DAFs: A Grantwriter Speaks Her Mind
We are always pleased to bring on-the-ground voices to the philanthropic reform discussion. Lindsay Jordan and her Oklahoma fundraising firm have raised nearly $300MM for nonprofits since 2018, and she previously served as Development Director for three direct service nonprofits. Based on a great variety of experience, here are some thoughts from her about donor-advised funds (DAFs).
If I see one more webinar on "how to win funding from DAFs,” I might actually puke. Do you want to know how to win more funding from DAFs? I’ll save you an hour-long Zoom call: Stop treating DAFs (donor-advised funds) like some mystical new revenue stream and start understanding them for what they are: separate financial accounts advised by charitable donors.
Donors who use DAFs are often the same people who give through other nontraditional means- stock transfers, cryptocurrency, anything but cash. So when nonprofits start freaking out about “not having a DAF strategy,” my first question is: do you have a separate strategy for stock gifts, personal checks, or EFT? For crypto? Probably not. And that’s fine, because we tend to recognize those gifts as simply another currency option for wealthy donors. DAFs are little different.
The reason we keep fantasizing about DAFs - the endless webinars, articles, seminars, blog posts, and podcast episodes - is because we don’t actually understand them. We don’t understand how DAFs fit into the philanthropic ecosystem.
That’s because, for general operating purposes, they don’t. Let me explain.
I run a fundraising firm. We raise money for nonprofits. So when my clients started expressing frustration about not being able to “win grants from DAFs,” my team started looking into it. Here’s what we found:
- Donors move money into DAFs to get an immediate tax benefit. They’re often told that it's a great way to get a tax benefit and put off deciding where to give. The fact that charitable need is met only when the money moves from DAF to nonprofit rather than from donor to DAF is left unsaid.
- DAFs are primarily housed at financial institutions and community foundations. And despite their public image, one isn’t necessarily more benevolent than the other (especially considering that community foundations were originally created to help wealthy Americans avoid federal income tax, not to exclusively benefit communities).
- Both types of institutions are actually disincentivized to move money out of DAFs. Why? Because they collect management fees while the money sits. These fees are often downplayed as a “minuscule” 1–2%. However, with DAF assets currently sitting at $250 billion, that “tiny” percentage translates to $2.5–$5 billion in fee income annually - dollars that could have gone to benefit local communities, but instead line the pockets of community foundations and financial institutions. Last year, only 24% of DAF assets were actually distributed to nonprofits.
- Most DAFs aren’t set up with an intentional giving strategy. While most donors intend for their gifts to support general operating or programmatic needs, those tax-deducted dollars end up held hostage by wealth-hoarding middlemen who abide by no regulation or code on the timely distribution of DAF funds.
- Lastly, and perhaps most importantly, the identities of DAF holders and their gifts are largely hidden. Community foundations and financial institutions are not held to the same annual reporting requirements as private foundations, which means they don’t have to specifically disclose to the federal government or the public how money moves in and out of each account, where it goes – just an aggregate list of all DAF transfers.This loophole to evade reporting and payout requirements creates opportunities for abuse. Bad actors can use tax-deductible gifts to keep money away from nonprofits. For example, a private foundation that’s at risk of falling short of its 5% annual payout requirement can simply transfer funds into a DAF. On paper, this satisfies its payout legal obligation, but in reality, not a single dollar reaches an actual nonprofit or delivers a public benefit, which is the rationale for their tax exempt status.
Donor makes $100K gift to nonprofit =
Nonprofit delivers $100K impact in community + develops relationship with donor
Donor makes $100K gift to DAF =
Nonprofit receives $24K, DAF makes $1-2K in fees, donor identity kept secret
In short, DAFs strangle the delivery of valuable services to communities so that community foundations and financial institutions can maintain account balances and keep collecting management fees.
So, what exactly am I trying to say here? That DAFs are evil and nonprofits shouldn’t be trying to get their piece of a $250B pie? No. DAFs are here to stay and represent a halfway step to generosity. However, the $250B given by donors is no longer theirs: it is a public trust held by DAF sponsoring organizations – mostly community foundations and the financial services industry. There is no putting that toothpaste back in the tube. However, nonprofits should not be wilting violets here either.
This is the exact position the nonprofit sector finds itself in when determining how to deal with DAFs: Yes, you can play nice in the sandbox for pennies on the dollar with community foundation and financial institution representatives, as countless webinars will instruct you to do. You can add a button to your website to remind donors that they have a DAF and that you are willing and able to accept those gifts. You will raise some money… and you will also perpetuate a toxic giving trend that has positioned Fidelity Charitable, the National Philanthropic Trust, and Schwab Charitable as the largest recipients of charitable donations in the U.S. (as recently as 2022, the top three were Feeding America, United Way, and St. Jude Children’s Research Hospital).
