Donor-advised funds have made countless headlines since their rise to becoming one of the most popular charitable donation methods. While this vehicle for philanthropy has boosted charitable donation rates in a time of relatively low giving, critics say the shift is not what it seems. This blog will break down all the information you need about donor-advised funds: what they are, how they benefit philanthropy, and why some dislike them.

What is a donor-advised fund?

Donor-advised funds, often abbreviated to DAFs, are a type of investment account maintained and managed by a sponsoring organization. People looking to donate funds, stock or even real estate to a charitable organization or foundation are able to put their money into their donor-advised fund while still maintaining control over the account by directly or indirectly advising their sponsoring organization. The funds then wait in the account, ready to be distributed to a charitable organization.

What are the benefits? 

Since 2020, donor-advised funds have rapidly become one of the most popular philanthropy methods in the U.S. They made up 70% of the top 10 public charities receiving the most contributions in 2021, and the trend shows little sign of slowing down. 

One major benefit cited by DAF proponents is their flexibility. By having funds already available in the account, a sponsoring organization is able to act quickly to move funds during emergency situations. This proved true during the COVID-19 pandemic, where payouts from donor-advised funds grew rapidly in response to the virus. 

Another key reason behind the new philanthropy vehicle’s popularity is their immediate tax benefits and possible growth of the charitable funds. Because a donor-advised fund is operated by a tax-exempt sponsoring organization, the funds are also exempt from taxation. DAFs also allow opportunity for money in the fund to compound tax-free over time, boosting the potential impact of the initial gift. Simultaneously, even before the money has been distributed from their DAF, donors are eligible for the same tax-deduction benefits as any other charitable donation. These factors make donor-advised funds extremely appealing to philanthropists large and small, contributing to their immense popularity.

Why the DAF controversy? 

The current controversy around donor-advised funds comes down to one main factor: regulations. While donor-advised funds are a simple, accessible way for philanthropists to dedicate money to charitable causes, the lack of restrictions on donor-advised funds have prompted backlash from individuals, organizations and officials alike. 

For example, there are currently no legal requirements for how much of the money in a DAF needs to be distributed to a charitable organization within any time frame. When combined with their tax-exempt status and ability to appreciate, critics say the philanthropy method is ripe for abuses like tax evasion and wealth hoarding. With philanthropists opting to place money in a donor-advised fund rather than give it directly to a charitable organization, some believe donor-advised funds take away valuable funding and agency from nonprofits and other charities.

National Philanthropy Trust’s 2021 Donor-Advised Fund Report found that the total value of money put into donor-advised funds outpaces the total value of grants made from them, and the annual payout rate for a DAF has lingered below 25% since 2016. For the three-year period ending in 2022, the average payout rate was 18%, according to the 2024 National Study on Donor Advised Funds. While payouts have been on the rise alongside DAFs’ rise in popularity, critics argue the rate is still too low.

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