Donor-advised funds are gaining traction – and are also at the heart of a complicated debate.
Mike Todd, founder of and philanthropic consultant with Transform Philanthropy, is very enthusiastic about donor-advised funds, or DAFs. “I’m weirdly passionate about donor-advised funds,” he says. They’re the “oldest new product out there,” he says, adding he believes they are crucially important to both donors and fundraisers, especially during a fraught time for fundraising.
But here’s the thing about DAFs: if you’re familiar with them, you probably have a strong opinion about them. And if you’re not familiar, buckle up. DAFs are a big topic of conversation in the charitable and philanthropic sector these days. “They are an underutilized, misunderstood tool,” Todd says. “The biggest misconception is that they’re not important.”
DAFs are an underutilized, misunderstood tool. The biggest misconception is that they’re not important.
Mike Todd, Transform Philanthropy
DAFs are indeed “the fastest-growing giving vehicle in philanthropy,” according to an analysis of DAFs in Canada from the CAGP Foundation (a charitable arm of the Canadian Association of Gift Planners) and KCI, a non-profit-sector consultancy group. That report found that there was $8.5 billion held in DAFs at the end of 2021, including $2.2 billion of donations flowing into DAFs that year – representing nearly 10% of all donations claimed for tax purposes that year. There are tens of thousands of DAFs in Canada. It’s increasingly clear in Canada and abroad: DAFs are no small player when it comes to ways to give to charity.
Yet as with many conversations these days, the debate around DAFs can be polarized, and many charities and fundraisers have been ringing alarm bells about what they say is the dark side of DAFs. “DAFs are kind of like AI, in the sense that the people who are talking the most about them want you to [adopt it],” says Abigail Oduol, the movement coordinator of the US-based Community-Centric Fundraising. “They’re really excited about you adopting their product, and so sometimes they share all of the really great things about it and they share less of the shadow side of it.”
The debate goes something like this: Are DAFs an efficient way for donors to set aside money for charity at a time that makes sense to them? Or are they an under-regulated way for funds to “languish” without being made available to charity – or worse, a “vehicle for hoarding assets” and “wealth warehousing”?
Part of that tension lies in a core feature of DAFs. When a donor moves money into a DAF, they get a tax receipt immediately. But the money doesn’t necessarily go to a charity immediately – a feature some in the sector are concerned about. For many, DAFs don’t address the urgency that is needed now. “There are a lot of different causes right now where this is our final stand,” says Chantelle Ohrling, philanthropy officer of legacy and planned giving at Ecojustice and member of the executive of the CAGP’s Vancouver chapter. “There is no future where we’re carefully doling out financing. It’s at this moment where we need to meet the myriad crises that are happening in society.” DAFs, she says, are not the place for wealth to sit around – charitable giving shouldn’t wait.
But for others, DAFs are a positive way to incentivize donors to set money aside for charity when it makes sense for them. And even just that on its own, they say, is good for charity. “Charities in Canada are in more trouble than ever,” Todd says, pointing to increased needs for services and simultaneous declining donations to many charities (Statistics Canada said last year that charitable giving was down more than 3% overall), as well as inflation and other rising costs. “I have confidence the DAF is an important part of any solution.”
DAFs have seen exponential growth in the last 10 years. It’s definitely a hot topic.
Ruth MacKenzie, Canadian Association of Gift Planners
“DAFs have seen exponential growth in the last 10 years,” says Ruth MacKenzie, president and CEO of CAGP, which has convened a DAF working group that comprises foundations and members of the charitable community, including some of the big players in the DAF world, and is a forum for information sharing and discussion of issues pertaining to DAFs. “It’s definitely a hot topic.”
How do DAFs work?
The basic premise? A donor wants to give some money to charity. So they put it in a DAF – handled by a third-party charitable entity that manages the money for them. The donor gets the tax receipt now, but the actual donations are distributed to charities later, on the advice of the donor. Crucially, it is advice: the funds are officially out of the donor’s hands. But the administration of the funds is done by a charity (usually a foundation) that manages the DAF; historically this has been a community foundation. That can also help charities accept gifts they might not otherwise have the means to accept. Say a donor wants to donate a physical item, real estate, or stocks. A small charity might be ill-equipped to accept them; a DAF-holding institution could turn that into money, to then be distributed to a charity.
For many, especially those with significant wealth, it’s a simpler way to manage money intended for charity.
When does the money actually go to charity?
In 2023, the Government of Canada increased the disbursement quota (DQ), meaning that for registered charities (including private foundations) with more than $1 million in assets, the DQ rose from 3.5% to 5%. As long as the foundation with DAFs is spending 5% overall on charitable activities, there are no spending requirements for the individual DAF (though some foundations do choose to apply the DQ to each individual DAF as well).
Meanwhile, data show that giving from DAFs is, on average, outpacing the DQ for private foundations. A recent report from the Veritas Foundation found that the payout ratio (grants to average assets) for Canadian DAFs in 2023 was 9.7% – but for DAFs held by community foundations, the payout ratio is only 5.4% of average assets.
