EarthShare Insights
Introduction to Donor- Advised Funds (DAF)
1. Introduction
You want to do something good for the planet, but you’re not sure if you have enough money to make your donation valuable. Or maybe you have a decent amount of disposable income but don’t know where it should go to have the most impact. Regardless of your circumstances, a no-minimum Donor-Advised Fund (DAF) like the one EarthShare provides is a fantastic option for individuals interested in supporting a healthier planet, no matter what your income may be.
But let’s take a few steps back. What is a DAF, and how can it be used to better the environment and our climate?
We’ve created this introduction to DAFs to help you understand how donor-advised funds work, the opportunities they can provide, and what makes the EarthShare DAF unique. Whether you’re brand new to the concept of DAFs (that’s totally fine, most people are) or you’re simply looking for a way to increase your social and environmental impact with every donation you make, this resource is for you.
Let’s get started!
2. What Is a DAF?
A DAF is a charitable investment account that provides important financial benefits to you, the user, while enabling you to support the nonprofits and charitable organizations that are most important to you.
A DAF allows you to contribute to an account designed specifically for charitable purposes. When you add money into your account, you receive an immediate tax deduction, even if the donation hasn’t been designated to go to a specific charity. While the money is in your account, you can invest it, earning interest until the time at which you choose to grant it to the nonprofit(s) of your choice. It’s important to note that money cannot be withdrawn from your DAF. The only way to move money out of your account is to grant it to a nonprofit.
To date, DAFs have a reputation for being “only for the uber-wealthy.” Many of the largest donor-advised funds in the United States, such as Fidelity Charitable, Schwab Charitable, and Vanguard Charitable, focus on larger accounts of $100,000 or more. But some DAF sponsors, like EarthShare, have no-minimum programs, which means that you can fund your DAF with whatever amount of money you can afford—even if it’s just $1. We believe that anyone interested in increasing how much they’re able to donate should be able to benefit from a DAF.
Today, DAFs are the fastest-growing charitable giving method in the country, with contributions growing 27% from 2019 to 2021 and equaling an estimated $34 billion in dedicated grants. These contributions now represent more than 3% of all U.S. philanthropic giving.
3. Why Use a DAF?
So now that you know more about what a DAF is, why use it? What’s the benefit?
DAFs offer a variety of unique features that make giving to a cause feel more impactful, both for the donor and for the receiving organization. For example, there are the tax benefits. When you, the donor, make a deposit—regardless of the amount—you are eligible for an immediate tax deduction benefit.
DAFs also provide simple, straightforward recordkeeping and data organization. This is great for both the donor and the nonprofit. If you’re sick of trying to track down donation receipts when it’s tax season, DAFs are a great option as they provide all donation receipts (for those gifts donated through the fund) in one convenient place. Plus, most DAF providers keep comprehensive records of all transactions that occur, which gives you the opportunity to track how your giving evolves over time.
Tax-free growth is another huge benefit of DAFs. Once you put money into your account, you have the potential to grow your balance by investing those dollars. While some DAF sponsors keep investment opportunities more generic, others like EarthShare provide a number of vetted investment options, ensuring what you choose is aligned with your personal values. You can have a positive impact with your charitable funds even before granting them out to nonprofits.
Do you hate the annual year-end decision making crunch? DAFs can help you avoid that by giving you the time you need to create thoughtful giving strategies throughout the year. Whether you let money accumulate for a while or you need a couple of extra months, DAFs offer you flexibility even after you have your tax receipt, which is a huge plus.
Finally, one of the most unique benefits of a DAF is that you can create a meaningful legacy. Your impact can expand throughout your lifetime and exist even after you’re gone. For example, you don’t have to be rich to incorporate your DAF into estate planning. To do this, work with a lawyer to make a bequest in your will to the DAF sponsoring organization or make the sponsoring organization a beneficiary of your retirement plan, life insurance policy, or charitable trust. By leaving instructions with your DAF sponsor, you can support multiple charities with one gift. These gifts can also help reduce or eliminate your estate’s tax burden that could be left behind for your heirs. You may also be able to create a succession plan, meaning you can pass your DAF to your heirs so they can continue your legacy of giving.
4. DAF Investment Options
How a DAF is structured and what investment options exist to account users is dependent on the DAF-sponsoring organization.
But that’s not all. The right investment has the potential to have an even greater impact than what nonprofits can provide. Why? Because the power of issue-focused investing means you’re not just potentially growing dollars to grant later, you’re investing in solutions upstream of the problems that nonprofits become responsible for fixing. In other words, if we can shift the way business is done, we may be able to avoid problems before they happen. By balancing smart investments with informed grantmaking, you have the opportunity to truly magnify your impact.
