Donor Advised Funds (DAF) are pools of money ($10,000 or more) created and financially sustained by individuals, families, businesses, or organizations (the Donors). These DAFs are managed and technically owned by non-profit organizations such as community foundations, colleges, and investment companies (such as Fidelity, Vanguard or Charles Schwab). Note that, while Fidelity is a for-profit corporation, the company maintains a separate non-profit mega-fund (Sponsor) that manages thousands of DAFs.
Legally, the DAF is owned by the Sponsor as soon as the Donor opens their DAF and “contributes” its money to the Sponsor. Technically, ONLY the Sponsor can invest that money and, legally, only Sponsors are allowed to award grant funds to DAF recipients. However, if the Donor “suggests” the Sponsor award a grant to the Red Cross, the Sponsor obliges the donor about 99.999% of the time.
Why does the Sponsor listen to the Donor so often? Because the Donor pays a management fee (between 5% and 10%) to the Sponsor. For Sponsor organizations like the Saint Paul-Minnesota Foundation and the Minneapolis Foundation, DAFs are their primary source of income as well as the source of more than half of the Foundations’ grants. Unless the Donor is giving to an illegal organization, the Sponsor will always oblige the Donor.
To be fair, community foundations are providing huge services to the Donor, to grant recipients, and to the community. It’s very clear DAFs are the only way more than half their Donors give away money. Some organizations in Minnesota receive more funds through DAFS than through other private foundations. Granted you have to be big and famous for that to happen, but if it weren’t for DAFs, the Walker and the Guthrie would be in serious trouble.
- Related, Sponsors like Fidelity and Charles Schwab are among the largest charitable giving operations in the United States. They charge a low management fee (5% or so) and they automatically award billions of charitable gifts/grants all over the world.
But there are two significant problems with DAFs.
- Some Donors “warehouse” their charitable funding. They “contribute “ funds to the Sponsor and receive a tax deduction for their contributions. But then they let the money sit in the DAF and never direct the Sponsor to contribute funding to charitable organizations. Their “contributions “ just sit in the DAFs for years or until the Donor dies. No one in the community benefits from this supposed contribution except the Sponsor.
- The second issue is more argumentative. Donors and Sponsors are not required to publicly divulge any information about the DAF, the Donor, the size of the DAF, or the charitable intent of the Donor. Only the Donor and the Sponsor know, and neither of them are talking. At least not to organizations not on the Donor’s grant list. So more than half of the funding from community foundations is actually anonymous and awarded behind a wall of secrecy.
- For some donors, this anonymity is THE primary reason they use a DAF rather than a regular private foundation (in which the IRS requires annually published public information). That’s understandable. If my family is afraid of being inundated by grant seekers, anonymity allows me to give money without worrying about lots and lots of grant requests.
- => Related, while the minimum DAF investment is usually around $10,000, that really means many DAFs are only awarding 10-15 $1,000 grants per year. Is it worth the Donor’s time and energy to chat with 100s of grant seekers to give away $10,000? Probably not, so the DAF system is time efficient for many Donors.
- On the other hand, so many great organizations have no platform to make their case to the Donor and they can’t rely on the Sponsor to support their case to the Donor when the Sponsor is so beholden to the Donor. So, it’s easy to see why less well-known charities are frustrated by the lack of access and it’s understandable why community members are disappointed that only the most famous organizations have access to these funds.
- Community foundations are legitimately protective of their Donors and relationships which raise so much of their annual income. But because of the negative community pushback and because of lots of recently proposed legislation and recently drafted IRS regulations about DAFs, some community foundations are becoming more accessible to grant seekers looking for DAF money.
- Some offer “applications” (generally 2-3 pages of info) that they can share with prospective donors. The Tides Foundation in San Francisco allows everyone to fill out a simple application that becomes part of a “catalog” that’s sent to all their Donors.
- Some community foundations allow the staff people who manage the DAFs and the Donor relationships to chat with high prospect grantees. One of our environmental clients met with one of Minneapolis Foundation’s DAF staff people and eventually received a $50,000 grant from a DAF.
Procedures shift from community foundation to community foundation and from grantseeker to grantseeker. If your group is not well known, it may not be “worth” the Sponsor’s time. Nevertheless, we recommend that grant seekers visit with community foundation program officers to determine their policies on DAFs.
Remember, virtually every community foundation, large and small, sponsors DAFs. From the 1500+ DAFs at Minneapolis Foundation to the 3-5 DAFs at places like the Women’s Foundation of Minnesota, the Headwaters Foundation for Justice, and the Catholic Community Foundation of the St Paul Minneapolis Archdiocese. And if you learn Margaret Cargill Philanthropies has a DAF at the Saint Paul Minnesota Foundation, please understand that their DAF is not really intended to make grants but to be an investment gift to the Sponsor.
If you see a gift from the Chicago Community Trust to a little theater company in Minneapolis, it’s a Chicago Community Trust Donor using their Chicago Trust DAF to support the little theater company. In Minnesota, more than 200 non-resident community foundations award grants to Minnesota groups through their DAFs. We’ve linked to a Donor Application from the Minneapolis Foundation that will give you a deeper understanding about the relationship between the Donor and the Sponsor.