My proposals for how we fundraisers deal with DAFs:
- De-center DAFs in our solicitations. Enough of the glitz and glam about DAFs. Yes, it’s the largest growing area of philanthropy - but that’s not a good thing for nonprofits. The more airtime and recognition we as a sector bestow on DAFs, the more they will continue to feel like a special little something. Remember, DAFs are just another giving tool – like a checking account is a tool – and you already have a toolbox FULL of these tools.
- Educate Donors and Ask Them to Follow Through. Donors don’t give to DAFs in order to decrease their impact by 76%. There was no community advocate in the room when they were making their financial plans. In short, they don’t know the collective catastrophic impact that the current structure of DAFs inflict on our sector.Elevate educational giving opportunities like Half-My-DAF, an annual campaign that encourages donors to tap into matching gifts by pledging to put half of their DAF balance into productive use. Or launch your own “Drain the DAF” annual campaign. Remind donors through these campaigns that those dollars were already committed to the community, and it’s their job (not the community foundation’s or financial institution’s) to make sure the promise is kept.
- Keep raising money from big and small individual donors. THey can give to you in cash, by credit card, by writing a check, by donating stock or crypto, by supporting your event, by using their Qualified Charitable Distribution from their IRA, and yes, from their donor-advised fund. When they want to give, they will choose the vehicle that works best for them.
As charitable giving continues to skew in America to a smaller and smaller group of wealthy individuals, we cannot allow critical dollars to be hoarded by community foundations and financial institutions like dragons on a veritable pile of gold.
Fundraisers - traditionally expected to “friendraise” - now find themselves in the crosshairs between a donor’s good intentions and the profits of major financial institutions, with the mission of their nonprofit at risk. It’s an unfair fight. And it continues the harmful framing of donors as saviors instead of community partners.
We fundraisers must first adjust how we interact with DAFs, understand their place in the world, and respond in ways that realign generosity with the communities it was meant to serve.
Lindsay Jordan is founder and owner of Write On Fundraising, a 15-staffperson firm based in Tulsa Oklahoma that writes grant proposals, conducts capital campaigns, and other fundraising consulting work. She has served as Director of Development in three direct service nonprofits, and in 2021 was named 2021 Oklahoma Small Business Champion of the Year by the U.S. Small Business Administration.
You can read more from the Philanthropy Project at www.philanthropyproject.net, and you can subscribe here.
Grantmakers and philanthropic reform
As various proposals for philanthropic reform have emerged, most associations of grantmakers have opposed them or stayed conspicuously silent. Philanthropy Northwest – a network of nearly 140 foundations in six Pacific Northwest states – stands out.
Marc Moshcatel is the Public Policy and Research Analyst at Philanthropy Northwest, interested in understanding how public policy and philanthropy impact people – and most importantly, how these institutions can do better.
Q: Marc, unlike many philanthropy-based institutions, Philanthropy Northwest has supported regulation to increase transparency and payout by donor-advised funds (DAFs). How have foundations and donors reacted to your taking this position?
Marc: Our policy position states that "we favor regulation to increase transparency and payout of donor-advised funds (DAFs), and we support increased education and research to help us deepen understanding of the complexities and considerations to inform our stance on specific proposals." There is more on our website about DAFs and our positions.
There's been a wide spectrum of reactions to this position, with some supportive of reform, some opposed, and some in favor of some reforms and not others. Ultimately, the Philanthropy Northwest board adopted this position with the understanding that philanthropic vehicles like DAFs need to be accountable by getting resources to communities in a timely manner.
Q: Philanthropy Northwest has urged policymakers to replace the current charitable tax deduction with a universal tax credit to make it available to more people. Why would this be a better option to encourage charitable giving?
Marc: One of Philanthropy Northwest’s policy goals is to bring more resources to communities. Unfortunately, the charitable deduction isn’t the most effective solution. People across income levels and demographics give to charity, but the charitable deduction is designed for wealthy donors, the vast majority of whom are white: most of the tax break goes to the top 1% and less than 10% of the deduction benefits donors of color. Providing this benefit mostly for high-income donors costs taxpayers roughly $60 billion per year. The new tax bill will shift these numbers, but the trends will likely be the same.
And by centering the wealthy, the deduction inadvertently pushes nonprofits to cater to the interests of a select few rather than communities at large. Tax analyses have found that replacing the deduction with a universal tax credit – such as 25 cents back per dollar donated – would increase giving, bring in millions of new donors, and distribute the tax benefits more fairly. It could be refundable to some extent so that lower-income donors get the benefit. Also, putting a sufficient floor on the incentive – a minimum threshold people must donate to get the incentive – would significantly reduce the amount of taxes lost.
Q: Kudos to you and Philanthropy Northwest for taking such strong stands on DAF report and improvements to the charitable deduction!
