THE CASE TO DEMOCRATIZE (& DIGITIZE) DONOR ADVISED FUNDS

I just had to write about a recent Senate bill introduced by Senators Angus King (I-Maine) and Chuck Grassley (R-Iowa) which, if passed would reform the tax laws that cover charitable donations, and in particular those made to, and by Donor Advised Funds (DAFs), with the goal of this new legislation being for philanthropic funds to be ‘made available to working charities within a reasonable time period’. The Accelerating Charitable Efforts (ACE) Act would establish a timeline for donations to working charities from donor-advised funds (DAFs), which currently have more than $140 billion set aside for future charitable gifts, but no requirement to distribute these funds.

As per Senator Grassley’s media release:

Donor-advised funds currently have more than $140 billion set aside for future charitable gifts – but under current tax laws, the funds have no requirement to ever distribute these resources to working charities. Accordingly, DAFs can accept and hold charitable donations that have generated a federal income tax deduction, but never devote the resources to charitable work. The ACE Act will address this problem and speed the provision of money to working charities by replacing existing DAF rules with two new types of DAFs:

  • 15-year DAFs: The bill will create a new form of DAF under which a donor would get upfront tax benefits (as under current law), but only if DAF funds are distributed (or advisory privileges are released) within 15 years of the donation. To avoid overvaluations, the income tax deduction for complex assets – such as closely-held or restricted stock – would be the amount of cash made available in DAF accounts as a result of the sale of the asset (instead of the appraised value). 
  • 50-Year DAFs: As an alternative, donors who want more than 15 years to distribute their DAF funds will be allowed to elect an “aligned benefit rule.” Under this rule, a DAF donor would continue to receive capital gains and estate tax benefits upon donation, but would not receive the income tax deduction until the donated funds are distributed to the charitable recipient. All funds would be required to be distributed outright to charities no later than 50 years after their donation.

Look, this is a step in the right direction, but doesn’t it feel like if this gets passed we are simply deferring a decision on the real issues surrounding DAFs for fifty years? I’m talking about the $140bn still sitting in DAFs, the barriers to entry to establish DAFs and the fact that regardless what this bill establishes, funds are not getting into the community in a timeframe that will actually help our communities now. 50 years? 50 years? 50 years of funds sitting there, benefitting no-one but those that house the funds. It’s not a bequest, it’s not a pledge, so what’s the point?

According to an Associated Press article that took a look at the broader national debate around DAFs when this legislation was introduced, John Arnold, a Texas-based billionaire who made his fortune in hedge funds and now co-chairs Arnold Ventures, joined with a group of scholars and philanthropies to propose a set of reforms under a coalition they called The Initiative to Accelerate Charitable Giving. Members of the group met with lawmakers to advocate for the reforms, which have largely been incorporated into the Senate bill.

What sparked Arnold’s interest was seeing rich people with philanthropic intent funneling money into DAFs yet distributing very little of it to charities.

“The money was just sitting there growing,” Arnold said. “There wasn’t any intent of abuse of the system. But the money was just building up because there was no forcing mechanism.”

I totally agree with that last line.What I don’t agree with is what was shared in the ensuing paragraphs stating that Opponents of the bill counter that tighter restrictions on DAFs are unnecessary because the average annual payout rates for DAFs hover around 20% — much higher than the 5% minimum required of private foundations. Richard Graber, who leads the conservative Bradley Foundation, calls the legislation “a solution in search of a problem.” (The foundation is affiliated with Bradley Impact Fund, a DAF sponsor).

Pretty sure we have a problem folks. A $140bn problem and the litany of social ill’s and injustices which continue to plague our society and ultimately are symbolic of this whole argument – that the status quo benefits a certain few.

This legislation feels like all the times government builds 4 lane highways in growing regions, only to need to build a further four lanes once the original construction has been completed and then having to pay double what it would’ve cost if they had just built 8 lanes in the first place?  Again, the intent is sound but the execution lacks foresight.

So how could they perhaps do this right? 

Define the gift – philanthropy and giving ultimately means different things to different people. So instead of the 15 year and 50 year options, why don’t they get defined as charitable or philanthropic donations where the differences are that charity is focused on providing immediate relief to people and philanthropy is focused on helping people and solving their problems over the long-term.

Set bold parameters – charitable gifts might have a window of 3 years to be disbursed. Philanthropic dollars should be no more than 10 that could include a yearly payout component to a nominated cause or nonprofit.

