FAQs on Donor Advised Funds and Payout Rates
Please connect with CMF Knowledge Insights Expert in Residence Brittany Kienker, Ph.D. with any additional questions you may have about the research series.
What is a donor advised fund (DAF)?
The concept of a DAF is outlined in the Pension Protection Act of 2006 and the Internal Revenue Code (IRC) Section 4966. Generally, DAFs are accounts or funds with the following attributes:
The account or fund is separately identified by reference to contributions made by a donor or donors.
The account or fund is owned and controlled by a sponsoring organization, such as a community foundation or other public charity that holds DAFs.
The donor (or their appointee) has the ability to recommend and/or inform decisions on where grants or investments are made from the funds held in the DAF account.
A DAF is not a separate tax-exempt entity.
The CMF-commissioned study, "Analysis of Donor Advised Funds from a Community Foundation Perspective,” includes common scenarios for the creation of DAFs at community foundations (Page 4), and the Technical Appendix includes additional examples of funds that do and do not meet the legal definition of a DAF.
In short, a DAF is a giving vehicle managed by a public charity on behalf of organizations, families or individuals.
A contribution to a DAF is an irrevocable commitment to charity; the funds cannot be returned to the donor or any other individual or used for any purpose other than grantmaking to charities.
Why do some donors choose DAFs as their giving vehicle?
DAFs provide donors with:
Lower initial startup costs, and a lower annual administrative burden, compared to creating a freestanding private or family foundation.
A substantial amount of flexibility for the donor to identify and implement short-, medium- and long-term strategies for gifts to charitable organizations.
Access to investment pools managed by the sponsoring organization and the investment expertise of organization staff.
Immediate tax benefits (i.e., charitable deductions) for their gifts.
Simplified record keeping for tax reporting.
Community knowledge in understanding opportunities to create local impact aligned with the donor’s intent, particularly when the sponsoring organization is a community foundation.
An entry point into philanthropy for new donors, and for those partnering with community foundations, the start of a relationship that can also lead to other ways of engaging in the community, such as volunteer opportunities.
What kinds of organizations can sponsor (hold) a DAF? Are DAFs only held by community foundations?
Three different types of sponsors can manage donor-advised funds: community foundations, single-issue charities (i.e., universities, hospitals, faith-based organizations, Rotary foundations) and commercial providers (i.e., Vanguard Charitable Endowment Fund, Fidelity Charitable Gift Fund, Schwab Charitable Fund). It is important to remember that the CMF-commissioned study does not include data from single-issue charities or the large commercial providers, but rather focuses on data from community foundations only. Further, the study includes account-level data only for Michigan community foundations, which cannot be projected to make assumptions about DAF activity nationally.
How do DAFs and community foundations work together?
Community foundations help oversee and manage contributions on behalf of families, individuals or organizations.
Community foundations were chartered with the specific intent to increase the impact of charitable giving and build access to long-term philanthropic resources for the communities they serve, ensuring there is a pool of assets available to address community needs in both the best and most difficult times.
To protect donors’ investments, the majority of community foundations voluntarily self-regulate through the National Standards for U.S. Community Foundations™.
Where can I read about Michigan community foundation DAFs to learn more about how they operate or what they do?
CMF has collected and continues to gather a series of stories featuring Michigan community DAFs. This curated collection can be found on the CMF DAF Resources page. (Click here.) Future stories will continue to be featured in CMF’s digital publication, The Download. (Subscribe here.)
Who can establish a DAF?
DAFs are a giving vehicle accessible to many contributors because in some cases the minimum to open a DAF can be as low as $5,000. Individuals, families, companies, foundations and other entities can start a DAF. The sponsoring organization typically requires donors to submit an application and sign a fund agreement, and in some cases, make a minimum contribution. Minimum contributions to establish a DAF vary by organization; there are sponsoring organizations with no minimum requirement, particularly for non-endowed (spendable) DAFs.
What is the difference between an endowed DAF and a non-endowed (spendable) DAF?
Among Michigan-based community foundations (which were the focus of the CMF-commissioned study), DAFs are created based on two distinct strategies and fund agreement types: endowed DAFs and spendable DAFs.
An endowed DAF is established with the intent of long-term use. A relatively high minimum level must be maintained in the fund to ensure sufficient investment returns. Typically, distributions from an endowed DAF are limited to a fixed percentage of the balance (e.g., the same as the community foundation’s selected endowment payout rate) — but occasionally a community foundation may allow additional distributions from the DAF beyond a true endowment payout (a “permanent” DAF). Not all community foundations provide a structure for an endowed DAF.
