quickly, like the #HalfMyDAF movement sparked during the COVID-19 pandemic, and put new DAF legislation in front of Congress, like the ACE Act in 2021, although it didn’t pass.

The Biggest Complaints: How DAFs Miss the Mark

Sitting Funds

The absence of a payout requirement is a significant challenge associated with DAFs, allowing funds to remain in accounts indefinitely without an obligation for distribution. This lack of a mandatory payout can hinder the timely flow of resources to nonprofits, contributing to a substantial accumulation of funds within DAF accounts.

While nonprofits received $52 billion from DAFs in 2022, those accounts still had hundreds of billions available to give.¹

DAF Intermediaries

Another notable issue stems from the intermediary role played by DAF providers, introducing difficulties in donor stewardship for nonprofits. Intermediaries can create barriers, making it challenging for organizations to establish direct connections with individual donors and cultivate relationships.

Antiquated Payments

The predominant use of checks in DAF transactions poses additional operational challenges for nonprofits. Reliance on this traditional form of payment introduces processing costs, heightened risks of loss or fraud, and the potential for errors when manually entering information into organizational databases.

This preference for check-based transactions within the DAF industry underscores the need for modernization and digital solutions to streamline the donation process.

Anonymous Donations

Additionally, the anonymous or insufficient identification of DAF grants makes it difficult for nonprofits to effectively acknowledge and communicate with donors. The lack of adequate information can hinder effective recognition and follow-up efforts, limiting the organization’s ability to steward life-long supporters.

Clunky Conversion Processes

It’s also critical to note the complex and time-consuming nature of DAF donation processes, as it can discourage timely and convenient donor contributions. Simplifying these processes is crucial for enhancing the donor experience and facilitating a more efficient flow of funds to support charitable causes.

The Biggest Benefits: How DAFs Fuel Sustainable Revenue

Reliable Philanthropic Support

DAF payout rates have been above 20% every year since first tracked in 2007, establishing them as a reliable source of philanthropic support.² This consistent and substantial payout rate contributes to the sustained flow of funds to charitable organizations.

That said, it’s crucial to note that some groups express concern about the implications of implementing a regulated minimum because it may move the payout rate closer to the requirement versus the rate it’s at naturally.

Higher Giving Levels

DAF donors tend to contribute more money, more frequently, and more consistently than other forms of giving.³

The average DAF grant exceeds the typical amounts associated with credit card donations, underlining the significance of DAFs in facilitating larger and more regular contributions to charitable causes.

In fact, the average DAF donor makes 12 gifts per year—that’s six times the average non-DAF donor amount.4

Economic Resilience

With a track record of increasing giving in challenging financial climates, DAFs showcase resilience during economic downturns. In fact, researchers from the University of Pennsylvania and the University of Memphis found that DAFs were the only form of charitable giving that increased during the Great Recession of 2008 to 2009.5

This resilience positions DAFs as a dependable source of support for nonprofits, even during economic uncertainty.

New Possibilities

Most complaints about DAFs relate to the troublesome processes of making and receiving gifts. The good news is that there are new, innovative solutions to enhance the efficiency of DAF fundraising.

Chariot’s DAF payment solution can help nonprofits overcome some of the biggest DAF donation challenges.

By streamlining the entire DAF donation process and providing features to facilitate donor engagement, Chariot helps make DAFs an even more accessible and effective avenue for philanthropic contributions.

How Can Nonprofits Secure More DAF Funding?

By implementing proactive fundraising strategies, nonprofits can secure the right technology and tactics to maximize DAF potential.

Get Specific in Your DAF Appeals

According to Scott Harrison, Founder of charity: water, donors are twice as likely to use their DAF when prompted by a nonprofit.

Knowing that effective communication and awareness are two of the most critical pieces of DAF success, think about how to highlight this donation type throughout the giving season and beyond and who you want to approach with this appeal.

We recommend including language about DAF giving in all fundraising communications, especially during one-on-one donor meetings.

On Classy’s fundraising platform, 25% of annual donation volume occurs between Giving Tuesday and New Year’s Eve. With heightened excitement around charitable giving during the holiday season, it’s the perfect time to amplify your DAF appeals.

Incorporate DAF Giving Directly into Your Donation Forms

There’s tremendous value in offering flexible donation methods that best meet your donors’ needs.

Streamline the donation process by incorporating DAF giving directly into your donation forms, offering donors flexibility and convenience. Solutions like Chariot go a step further by providing a seamless experience in just three clicks.

Discover How Classy’s Partnership with Chariot Can Help

Classy has partnered with Chariot to enhance its comprehensive fundraising solution. The partnership offers three key benefits:

  • Secure, easy giving: Chariot makes it simple for DAF donors to contribute directly to an organization’s donation form in just three clicks and avoid the risk of fraud and manual data errors from sending checks in the mail.
  • Increased conversion rates and donation frequency: Chariot’s platform includes nudges and suggestions to boost donations, urging supporters to finish transactions they start and give at their full potential.
  • Proper stewardship: Chariot captures donor information immediately, enhancing your ability to thank and connect with those interested in your cause.

Classy’s pilot of Chariot’s solution is underway with a select group of customers. Let us know if you’d like to see this pilot scale into a full Classy x Chariot integration to help amplify your fundraising success.

Copy Editor: Ayanna Julien

Article Sources:

  1. “The 2023 DAF Report,” National Philanthropic Trust, accessed December 4, 2023, https://www.nptrust.org/reports/daf-report/.
  2. “2022 Donor-Advised Fund Report,” National Philanthropic Trust, accessed December 4, 2023, https://www.nptrust.org/wp-content/uploads/2022/12/2022-DAF-Report.pdf.
  3. “2023 Fidelity Charitable Giving Report,” Fidelity Charitable, accessed December 4, 2023, https://www.fidelitycharitable.org/content/dam/fc-public/docs/insights/2023-giving-report.pdf.
  4. “Nonprofit Fundraising Statistics to Boost Results in 2023,” Double the Donation, accessed December 4, 2023, https://doublethedonation.com/nonprofit-fundraising-statistics/.
  5. “Understanding Donor-Advised Funds: How Grants Flow During Recessions,” University of Pennsylvania School of Social Policy and Practice, accessed December 4, 2023, https://sp2.upenn.edu/wp-content/uploads/2019/02/Heist-Vance-McMullen_Understanding-Donor-Advised-Funds_working-paper-002.pdf.
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