We can’t [meet the challenge of the polycrisis] if our gifts are tied up in investments in industries that are the reason for the polycrisis.
Chantelle Ohrling, Ecojustice, CAGP Vancouver
For Ohrling, 5% is not enough. Nor is 5.4% or 9.7%. “In my dream world, it would be 50%,” she says. With the urgency of need facing charities – and the demand for many charitable services – “I really believe the time is now,” she says. “We are facing a polycrisis, and it’s time to meet the challenge. And we can’t do that if our gifts are tied up in investments in industries that are the reason for the polycrisis – or at least are the driving force behind many of the crises.”
Any kind of endowment is a form of funds languishing. It’s just the inherent nature.
Malcolm Burrows, Aqueduct Foundation
But as Malcolm Burrows, executive director of the Aqueduct Foundation, points out, DAFs are not unique in withholding funds and allowing them to “languish” as they sit in an investment – and in his opinion, that’s not always a bad thing. “Any kind of endowment is a form of funds languishing. It’s just the inherent nature,” he says, noting that the first DAF was established in 1952 through the Vancouver Foundation. “Donor-advised funds are a structure that came out of the community foundation movement, and the whole sort of fundamental raison d’être of the community foundation are endowment funds and long-term support. It’s fundamental to the structure.”
How do DAFs benefit charities – and donors?
As Todd explains, DAFs create more flexibility for donors to donate large sums of money when it makes sense for them. He lays out a scenario where a wealthy individual – accustomed to giving to charity by, traditionally, writing cheques – has, say, invested in stocks that have done very well. The person is “facing a big capital-gains tax problem when they get around to selling those stocks.” That’s the time to open up a donor-advised-fund account, he says.
Effectively, that person has then “pre-funded” their giving – while maximizing their own tax incentives. “So when’s the best time for me to fund my DAF? It’s when I have the asset to donate, when I have a tax problem, and I have lots of capital gains,” Todd says. “So I put it in [a DAF], and now it’s available to go to charity. In fact, it can only go to charity. I can’t have it back. It can only go one direction. It’s halfway there, and so it’s conceivably easier for the charity to get that.”
Because a DAF is “pre-funded” as Todd says, funds flowing to charity should be more resilient even in times when the economy is tight. “I’ve started referring to [DAFs] as a recession-resistant revenue stream,” he says. “I’m getting better at saying that, but it doesn’t roll off the tongue,” he says with a laugh. And that, he adds, is a win-win for donors and charities – and, in his opinion, a better situation for fundraisers. Asking for a grant from a DAF, he says, is “a less onerous task than asking me to actually open my wallet, because that’s a different question. That question’s gone.”
What should charities be doing about DAFs?
“DAFs are very, very important for fundraising,” Todd says. “They’re the fastest-growing way to give.” And that, he says, means charities need to be not only receptive to DAFs, but proactive about them. Many charities don’t list DAFs on the “ways to give” page of their website, for example. Or they’re not booking DAF donors into their relationship-management system, nor doing everything they can to identify the actual person behind the donation.
But for others, DAFs are a barrier to direct communication with donors – and some charities have been frustrated by their uptick in popularity. “It’s new. It’s growing – it’s growing really fast. And so that has some people a little on edge,” MacKenzie says.
“Charities are more tepid with new giving vehicles,” Ohrling says. “We want to ensure we’re building relationships in a holistic way.”
Charities can end up spending a lot of time going down rabbit holes of ‘Who does this DAF belong to?’
Abigail Oduol, Community-Centric Fundraising
For Ohrling and others, DAFs can seem to stand in the way of direct communication – and appreciation of donors. As Oduol puts it, charities can “end up spending a lot of time going down rabbit holes of ‘Who does this DAF belong to?’”
“We want to ensure that we’re thanking our supporters. Gratitude is very important to us,” Ohrling says, adding that DAFs can make those relationships more complicated. Communications with donors may be limited – or charities may be unsure if donors are receiving letters sent to them through the DAF intermediary.
And that gets at a larger criticism of DAFs and the types of relationships they can create between donors and charities. “When someone has ‘set it and forget it’ charity . . . it’s very easy and frictionless. And it’s literally the opposite of human relationships,” Oduol says, citing automated credit card payments as an example of “frictionless relationships” with supporters. With automated payments, she says, charities often forget about the donor – and the donor about the charity – until their credit card expires. And that, she says, is a critical loss in the donor–charity relationship, and a missed opportunity to grow together. “I believe donor-advised funds are another manifestation of that,” she says. “It’s not viewing the person as a person; it’s viewing them as an ATM.”
Burrows acknowledges the anxiety charities feel about not knowing exactly where their donations are coming from. “There’s the perception that [DAFs] break or interrupt that direct experience with donors,” he says. At the Aqueduct Foundation, he says, they recognize that the “relationship is between the fund holder and charities they support.”
