Understanding the Donor-Advised Fund Giving Process: Insights From Current DAF Users

Phase 1: Initial setup

The initial setup phase included learning about a DAF, choosing a sponsor, making an initial contribution, and selecting an investment approach. Although many of these decisions could be modified later, donors generally stuck with their original choices, making initial setup important for future DAF activity. Those who had made changes had often been using DAFs for many years (i.e., decades) and several had multiple DAFs. Donors mainly learned about DAFs at their place of work, from their involvement with philanthropic institutions, or family and friends. Contrary to popular critique that financial service firms are pushing their DAF products on their clients (Gelles, 2018; Hobson, 2020), professional advisors were less frequently cited as points of DAF introduction, which is in line with existing research (Bank of America, 2018). However, referrals from advisors were more common among participants who were contributing larger sums of money. When choosing a DAF sponsor, participants often had prior experience or familiarity with the institution. For example, CF donors typically had some direct involvement with the CF prior to opening a DAF there. Similarly, national sponsor DAF donors cited the convenience of combining charitable giving services with the other financial services of the parent company. As Peyton shared, “I had my brokerage account with [Parent Company], and it was the logical convenient choice.”

When making initial contributions into the DAF, we found different rationales for timing, donation amount, and asset types depending on circumstances. Several donors made an initial contribution based on a liquidity event (like Yael, who sold her winery) or another form of income volatility (like Bill, who had a retirement bonus). Donating nonpublicly traded assets (like the winery) are especially attractive to DAF donors, because DAFs are public charities, which allow for more favorable (i.e., less restrictive) tax deductibility limits than private foundations. A few participants specifically deployed a “bunching” technique by initiating their DAF with enough resources to supply funds for several years of their normal charitable giving, in a way that would allow them to itemize their DAF contribution as an income tax deduction. Most participants used some form of appreciated assets (generally securities) to initially fund their DAF. Some participants used cash to fund the DAF, which mainly reflected the lack of appreciated securities in the participant’s wealth portfolio. For some, tax savings were not the primary motivator for cash contributions, like Priscilla who contributed to her DAF from a payroll deduction, or Gordon who used the proceeds from surrendering his cash value life-insurance policy to set up his DAF at the CF where he served on the board. In other cases, high income provided the tax motivation for donating cash to the DAF.

Some participants contributed resources from another DAF or private foundation. A couple of interviewees had a DAF initiated for them with funds from family member’s DAFs as a way to pass on family philanthropy. Some donors in our sample used funds from one DAF account to establish an account at another DAF sponsor organization either to support a specific cause or community represented by the organization or for more convenience. Two participants used distributions from a private foundation to fund a DAF, each for different reasons. One interviewee was exploring the option of closing down the private foundation and using the DAF vehicle as an alternative vehicle. The other used the DAF “like an overflow acount” for the minimum 5% payout requirement, for two reasons: “I just don’t have enough charities that I want to support that year or. . . I’ve made a pledge, but it’s not going to be within that calendar year.” Both DAF-to-DAF transfers and private foundation transfers, as ways to fund DAFs, are controversial for reasons that will be discussed later.

Once a DAF is funded, the donor generally has the option to select an investment strategy for the DAF funds. National sponsors seemed to have more variety in investment options; however, a few donors seeking social impact investments chose DAF sponsors specializing in this area. Regardless of options, most participants mentioned little interest in either investment strategies or performance, other than a few participants who specifically noted an interest in seeing their account grow. Only a few could share details about how money in the DAF was invested or the returns on those investments. One possible reason for this lack of interest was the short time horizon expected for the money in the DAF. Priscilla explained, “I didn’t actually do it as a growth vehicle at all. I just did it as a holding tank for the money that I wanted to contribute.” Some participants, who voluntarily shared their professional experience with finance or accounting, were more involved in the investment approach. Overall, however, few participants reported making changes to their investment strategy after the initial setup.