Apply sunset provisions – after the disbursement window has passed the funds should be moved to a discretionary fund at the institution that the DAF is housed at. Given that a gift to a DAF is effectively a donation to that entity, then it shows that they believe in the mission & values of that organization, and they should in turn be able to steward that trust into important donations to the community.

But they are not going to do that, so how can we do it better? Well, before we move forward I wanted to share a little disclaimer.

Look, I’m actually a big fan of DAFs, I have one. It was free to set-up when I worked at a community foundation and I was grandfathered into a no fee arrangement on that fund. For the past ten years I have made small unrestricted grants to organizations that help our next generation of leaders reach their potential, support our most vulnerable communities and help build a better civil discourse.

Grantees have included: Teach for America, Youth Will, Civic Leadership Fund, San Diego Diplomacy Council, Equity & Innovation Fund, San Diego Leadership Alliance, Partnerships With Industry, Voice of San Diego, World Affairs Council, United Nations Association and Travelling Stories.

I would set-up a payroll deduction and every time it got to $250 and above I would make a grant. It was like a charitable bank account for me which helped me be more intentional in my giving and more connected to my community. I ended up saving funds and then putting them up as a matching gift for a Giving Circle I helped establish with 15 other people when I was Chair of the San Diego Chapter of Emerging Leaders in Philanthropy (EPIP). 

DAFs have the potential to revolutionize giving but first there is an urgent need to democratize this form of philanthropy to make it accessible to everyone that wants one.

Many eyebrows were raised when the Fidelity Charitable Gift Fund (FCGF) took the top spot in the annual rankings of the nation’s largest grantmaking charities a few years back, surpassing United Way Worldwide in private contributions. Fidelity’s private contributions had been surging up to 20 percent year over year, according to the Chronicle of Philanthropy when they first reported it, but as we know, the FCGF is not your traditional charity.

Fueled by donor-advised funds (DAFs), these giving vehicles signaled a shift in how the wealthy approach their philanthropy.

But we aren’t here to discuss current trends. We are here to anticipate new ones. And when it comes to DAFs, the future is through automated online platforms.

Why this direction? Because of three things:

1. The insatiable thirst of the sector to engage young donors & take advantage of the upcoming $60trillion generational wealth transfer

2. The reality that the fees associated with opening and administering DAFs are overinflated.

3. The sector’s ripeness for disruption.

When I say disruption, I mean further disruption. You see, Fidelity, Schwab Charitable Fund, and the Vanguard Charitable Endowment program were the first to disrupt the sector twenty-five years ago. All spin-offs of established investment companies, they turned these flexible charitable accounts into a multibillion-dollar-a-year funding vehicle that has seen more than a 500 percent increase from 2010.

Why is it that these companies—sorry, I mean charities—were able to outpace other more established institutions, such as community foundations that offered the same options with arguably better outcomes? In short, it was cost. Community foundations charge on average $25,000 to open an account. Fidelity, on the other hand, charged $5,000 until recently decreasing the barriers to entry even further, supporting households that annually donate $2,600 to charity (and word is they are looking at cutting this even further).

DAFs have been one of the most popular philanthropic vehicles for around thirty years. Yet once applied through that elusive millennial lens, they have been traditionally out of reach for younger or limited capacity donors due to the costs of opening a fund. In the coming years, though, we should see yet another seismic shift in giving, and the catalyst will be mobile apps. DAFs will become commonplace when hybrid corporations understand the marketplace and can open these accounts at substantially lower rates because their software won’t need physical locations or bloated numbers of financial, charitable giving, and administrative staff.

With millennials coming of age professionally, DAFs and charitable banking will become more common and accessible, especially when grant recommendations can be made instantly.

And in the not-too-distant future, they will surely be combined with the following:

• AI that will identify compatible charities and trends for users.

• More robust dashboards that will show the impact of donors’ dollars.

• Blockchain technology that will track dollars from donation to implementation, increasing trust, transparency, and accountability within the sector.

With 87 percent of millennials donating each year, it’s time that the traditional actors within the sector anticipate these future trends (not only DAFs but also the technology that supports round-up spending  options, administering giving circles, and pooled funds for collective impact) and look at providing flexible alternatives for their charitable giving. Otherwise, they risk becoming stagnant institutions of yesteryear.

I even had a crack at trying to solve this issue myself. Upcentiv was my first attempt at a philanthropy tech application and a way of tackling the issues I saw with accessibility to the tools and networks that were being wielded by foundations and other charitable titans.