We get a number of gifts that come to us through DAFs. We don’t have any problem stewarding those donors. We know who they are.
Ruth MacKenzie
That’s been MacKenzie’s experience, where CAGP has a foundation. “We get a number of gifts that come to us through DAFs. We don’t have any problem stewarding those donors. We know who they are,” she says. “If your DAF provider has not sent you the name, pick up the phone or send an email to the DAF provider, and unless a donor has specifically asked to remain anonymous, it’s quite likely that they’re going to let you know who the donor is,” she says.
The Aqueduct Foundation tries to model this simplicity, Burrows says. “We really try to be that clean channel, the clean bridge, and not an impediment,” he says. “We don’t want to displace; we want to be additive. We want to bring money into the community and get it out so things grow. And facilitate donations that wouldn’t happen otherwise,” he says. “The intention, at least from our end, is not to get in the way, but if anything to be a bit of a connection point – but frankly, also to get out of the way, because it’s a direct relationship within the community.”
To address some of the tensions around DAFs, the CAGP working group – made up of approximately 60 people from across the DAF sector, according to MacKenzie – has asked numerous charities to provide input on its work, hoping to bring more perspectives together into open communication.
What’s different about the US DAF landscape?
DAFs are also growing in popularity in the United States, where some similar debates exist. “A lot of information about DAFs has come from the US context, and people are applying those issues and trends here in Canada,” MacKenzie says.
But according to Burrows, the DAF has “a very different meaning in Canada than it does in the United States.” In Canada, he has written, “there are only foundations with DAFs, not charities that are DAFs. In the United States, in contrast, DAFs denote a type of charity that has giving accounts and ties to a financial institution.”
Too often, we Google these issues and we don’t look at the Canadian regulatory environment.
Malcolm Burrows
Burrows cautions against drawing too many comparisons between the US regulatory landscape and that of Canada. Too often, he says, “we Google these issues and we don’t look at the Canadian regulatory environment.” Much of the DAF debate online, he says, is focused on the United States and does not necessarily apply in Canada.
“The divisive rhetoric around this, we’ve imported from the States – a nation that’s tearing each other apart,” Burrows says. “We need to rethink for the Canadian environment, grounded in Canadian charity law and regulation, and I think we have a chance to work better as a sector, to work through some of these issues.”
For Burrows, Canada’s charity law covers a lot of the concerns raised around DAFs, especially when compared to the United States. “I think we’re much further along. I think that we have rules,” he says. “The fundamental obligation of every foundation is to use all of its resources for charitable purposes and public benefit. There’s a legal obligation throughout our charity system that the board of directors have essentially direction and control and oversight on where those funds go.” In Canada, he says, “we have mechanisms, we have policies that are very, very clear about making sure that the board has oversight.”
But Oduol says many of the issues around DAFs are indeed similar in both countries. For example, in both countries, DAFs can provide a certain degree of anonymity about where funds are coming from. And in both countries, charities have complained about the challenge of accessing donor information.
Based in California, Oduol is among the US fundraisers calling for regulatory reforms around DAFs in that country. She wrote last year that DAFs focus on optimizing donor experience, “rather than considering the disturbing inequities that created, maintain and make the sector a necessity.” She added: “DAFs will continue being harmful in our sector as they reinforce transactional interactions.”
Oduol is also part of a chorus in the United States calling for a disbursement quota for individual DAFs, an idea some have floated in Canada, too. “It would be a baby step in the right direction,” she says.
***
Like it or not, for many the basic fact remains: with DAFs, the horse is out of the barn. “I view them as both a positive giving mechanism as well as sort of a sector reality at this point,” Burrows says.
What’s next is tweaking the administration and regulation of DAFs – and also how charities relate to them.
“There are shifts in giving patterns,” Burrows says. “We’re seeing a decline in the number of ordinary donations. We’re seeing an increase in wealth-based donations, which historically leads towards more intermediary giving.” All of that taken together means, to him, that everyone across the sector – donors, fundraisers, foundations, financial planners, and more – needs to be working together to find new ways to make sure the work is done. “It’s a ‘we’ issue for us in the sector, I think,” he says. For some, that means educating charities about DAFs, which is one of the goals of the CAGP’s DAF working group: it will soon be publishing guidelines that lay out what DAFs are – and what they’re not.
For Burrows, it means clear guidance from the Canada Revenue Agency. “The CRA needs to take a position on this. They need to have a guidance. They need to make sure there’s checks and balances in the system,” he says.
And for others it means legislation, including a disbursement quota for individual DAFs. “Just because we’ve been unsuccessful with having DAF legislation in the United States doesn’t mean that Canada can’t be better than us in yet another way,” Oduol says with a laugh.
And, finally, it also means open communication between the different players in the DAF landscape. “We think that’s essential – there’s a need to have that dialogue,” MacKenzie says. “I think that’s critically important.”