The vast majority of participants directly or indirectly discussed the tax-saving benefits of donating to a DAF. This motivation was typically coupled with contributing appreciated assets into the DAF, in line with tax-saving strategies explained by Andreoni (2017). Participants often recognized the tax benefit of giving during years with high income or capital gains. Walter put the tax benefit most succinctly when he commented that DAFs allow donors to “get the charitable deduction in the year they want to receive it.” Isaac explained it in more detail:

You have an asset where you have a very low cost basis and a huge tax liability. By giving it to your donor-advised fund, you discharge that entire tax liability. That’s really a very efficient way of giving. It’s the most efficient way of giving, but it requires you to have an asset that’s appreciated.

Other participants were more vague about the role taxes played in their charitable decisions, describing DAFs as “a tax convenient way” to give or saying that it allows them to give “tax efficiently.” Participants had varying degrees of awareness of the specifics of the tax benefits. Carissa told us “my friend explained the benefit in tax write-off options of a DAF. Now I know I didn’t understand correctly but still, I thought it was a benefit.” Almost all respondents had some level of awareness of the tax implication of donating to a DAF.

The second-most prominent reason why participants described using DAFs was for the convenience and ease of use. For example, participants referred to DAFs as “a low-cost, low hassle, win-win type of thing,” and, “once it’s gone through the process, it’s set up and it’s so easy.” Participants commented particularly on how “really easy” or “very easy” it was to transfer appreciated assets, especially when they had an investment account at the same parent company as a national sponsor. Adam spoke of how his sponsor made it easy to identify stock “with the largest unrecognized gains” and that a big advantage is the “real time access to this where I can time [contributions] much more precisely,” referring to the ability to time—during the day—the donation of a security to the DAF.

Phase 2: Grantmaking

The grantmaking phase includes donors’ decisions about how much, when, and to whom to make grants. Analyzing donor responses about grantmaking, we found a wide range of causes, key considerations, and some complications. Our findings suggest DAFs facilitate extant philanthropic behaviors and preferences. Participants in this study gave before using a DAF, gave in addition to using a DAF, and would have given even without a DAF. They issued grants to a wide variety of nonprofits, representing a host of charitable causes, including to “a local school for girls” or “environmental causes” or for “tithing.” However, we did find that the type of sponsor organization mattered. Those giving through a CF exhibited more geographic (local) preferences, and those giving through single-issue charities exhibited more cause-related (specifically religious) preferences. When asked whether or not donors sought or received grantmaking recommendations from the sponsor organization, only a few donors with CF and faith-based DAFs had engaged with their sponsor in a way that affected their grantmaking. Most participants expressed that they did not want that kind of engagement with the sponsor. Even rarer was incidence of DAF sponsors blocking a grant request from a donor—only two interviewees had this experience. From our sample, we found donors bring their own philanthropic agendas while using a DAF as a philanthropic tool.

DAF grantmaking can involve several strategic considerations. Of top concern to nonprofit leaders is the issue of anonymity. Most of our participants chose not to give anonymously most of the time. Viviana shared, “Typically, we do attach our name, though I think we have given anonymously.” For the few who had chosen anonymity on specific occasions, we found a few different rationales. Anonymity allowed them to avoid recognition, to avoid receiving subsequent solicitations, or to avoid social stigmas. For example, Wendy explained:

So we don’t usually give anonymously through that fund. But when we give our bigger gifts, we try to give anonymously. It’s hard, I think once your name gets out there having given a certain amount, the number of people that start calling you is really overwhelming.

In contrast, both Janet and Una gave anonymously to their children’s schools to protect their children from bias or stigma. One participant in particular gave anonymously most of the time to avoid unwanted solicitation. Moreover, some participants simply did not want to be recognized as a matter of personal preference.

The added layer of separation between donors and charities created by DAFs can precipitate challenges. For example, some DAFs offer partial anonymity, listing only the fund name (which may or may not include a family name), but not the name of the donor, making it difficult for charities to acknowledge and steward the donor. On the other side, several participants expressed a lack of responsiveness from recipient charities, and on occasion, they had to make extra effort to request confirmation of receipt and acknowledgment for a gift. For example, Yvonne shared, “I gave a $25,000 donation in January out of the donor-advised fund. I had documentation in my [DAF] account that it was transferred to [Charity], and that it was received. I never got a thank you note.” Giving through DAFs can make it difficult for charities to recognize donors, and this lack of responsiveness disrupts the appreciation donors often seek.

