Dear development professionals and other citizens interested in raising money, make no mistake, there are Donor Advised Funds (DAFs) sitting on a lot of cash right now. There has been a huge increase in DAFS since 2008, and they are not going away anytime soon. So how do we as fundraising professionals deal with this phenomenon?

Grantmaking from DAFs has slowed since 2008 – by a lot! Payout rates from DAFs have been declining slowly every year, from 2008 (20% of assets) through 2013 (14% of assets).  DAFs are not subject to excise taxes, payout rules or disclosure agreements, like private foundations. Even worse, no federal law requires that those funds ever be distributed to charity! Call your Congressperson to object, since donors get to take that tax exemption once they put their money into the DAF. It could be decades before those dollars ever find their way to a charity.

I liken DAFs to squirreling away money for endowments, when scholarships or faculty development is needed now! You can’t really blame donors since the tax code gives them the flexibility to put their money in DAF vehicles. The scam of DAFS is that an individual gets a tax exemption for a charitable donation now, but they don’t really give up control. They can still pick the charities to donate to, even though a third party sends a check (e.g. Fidelity Charitable, Vanguard, etc.).  It was never the intent of charitable gift tax policy to provide tax relief to the donor, without giving up control of the money –until recently, that is.

You can’t really blame the financial giants who run DAF programs either. As for-profits, it is in their financial interest to accumulate wealth – fees for managing that DAF money – rather than to give generous payouts to charity. The bigger the assets to manage, the larger the management fees will be, or endowment building over major gift preference, in other words.

So what to do? If we know that the financial incentives are for saving versus spending for these DAFs, then we need to make good cases to donors about the immediate impact they can make to further the mission with a restricted gift, by making a major DAF payout (if they have one) yearly, or instead of, creating a DAF.

If we need scholarships for financially-needy students to meet our mission, or staff development to promote excellence, then we can encourage donors to set up a named major gift (restricted) to meet that need, over a number of years. And it would encourage annual distributions from their DAF which they are not required to make by law.

Development’s number one rule is that you have to ask to get! If you aren’t speaking with donors about an immediate community need that your organization can solve with their help, then why would they make a large gift?

Interestingly, the rise of DAFs favors the individual over community needs. Before DAFs, a lot more charitable dollars used to go directly to charities or federated campaigns. Despite a proliferation of DAFs, nationwide charitable giving remains at 2% of the US gross domestic product so charitable dollars are being directed into these private funds that lack transparency and payout rules.

Financial institutions that hold DAFs aggregate all funds into a single report, making it impossible to determine the activities of a single account, and whether or not it made any charitable contributions during the year, unlike a charitable foundation which has to file an IRS Form 990.

Let’s get back to thinking and acting like members of the community that we are. We are only as strong as our weakest link(s), so we need to advocate and remind donors of the power of community working together to solve societal problems.