By John Bromley
Donor-advised funds (DAFs) can sound more complicated than they are. In practice, a DAF is remarkably simple: it’s an account you open to manage your charitable giving. Think of it as a kind of savings account, only this one is for giving back.
In a world where the vast majority of financial tools are built for charities, the DAF offers donors what they need to be more thoughtful, strategic, and organized about their giving. Any donor — an individual, a group of people, a company — can open a DAF.
DAFs are typically offered by registered charitable foundations through financial institutions, community foundations, and specialized services like Charitable Impact. Here’s how they work: The donor contributes funds to their DAF account as a charitable donation. They receive a charitable tax receipt for their contributions. Depending on the DAF provider, the money in the account can be granted to any registered charity or another qualified donee, once the donor is ready to make those decisions. In most cases, funds remaining in the DAF account can be invested, allowing the giving balance to grow.
A key advantage of the DAF is that it separates the decision to make donations into the DAF, from the donor’s decisions on which charities will receive grants from that fund. In fact, all other benefits of the DAF—of which there are many, such as giving anonymously—stem from this core value proposition.
Why is this the most important benefit of the DAF? Thanks to this separation, donors can focus more on each major decision point in their holistic giving journey.
For example, on the donation side, how much money am I prepared to give away? Do I want to make that donation in monthly amounts or give one lump sum? Do I want to donate cash and/or another asset type, like public securities?
On the grant-giving side, considerations include: which cause do I want to focus on? Within that, which specific charities do I want to support? Do I make this decision alone, or make joint decisions with my family, work colleagues, or others? Do I want to share my name with the charities I support or remain anonymous?
The DAF is a tool to help you seek out those answers. Scientific research across cognitive psychology and behavioural economics corroborates that our decision-making improves when we have less to think about. In my experience, separating donation and grantmaking reduces stress and regret from reactive giving. It also increases joy and confidence.
With all of giving activity centralized in one place, the donor can easily track their donations and grants, learning from the giving history they’ve established to inform future decisions. The DAF’s history also equates to a resume of charitable giving.
In the past, why have DAFS mostly been used by wealthy people?
Despite their practical benefits, DAFs still have an access and perception problem. For years, DAFs have been viewed as tools for high-net-worth individuals. That reputation didn’t appear out of nowhere.
You see, DAFs have required considerable back-end administration: processing contributions, managing balances, disbursing grants to multiple charities, and maintaining records…all of which had to be done with largely manual systems. As a result, it made economic sense for DAF providers to support a small number of large donor accounts. In addition, the organizations administering the DAFs often charged fees based on assets under management, naturally favouring donors whose large balances could justify the administrative effort. So, it’s no surprise that DAFs became synonymous with high-net-worth philanthropy.
DAFS are now possible for every donor, regardless of donation size
Today’s DAF platforms use technology that has drastically reduced the daily administrative burden associated with managing these accounts. Tasks that once required data entry, spreadsheet management, and cheque writing are now automated. The cost of servicing a DAF — let alone opening one — has dropped. This makes it possible for DAF providers to support tens of thousands of donors, regardless of how much they wish to give.
Across North America, new platforms prioritize accessibility and user experience. Their goal is to engage more people and companies into making charitable giving a part of who they are and what they do.
This is a typical DAF donor story.
Jason, a retired business owner, opened a DAF and made an irrevocable donation of a significant gift of public company shares, taking advantage of the tax incentives the Canadian government gives to donors. Following DAF policies, an investment advisor manages those assets, enabling them to grow. Jason is not under immediate pressure to grant all of that money out. He has the time and space to thoughtfully consider which causes and geographies matter most to him and which charities he wants to support.
Other stories will be more relatable to you but are not the type we expect from a DAF.
Amanda, a teacher and mom of two kids, is managing a tight family budget. Nonetheless, she’s committed to being charitable and contributes $100 a month to the DAF account she manages with her spouse. That regular contribution means she has charitable money ready to give regularly. From the account, she makes two automatically recurring monthly grants to charities she loves, one to the house of worship they attend and the other to a local food bank where they also volunteer. Wanting her children to understand what it means to give back, Amanda also allocates small monthly grants from her account to DAF accounts she set up for each of her kids as a charitable allowance. The kids choose where and when to give that money away. Giving, for Amanda, is not a tax strategy. It’s a family value.
Or this example:
A local manufacturing business that donates a set percentage of its profit quarterly into its DAF account, taking a charitable tax receipt for their company. They use half of it to match the charitable gifts made by their employees. They use the other half to support various philanthropic initiatives in their local area, often brought to them by their customers and suppliers. The DAF dramatically decreases the amount of time they spend tracking and administering their giving program, time they can put to more productive use elsewhere.
These stories are different from one another, and they should be. Donors are as unique as their personalities. However, the tool helping each of them manage their giving is the same: the DAF.
When a retiree in Victoria, a teacher in Winnipeg, a local business in Halifax, and a seventh grader in Montreal can use the same infrastructure as a major philanthropist, it challenges the idea that you have to be rich to be a philanthropist. It reminds us that generosity is something shared. After all, we all care for causes that can create desirable change. The DAF is the tool for donors — people and companies — who put their beliefs and donations into action.
You don’t need to give away a lot of money to benefit from a DAF; you just have to be committed to making giving a part of your life.
John Bromley, Founder and CEO, Charitable Impact
Charitable Impact is a modern donor-advised fund platform that empowers Canadians to engage more personally and intentionally with charitable giving, creating the change they want to see in the world. It offers flexible tools and support for people to plan their giving, support meaningful causes, and collaborate with others to grow their collective impact. Since 2011, more than 210,000 Canadians have donated over $1.5 billion through Charitable Impact DAFs. Learn more
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