Conversely, donors also said that “[the DAF] has made it a lot easier to make a grant,” especially to small charities and for small amounts. For example, Henry spoke of the ease to donate appreciated assets to a DAF to a small charity:

A lot of the charities that I deal with are very small, and so it’s a big undertaking for them [to handle appreciated securities]. . . [The DAF] was just a convenient way to handle transactions with charities, and it had the added advantage of making it easy to use appreciated securities.

For ease in grantmaking, Bill explained that he could use the online DAF platform to grant to any charity he could think of, “I was overwhelmed by finding no problem finding any charity imaginable.” The convenience factor, however, varied by sponsor. For example, a couple of our interviewees who used multiple DAFs appreciated the ease of the national sponsors’ websites but were frustrated by the length of time it took for smaller sponsors to make grants.

Finally, DAFs created an opportunity to connect with new organizations. As Victor shared, “We’re giving more, and it gives us more opportunities to say, ‘Well, here’s a request for some money. Let’s evaluate it and say yes or no.’ Before it was almost always a no.” This is particularly important during natural disasters and crises like the COVID-19 pandemic, in which we have seen reported increases in DAF grantmaking. Several Study 2 participants mentioned COVID response giving (as they were interviewed during the pandemic), like Denise who said, “Whereas in my own personal giving, it’s a little bit more loosey-goosey and COVID-19 hit, so I’m going to give to this service organization . . .” This individual flexibility to respond to changes in the giving environment is facilitated by the flexibility of using the DAF vehicle as an intermediary.

To summarize, the consistent theme across our interviews was that DAFs provided a high level of flexibility to the grantmaking phase, allowing donors to pursue individual philanthropic strategies customized to their own unique preferences and life circumstances. The grantmaking phase often followed an iterative, cyclical pattern with the maintenance phase. Donors make grants out of the DAF, then contribute more resources into the DAF to plan for subsequent donations.

Phase 3: Maintenance

The maintenance phase focuses on the near-term efforts involved with maintaining the DAF, including reviewing records of contributions and grants, and making decisions about additional contributions. During the maintenance phase, participants periodically checked their DAF balance and, if needed, added more to the account. When asked the approximate balance of their account, most participants could readily answer, but answers were often contextual, indicating that the balance changed depending on where donors were in the grantmaking/maintenance cycle. DAF balances fluctuate depending on grantmaking, additional contributions, and investment returns. Phrases such as “we just added some more” or “we are about to spend it down” gave some indication of where participants were in the DAF giving cycle. Participants also used their DAF to conveniently keep track of their giving, which helped for both the grantmaking process and for tax-filing. Donors only have to report contributions into the DAF on their tax returns and do not have to report the (often more numerous) grants made from the DAF. Explained Sergio, “It’s just such an easy way of doing it, maintaining it, and managing it. Record keeping is just so easy.” Record a keeping was one of the DAF features closely associated with perceptions of convenience and was frequently mentioned as reason why people like to use DAFs. Record keeping also allows donors to easily repeat previous donations and look at historical giving to make more strategic decisions about giving in the future.

As mentioned above, the Grantmaking and Maintenance phases represent a cyclical and iterative process. Throughout the interviews, participants explained their personal strategies that governed their approach to these phases. Presented here are several of the more common strategies, but this synopsis is by no means exhaustive of all strategies donors may take with DAFs.

Most donors had some sort of annual reckoning with their DAF use, and a common strategy was to contribute money into a DAF in anticipation of what would be granted the following year. When asked if she keeps a lump sum in her DAF, Una, who gives about $350,000 to nonprofits every year, responded, “No, we’ve been spending it down every year.” Similarly, Quinton reported having a current balance of $4,000 (at the time of the interview) but that he normally contributes and then grants out about $75,000 per year. This annual budgeting strategy did not seem to be limited by gift amount. Kayla explained, “We give away $5 million a year. So we put the $5 million in, we spend it down, we put the $5 million in, we spend it down.” This annual strategy has a high “flow rate” of money through the DAF, and a payout rate that would be difficult to calculate (see Heist & Vance-McMullen, 2019).