A spendable DAF is intended to be used by donors to fill the fund and pay out the majority of the fund within a short period of time. The donor can then refill and reuse the account regularly to support their charitable contributions. Typically, spendable DAFs can be drawn down to zero but some community foundations may instead allow unlimited distributions until a specific minimum balance is reached (e.g., a $5,000 or $25,000 floor).
Why do some donors choose to establish their DAF as endowed?
Contributors of varying income levels can use DAFs as a way to sustain charitable giving into the future. In the case of a family foundation, for example, they may establish a DAF to involve their children in philanthropy as they grow. Another donor may establish an endowed DAF to make long-term impact that requires a larger pool of funds that need to be grown over time. Donor intent is a critical component of establishing a DAF and understanding how DAFs operate.
Are there other reasons it is important to understand or be aware of the role of endowed DAFs?
Endowed DAFs serve as permanent charitable capital, designed to address community needs now and in the future, allowing foundations that hold endowed DAFs to draw on those assets forever.
What is the difference between an “active” DAF and an “inactive” or “quiet” DAF?
For purposes of the CMF-commissioned study, DAFs were categorized into four patterns of activity, outlined below. Along with understanding endowed and non-endowed DAFs, understanding these activity patterns is key to fully grasp the complexity of how DAFs operate.
Highly active: DAFs that received contributions and made payouts (distributions) in the same year.
Active-outbound only: DAFs that only made distributions (payouts) in a given year.
Active-inbound only: DAFs that only received inbound contributions in a given year.
Quiet: DAFs that had no contributions or distributions in a given year.
Do some DAF sponsors have policies on “inactive” or “quiet” funds?
DAF sponsoring organizations can determine their own policy for inactive DAFs (where there is no active spending of the DAF funds). In the case of community foundations, it is important to note that those wishing to be accredited under the National Standards for U.S. Community Foundations accreditation process and align with best practices are required to have a policy addressing inactive funds.
About the Study and its Findings
Are the findings for Michigan community foundations similar among DAFs outside Michigan?
The study does include information on the national data from IRS Form 990. However, with the account-level data coming from only one state, we cannot make assumptions or general statements about DAF activity in other states. In other words, Michigan data cannot be projected to understand DAF activity across the country. Further, it is important to remember this study includes data from only one type of DAF sponsoring organization – community foundations. The study does not include data from the largest DAF sponsoring organizations such as the Fidelity Charitable Gift Fund and Schwab Charitable Fund.
Is there a minimum payout requirement for DAFs like there is for foundations? What did the study show as the payout levels of Michigan community foundation DAFs?
There is currently no minimum payout requirement for DAFs, including those held by community foundations. In 2020 (the most recent year available), approximately 43% of Michigan’s DAFs paid out 5% or more of their balance, and 32% paid out 9% or more. It is important to look at these figures for just spendable (non-endowed) DAFs, where the donor’s intent is to distribute the funds within a shorter period of time. In looking just at Michigan’s spendable DAFs, they distribute nearly half of their balance in any given year, and one in every ten spendable DAFs distributes 80% or more of the available balance in any given year.
Did the study find there was an issue of “parked wealth” among the DAF accounts (where funds were not being spent/used)?
No. The study showed that 90% of Michigan community foundation DAFs paid out at least once every four years during the period of the study (2017-2020). The “quiet” group (10%) that did not make a contribution out of the DAF holds less than 5% of total DAF assets in the state. In fact, the DAFs that were active in every year of the study — with a contribution, distribution, or both — comprised the majority of Michigan’s DAFs (59%), received nearly all of the contributions (96%), made nearly all of the distributions (88%) and held nearly all of the assets (82%).
What did the study find about DAF contributions in 2020, the first year of the COVID-19 pandemic?
The study showed that two-thirds of all the DAFs made distributions in both 2019 and 2020, with just over one-third (35%) increasing both the dollars distributed and the payout rate in 2020 compared to 2019.
Nearly one in five distributed dollars in 2020 came from DAFs that made no distributions during 2019. Further, the median distribution from a Michigan DAF rose from $8,500 in 2019 to $9,750 in 2020.
Did the study include research on how DAFs were used (i.e. tracking which charitable organizations ultimately received DAF contributions during the study period)?
No, the data did not follow the contributions of highly active and active-outbound DAFs to track where (to which specific organizations) those dollars were being directed. Understanding more about DAF activity is one potential area of research for a future study that can be considered in the field. That level of detail may help the field further explore how DAFs are being used to advance equitable outcomes in community.
