Donor Advised Funds (DAF) 101
By: Leah Brickman, Program Manager of Inspire Access
While the donor-advised fund (DAF) structure has existed for over a century, DAFs have surged in popularity and grown exponentially in recent years. Today, there are over 1,000 charitable DAF sponsors, with almost 2 million accounts, holding over $230 billion. It is a growing field with much appeal to individuals seeking to maximize its tax benefits, although, with few rules and regulations monitoring charitable resources, valuable philanthropic capital remains unallocated and ineffective.
What is a Donor-Advised Fund?
A Donor-Advised Fund (DAF) is a giving vehicle that enables donors to support charitable organizations and causes. It is often set up as an individual or family giving account established at a Section 501(c)(3) public charity sponsoring organization. They exist at different types of charitable sponsors, such as universities, hospitals, charities affiliated with financial firms, community foundations, and religious institutions. Donors can benefit from an immediate tax deduction when they contribute cash or other assets to their DAF and surrender legal ownership over the funds to their charitable sponsor. Contributions are permanent, meaning they cannot be withdrawn for personal use, they’ve been dedicated to charitable giving only. That being said, the donor can advise on how the contributions are deployed for charitable use. Any remaining assets benefit from tax-free growth as long as the account remains funded.
The unintended consequence of this is that funds often sit unallocated in the DAF, failing to have the intended charitable impact. In the US alone, over $125B sits unallocated in donor-advised funds. These funds are stockpiling as opposed to being put to use for impactful purposes.
DAF funds can also be invested for tax-free growth, making available even more money for giving. Most DAF accounts at sponsoring organizations have traditional means of investing and growing charitable dollars, traditionally, in mutual funds and ETFs. And while in a lot of cases donors can advise how they are invested, it is still within the confines of the money market. The charitable funds growth is not inline with the funds intended charitable purpose. Most often they are just lining the pockets of DAF sponsors like Morgan Stanley, Schwab, Fidelity, and Vanguard.
What is the relationship between Inspire Access and Donor-Advised Funds?
Inspire Access has witnessed DAF dollars sitting stagnant and invested in traditional means supporting those who benefit most from our traditional money markets, not in an impactful manner. Charitable dollars invested to create impact aren’t doing so.
Inspire Access has created a platform that allows DAF funds to grow while strategically investing in underrepresented founders of innovative, high-potential companies. Donors can direct their DAF dollars sitting in their accounts to Inspire Access as a 501c3 nonprofit. Inspire then invests that grant in an impactful way supporting companies led by women and people of color, who lack equal access to investment capital. Any returns made on the grant investment can be returned to the DAF of the donor. Inspire is working to rectify the historic imbalance in capital flows to under-represented founders by putting DAF dollars to work as opposed to letting them sit ineffectively.
Inspire Access sees the reach and focus of DAF dollars as broader than solely supporting charitable entities. This includes charitable investments in and support for under-represented founders in myriad ways, including via for-profit structures. If DAF sponsors can invest in mutual funds and ETFs, we should put the funds to better use and invest that capital to close the racial and gender investment gap.
Inspire Acces conducts due diligence on all fund recipients to ensure they are appropriate vehicles for carrying out our charitable purpose of providing capital to underrepresented founders/economically disadvantaged minority groups who otherwise have not been granted access to conventional sources of funding, in addition to ensuring its activities are compliant with the rules governing it as a 501(c)(3) public charity.
Do I need a DAF to work with Inspire Access?
No, while we’d love to put stagnant DAF dollars to use, our mission is focused on providing investment capital to companies and funds led by women and people of color, ultimately, working to bridge the racial and gender wealth gap. Donors can also participate in our programs by making a tax-deductible donation.
Read this article to learn more about the core of our work, the racial and gender investment gap, or this article to learn about our programs and how Inspire Access works.