A few interviewees had used the “bunching” technique, explained above, so that DAF contributions could be itemized in 1 year, and grants could be made in subsequent years. Yael explained,

We don’t have a donor-advised fund where the money just sits there; it pretty much gets spent within a year or two of putting it in there . . . We put a bunch of money in the donor-advised fund, so we could mete it out over years, but we’re just finishing that chunk of money.

In fact, all of the participants who used this strategy had short-term time horizons (2–3 years) on their DAF grantmaking/maintenance cycle.

For some interviewees, additional contributions had more to do with the timing of investments. When an appreciated asset was prime for donating, or when experiencing a liquidity event, some participants would contribute into the DAF for future grantmaking. Norm explained,

I put in a little over a million dollars or something like that in stock, highly appreciated stock, so [a] liquidity event. It’s been there, and every year my wife and I will distribute $50[,000] to $100,000, sometimes more, out of that DAF. Occasionally, we put more money into it.

Notice a roughly 10 to 20 year horizon for granting out this charitable money, with intention to add more as time progresses. Jocelyn had a bit shorter time horizon, but with the same rationale:

I’m roughly spending it down, but . . . when eight years, five years from now and markets are up again. and I want to take some off the table instead of selling and paying capital gains tax, I’ll move it into the DAF knowing that I want to give money away anyway. So yeah, part of it’s a market related question.

Time horizons for grantmaking on the contributed assets also varied considerably.

A few of the participants had long-term strategies for their DAF grantmaking/maintenance cycle. One approach was to use the DAF like an endowment, similar to a private foundation, where a percentage of the assets would be granted. David explained:

I set myself up a budget of 5% a year. So, the fund has over 2 million dollars in it right now, so 5% a year is over a hundred thousand dollars. I try to just make that as my annual budget, because I want the fund to stay stable and even grow, if possible, which it has been doing.

Although the strategy has a long-term trajectory, it still involved short-term cycles of grantmaking and maintenance. Grantmaking in this model seemed to be more structured, and yet involved annual granting decisions similar to other DAF giving strategies. Maintenance in this model focused on reviewing market returns and records of previous grantmaking.

Phase 4: Future plans

The future plans phase included long-term plans beyond the immediate grantmaking/maintenance cycle that may include family involvement or end-of-life plans. Only Study 1 participants were asked about future plans. Among the responses, there was substantial ambiguity around future plans for their DAFs. Most of the participants were more focused on the immediate grantmaking/maintenance cycle. Some participants, however, did have plans for how their DAF use may change. Rita had an end-of-life plan with a partial remainder beneficiary and with her spouse named as successor:

Then, on my death, a couple percent of the DAF will go to my alma mater . . . and the rest would just go to my spouse to grant out. I think that in the future, we will set up further successors that will probably include members of the next generation.

Rita, however, was one of very few participants who articulated clear postmortem plans for their DAF.

More of the discussion on future plans revolved around family member involvement. Janet explained her family members “can make grant recommendations. So, we ask them to do some research and to tell us who they recommend and why. And then we can all learn about it.” Zoe and her spouse revealed to their children their intention that the DAF be “passed on” in hopes “it will grow and [their children] can make grants from it.” One of the interviews included Laurie and her adult son, Michael, who were using the DAF vehicle as a tool to encourage next-generation participation in family philanthropy. Michael explained, “I feel like I inherited the practice of philanthropy, just with being given an allowance growing up, but part of that being moved to [a DAF], that my parents had set up when I was a kid.” Nevertheless, next-generation involvement cut across the various giving strategies. Adam who took an annual approach to DAF giving, Bill who had an 8- to 10-year plan for giving away a retirement bonus, and David who used it as an endowment, all had children and grandchildren involved in their DAF plans. Such overlaying and intersecting strategic considerations underscores the vast heterogeneity of individual adaptation made possible through the DAF giving process.