What might community foundations want to do in reflecting on the study and its findings?
CMF and the research team are aware of a number of community foundation leaders who have shared the findings with their board members. The research can be a helpful resource to open new conversations around DAFs as a giving vehicle – recognizing not all trustees may be familiar with this charitable tool – sharing what DAFs are, why the foundation offers them as an option to donors and how they are established. Foundation leaders can also engage trustees and staff in conversation about the status of the DAF accounts the foundation holds. (Potential guiding questions are listed in the next FAQ item.)
Some foundations are also exploring new opportunities to share stories highlighting their DAFs in action. Through the development of this research and its release, the CMF team has uncovered many untapped opportunities to share the roles and functions of DAFs in communities both within our sector and more broadly. We invite you to read impactful DAF stories emerging from our network of Michigan community foundations via our News section. Foundations may be interested in using existing newsletters, annual reports, social media channels and other communication tools as spaces to highlight their DAFs.
What are some of the data points that foundation staff may be interested in reviewing or better understanding among the DAF accounts the foundation holds?
The following questions may serve as helpful prompts for a foundation’s own review of the DAF accounts they hold:
- How many of your DAFs are over $1 million?
- How many of your DAFs are endowed vs. spendable?
- Do you have an inactive funds policy?
- If you do have a policy, what is the timeline for payout? Are all of your DAFs compliant with that policy?
- Do you have DAFs that were started by a private foundation?
- What were the payout levels of endowed and non-endowed DAFs over the study period (2017-2020)? Over the last decade? What trends do you see? (The Technical Appendix of the CMF-commissioned study includes a formula for reviewing DAF payout rates.)
Understanding DAFs in the Context of Pending/Proposed Legislation
Was this study launched in response to, or to address, specific legislation?
No. The research was never designed to drive a policy agenda and pre-dated recently proposed legislation related to DAF activity. This report serves as the third phase of a broader research series designed to help the sector better understand payout rates of private foundations, community foundations and DAFs as common instruments of philanthropy. In the case of this third report on DAFs, the research was broadly designed to inform the field within a local (state-specific) context and support continued data-informed dialogue.
What are some of the other key points surrounding DAFs being discussed in the philanthropic sector and some policymakers?
The following information represents just some of the DAF discussions happening currently in our sector among the various points being raised in support of and in opposition to potential and/or pending reforms.
Unlike a private foundation or community foundation which files regular annual summary information via IRS Form 990 or Form 990-PF detailing major contributions and itemized outbound grants, entities that hold DAFs are not required to publicly identify the DAF account holders or distributions, or any account-level information. Some suggest that reform is needed to make it easier to distinguish grants based on the foundation’s own grantmaking priorities from grants that are recommended from DAF account holders, while others have expressed concern that eliminating donor anonymity would discourage donors who prefer to keep their philanthropic giving private. The absence of a legally defined minimum annual payout means that lump sum contributions to DAFs may sit in the DAF’s asset balance for an extended period of time before being granted to nonprofit recipients.
Some suggest that lack of a payout requirement leads to “parked wealth” where funds accumulate in a DAF instead of being distributed to charity – even though the donor receives an immediate tax benefit – and note that in times of crisis these funds are needed more than ever. Others note that the “parked wealth” argument is largely a non-issue given research findings showing higher levels of activity among the majority of DAF accounts. Further, in the case of community foundations, those foundations wishing to be accredited under the National Standards for U.S. Community Foundations accreditation process are required to have a policy addressing inactive funds. Some also point to the importance of DAFs as a way to plan for – and in some cases, grow – philanthropic giving over time.
What might foundations want to discuss with potential new DAF holders about the possibility of changes in legislation impacting DAFs? Is there a chance new legislation on DAFs could be retroactive, or would it apply only for new DAFs?
At this time, there is no confirmed change in legislation coming forward related to DAFs. Foundations may want to consider how best to transparently note that DAF legislation has been proposed which may impact DAF payout requirements, recognizing a donor cannot take funds back once they open the DAF. It is possible that future legislation could apply to existing DAFs retroactively.
Where can I learn more about pending and proposed legislation regarding DAFs?
The following information represents just some of the resources available regarding potential and/or pending legislation.
- Council on Foundations: "Summary of Accelerating Charitable Efforts Act (ACE Act)”
- Independent Sector: "Accelerating Charitable Efforts (ACE) Act Summary and Key Context”
- Full Legislative Text on the ACE Act – “Full Legislative Text”
- Exponent Philanthropy – “Blog on the ACE Act”