Q: Next, after a series of Trump administration executive orders, organizations of all types are being strong-armed to step back or eliminate positions and practices on DEI (diversity/equity/inclusion) with which the Trump Administration disapproves. For example, Charity Navigator recently dropped a part of its rating system, the section of the Culture & Community beacon asking about commitment to equity and inclusion practices. How are your members reacting to these anti-DEI pressures?
Marc: The anti-DEI pressures have created uncertainty and plenty of questions from our network. [They wonder] Can I still do this program for my community? Can I still say certain things when describing my work? Is my organization next to lose federal funding, or have its nonprofit status threatened?
We have hosted conversations and programs with legal experts to keep people updated and emphasize that organizations should not preemptively halt their efforts out of fear, because doing so gives the executive orders power they might not actually have. “Do not obey in advance,” as Timothy Snyder wrote in his book On Tyranny. Charities and funders must stand up for their values by continuing to support their communities.
Q: Foundations in the Pacific Northwest have a reputation of being more progressive than in the rest of the U.S. Why do you think that is? What should other parts of the country know about how philanthropy has evolved in the Northwest?
Marc: I didn’t realize that was our reputation! Maybe it comes from having some foundations based in the Seattle and Portland areas (for reference, Philanthropy Northwest’s region includes Alaska, Idaho, Montana, Oregon, Washington, and Wyoming). The rest of the country should know that the Northwest covers a very diverse spectrum of philanthropies that come from and support a variety of communities. For examples of how the area’s work has been evolving, I recommend Philanthropy Northwest’s 2024 Annual Report, as well as our new report discussing lessons learned from a cohort of community foundations, identity-based funders and United Ways.
Q: What advice do you have for the Philanthropy Project on making the case for DAF reform?
Marc: I think DAF reform is a microcosm of a larger conversation concerning wealth inequality, as well as concerns around the accountability of moving resources in the public and charitable sectors. Most people might not know exactly what a DAF is. However, they know that the rich have too much power while most people struggle to make ends meet. They would like to see more resources reach their communities. They want these resources to be spent in an accountable manner in alignment with their communities’ needs.
We should make the case that DAF reform is one of many ways to help make that happen.
Q: Is there a question we didn't ask, but should have?
Marc: None that I can think of! We're pleased that the Philanthropy Project exists, and thank you for the chance to lend some support.
You can read more from the Philanthropy Project at www.philanthropyproject.net, and you can subscribe here.
A fundraiser asks why nonprofits and foundations aren't speaking out about philanthropic reform
Hildie Lipson recently left a long career in fundraising in Maine (she's still working for good causes!), and we think you'll find her letter compelling:
I have worked in nonprofit fundraising in Maine for 35 years, and I'm so glad to find the Philanthropy Project. I see many familiar names on your Working Group – people whose work I have read for years.
My concern is that we are not seeing any kind of response, in New England anyway, from the philanthropic sector to our immediate crisis of threats to our democracy, civil rights, planned climate decimation, and all the rest. We need a strong, urgent campaign to demand not a 1% or 2% increase in giving, but giving to make real change in the short amount of time we have.
We need a massive and immediate increase in the giving rate of foundations to support the organizations and people fighting for our rights. Vu Le has made this argument for years. Where is everyone else? I am not a funder. I don't serve on funding boards. I am one of the thousands of former development directors who worked for many years, groveling for grants. How can we promote this message?
And why aren't more nonprofit leaders and nonprofit associations speaking up?
I don't have a good answer to this question.
In fact, one of the reasons I got out of fundraising was that I no longer had the stomach to explain to a wealthy foundation trustee why they should fund advocacy ("Our trustees don't like advocacy..." he said, from his midtown Manhattan well-appointed law office). How else do good laws get made to help people?
I know nonprofits fear offending the funder. Maybe we need the board members of nonprofits to be the ones speaking out. They don't have as much to lose, generally. And funders shouldn't have such thin skin. They are the ones in positions of power and I'd like to believe they are open to hearing from the orgs they fund and other potential orgs.
But I know better. For instance, a local community foundation is sitting on $732 million in assets. And once a year, they have an open application that any nonprofit can apply for, for the maximum of $10,000. It's insulting.. That program gives away maybe $2 million a year. And usually the grants are only for project funds.
So what are they saving for? A rainy day? It's storming and hailing, and the winds are over 60 MPH!
We need to work with our state nonprofit associations and with associations in our fields to promote what the funders are doing to respond to this moment. It's a frightful time, and all of us are thinking about what risks we can and/or should take as individuals and as organizations. I hope that in three years we aren't all looking back and thinking we should have said something.
Q: Amen, Hildie
You can read more from the Philanthropy Project at www.philanthropyproject.net, and you can subscribe here.