The concept for Upcentiv was loosely built around the Acorns app, which allows users to grow an investment portfolio through stocks, bonds, and other securities. The DAF platform, as my cofounder and I envisaged, would help users invest their spare change automatically by rounding up transactions from everyday purchases to the nearest dollar and depositing it directly into a charitable checking account. Users could then make grant recommendations from the balance in their account to a 501(c)(3) nonprofit at any time but receive immediate tax benefits at a higher rate.

My cofounder and I received great initial traction on this and were selected to the Unreasonable Institute’s (now Uncharted) San Diego Impact Accelerator with a number of San Diego–Tijuana impact entrepreneurs. It was a great experience and a chance to validate our product and work with a number of local investors. However, shortly after the conclusion of the lab, my cofounder received a job at an iconic restaurant chain and is now their VP of information technology—which, while unfortunate for me, was fantastic for him.

I hadn’t seen anything like Upcentiv on the market, until recently when I came across a tweet about Daffy.

Daffy is a new, modern platform for giving, one built around the commitment to give, not the amount you give. I was particularly sold by this narrative, it was simple, yet empowering and gave a really good account of what A DAF could be. At the end of the day a DAF is just a vehicle to give, but if it facilitates & empowers people to be more generous, more often, and makes it easier to do then you are well on your way to making giving an easy habit to keep.

As I have alluded to, the issues I have with DAFs are costs. Traditionally, donor-advised funds have made money by charging based on a percentage of assets on accounts, leading them to focus primarily on high-net-worth individuals. Daffy changes this, charging only a $3 per month membership fee to join the Daffy community.

I rarely write articles on products, but have been compelled to write about this one. Ultimately what is the point of writing about philanthropic futurism if we can’t celebrate the future being realized. The whole point of writing my book was to encourage new solutions and its success is linked to my vision for the sector being realized and woven into a new culture of giving. So I put on my reporter hat and reached out to the folks at DAFFY to see if they had cracked the code as it were. CEO & Co-founder Adam Nash was kind enough to answer a few questions…

Why Daffy & why now?

Alejandro and I founded Daffy in the midst of the pandemic when we noticed that while everyone has felt the impact of this crisis, some people have felt it much more than others. Some industries flourished during the pandemic, while others have suffered immensely.

Technology turned out to be a major component of how people adapted to the limitations imposed by the pandemic, and as a result, it turned out to be one of the industries that flourished most during the pandemic. There are millions of people who have done exceptionally well financially through the tech industry (stock, crypto, etc.) and yet, millions more are doing worse. We knew people wanted to do something to help, so we thought how can technology bridge this gap and help more people give back?

We spent the last year building a new platform for giving, designed from the ground up to help make giving a habit. Daffy stands for the Donor-Advised Fund For You™. And while we know that financial services, like donor-advised funds, are services that most people have never heard of, because they’ve historically been marketed mostly to the ultra-wealthy. We believe our new, modern mobile-first DAF platform can help make it easier for many more people to give. We envision a community of millions of people bound together by a simple commitment to do something. We call that commitment The Daffy Pledge. A promise to proactively put money aside to help others is a simple action beyond tweets that we believe many more want to take. Plus, we’re helping people give more easily by allowing them to contribute to their Daffy fund through a linked bank, credit or debit card through Apple Pay, stock, and crypto. Their fund is then invested in one of our nine modern portfolios including, Standard, ESG, or Crypto, and then at any time, they can donate to over 1.5 million charities with just a couple of clicks.

There are a number of proposed policy changes for the administration & disbursement of DAFs – what direction would you like to see change head?

We are very supportive of the Accelerating Charitable Efforts Act and the requirements for donor-advised funds to give to charities at a faster rate. Based on how we’ve designed Daffy, we anticipate our pay-out rate will be much higher than the traditional DAF providers. However, we’d also like to see a greater expansion of the benefits of charitable giving for people who don’t itemize deductions, as the benefit is currently limited to $300 per taxpayer ($600 for a household) and excludes contributions to donor-advised funds.

Where do you see the space in ten years?

In tech, 10 years is a lifetime. That said, we envision a global community of millions, brought together on Daffy by the commitment to give. We would also like to see donor-advised funds (DAFs) become as common as 401(k)s and IRAs so that many more people are setting money aside for the causes and organizations they care about. 

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I would encourage folks to check out DAFFY and let me know what you think. It’s currently available on the App store and will be launching a web version prior to Thanksgiving and that little charitable event they call Giving Tuesday.

DAFs will continue to evolve as will the features available on platforms like Daffy. And while legislation will be desperately lagging behind, let’s realize that this is the very floor of the opportunity, not the ceiling. DAFs are here to stay and there is no doubt they are going to be both a viable and integral way to build a new culture of informed giving for the budding philanthropists of the future.

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