DAF giving will be crucial in a tough year

Through difficult times, including the Great Recession and the COVID-19 pandemic, donor-advised funds have played an outsized role in supporting the nonprofit sector. While donor-advised funds (DAFs) represented less than 11% of charitable giving in 2021 ( Giving USA Foundation | The Giving Institute ), their impact was substantial thanks to their resiliency.?

In 2021, total giving in America rose 4% to meet unprecedented needs related to the pandemic. This overall increase was flattened by inflation (Giving USA), but not so with grants from donor-advised funds (DAFs). Giving from DAFs soared 28% in 2021 before adjusting for inflation, exceeding $45 billion in grants to charity.

Inflation may be less persistent in 2023, but a slowing economy could put pressure on #philanthropy, making donors with DAFs an even more important source of fundraising. About 70% of nonprofits receive DAF grants (according to research by the Lilly Family School of Philanthropy), and the number of DAFs is growing. In their end-of-year “2022 Donor-Advised Fund Report”, the National Philanthropic Trust (NPT) reported that one of every five DAF accounts was created in 2020-21, pushing the total number to 1.3 million. ?

Eileen R. Heisman , CEO of NPT, has noted that one trend among donors was to find a sustainable way to support causes or organizations important to them so they would not “go out of business.” At DAFgiving360 , we also see donors combine consistent support for causes near and dear to them with a willingness to open their hearts and wallets to new charitable organizations as needs arise.

DAFs have existed for almost 90 years, and while they are hardly new, both donors and charities continue to find innovative ways to use these giving accounts to maximize their philanthropic impact. Sponsors now come in many different types with different areas of focus – from national charities to community foundations to single-issue organizations. DAFs relieve account holders of administrative burdens and provide special care and attention, like accepting and disbursing contributions, filing taxes, recordkeeping and grantmaking – all time-consuming processes that can slow down #charitablegiving.

Donors also use their accounts in diverse ways. Some grant their total balance out every year, while others sustain ongoing donations. A small percentage operate like the average private foundation, limiting grants to protect an “endowment”. In recent years, DAFs have also become more mainstream and accessible to less affluent donors as administrative fees have fallen and some sponsors have eliminated account minimums.

Despite their differences, all DAF sponsors are IRS-regulated public charities that have a mission to help donors support operating charities. A contribution to a DAF account is an irrevocable commitment to future charitable giving. The positive impact of DAF’s variety, flexibility and irrecovability is clear: Since 2012, DAF grants to operating charities have increased 400%.

The sector-wide payout for DAFs has also stayed above 20% for a decade according to the standard calculation that allows for comparison with private foundations. The private foundation average payout hovers near their legal minimum of 5%, a level designed to protect foundation assets so they can operate forever. Private foundation assets now exceed $1 trillion, according to the St. Louis Federal Reserve.

Since the money in DAFs is already set aside exclusively for charitable purposes, DAF donors can react quickly to crises and maintain their support through difficult economic times. The pandemic is a global health crisis that has created enormous economic disruption, and the response from DAF donors has touched nearly every part of the #nonprofit community.

In a recent article, Debbie Wilkerson explains how the Greater Kansas City Community Foundation | Greater Horizons worked with a family who used their DAF to help teachers and staff continue to receive paychecks as school lockdowns spread across the world. For 20 years, they have supported a variety of causes, and Wilkerson says, “That’s just one example among thousands of donors who use DAFs for major legacy gifts, regular ongoing donations and immediate responses to unexpected hardships. DAFs are especially valuable during times of crisis because the money is already donated and available.”

As the pandemic continued in 2022, war broke out, natural disasters multiplied and the U.S. stock markets had the worst year since 2008. Yet, many Schwab Charitable donors remained in a position to increase their giving because of previous contributions. We partner with The Center for Disaster Philanthropy (CDP) to provide donors with lists of CDP-recommended charities supporting relief and recovery efforts for crises across the world. In 2022, donors increased the number of grants?to organizations recommended by the CDP by 33% compared to 2021. Schwab Charitable donor Gary told us that, “this is probably the time to grant more since certain charities are likely struggling as some [donors] may have cut back on their donations.”

For decades, Americans have had some of the highest participation rates in the world for charitable giving and volunteering. Our generosity is supported by what my colleague Sam Kang calls a “giving ecosystem” where DAFs play a critical supporting role. Communities across the US only expect challenges to grow in areas such as housing, education, health and economic opportunity. With the help of donor-advised funds, we can continue to increase our support for these and other vital causes.