The option(s) a sponsor organization chooses to offer (or what a donor chooses to invest in) frequently has to do with a few key considerations: intention, time horizon, and cash versus non-cash assets. What does this mean?
- INTENTION | What cause does the sponsor or donor want to support? Aside from providing donations, what is the desired outcome of the DAF? (For example, is it to increase impact by increasing the total amount of funds available? Or to recycle funds so they can continuously benefit new projects and organizations?)
- TIME HORIZON | This item is a more relevant consideration for DAF sponsors. What is the donor’s timeline for giving? How long should a donor be able to hold money in their account without granting it? How long might a donor want their money invested and growing before granting it? Consider what kind of giving schedule you would like to operate within.
- CASH VS. NON-CASH DONATIONS | This is a question of how a particular donor-advised fund accepts donations. Cash, check, cryptocurrency, stocks, etc. How are non-cash donations translated for investment? While donating non-cash assets can lead to greater tax benefits (especially compared to giving via cash or credit card), how a DAF chooses to accept these donations can directly influence the investment opportunities offered.
For all types of DAFs, these investment opportunities are optional and may come in a variety of forms, including public investments, private investments, recoverable grants, and project-based funding.
5. Frequently Asked Questions
Are DAFs refundable?
No, DAFs are not refundable. Because money you put into a DAF is immediately tax-deductible, all donations are final.
What restrictions are associated with DAFS?
DAF assets can only be granted to IRS-qualified 501(c)(3) organizations. Non-501(c)(3) organizations such as political groups, crowdfunding campaigns, and private foundations are ineligible to receive grants. Also, grants cannot result in a personal benefit, such as memberships or tickets to charity events.
How will I receive my DAF receipts?
When using EarthShare’s DAF, all your receipts will be available 24/7 on the EarthShare Platform. You will receive a new receipt any time you fund your account. Because any money you put in your DAF is instantly tax-deductible, these are the receipts you’ll need for tax purposes. (NOTE: Unlike traditional methods of giving, you won’t receive an additional tax receipt upon granting the money to a nonprofit because the tax-deduction occurred when you funded your DAF account, but you will receive confirmation that your funds have been allocated to the nonprofit of your choice when you choose to make a distribution.)
How do DAFs differ from private foundations?
DAFs and private foundations are both charitable vehicles that help donors facilitate giving. However, unlike DAFs, private foundations are separate legal entities, usually established by an individual, family, or corporation. Private foundations must follow more stringent tax laws and regulations than public charities and are responsible for their own tax filing and recordkeeping. (Basically, they’re responsible for all the paperwork.) Private foundations are typically more work, but provide greater administrative control over assets and grantmaking, including the ability to make grants to organizations that are not IRS-qualified 501(c)(3)s.
Are there drawbacks to having a DAF?
Donors should know that DAF sponsors can profit from the donations they receive via the fees that they charge. For example, Fidelity Charitable charges the greater of $100 or 0.6% for the first $500,000 of donations to its fund. It can also make additional money from the charges that are assessed by the mutual funds in which donors invest. Choosing a mission aligned DAF with transparent policies is extremely important.
What are the biggest criticisms of DAFs?
Possibly the biggest criticism of DAFs and DAF-sponsoring organizations is the low payout rate (and the general stagnation) of DAF accounts. In some cases, they’ve even been labeled vaults for the rich—a place to keep money without being forced to designate it to charity; it’s a considerable problem and one EarthShare seeks to correct. The EarthShare DAF is specifically focused on amplifying impact and, as a result, we have a payout policy in place to make sure money cannot rest in a DAF account indefinitely. The money will be used to invest in the future of our planet.
6. EarthShare’s DAF and How to Get Started
EarthShare is offering the first-ever environmentally focused DAF for people who want their money to do even more for the planet. What does this include?
- ENVIRONMENTAL INVESTMENTS | When growing your money, you can make sure it’s invested in companies and initiatives that are pushing forward global sustainability goals. Even your investment is doing good for the world.
- MULTIPLE WAYS TO INVEST | In addition to the traditional method of transferring money from an existing bank account, the EarthShare DAF also supports credit card transactions, ACH, and stock transfers. (For more options, feel free to email jessica@earthshare.org.)
- FULL & TOTAL TRANSPARENCY | You know exactly where your money is going; no smokescreens or misdirection. You choose when, how, and where to invest your money, who will be benefiting from your investment, and who should ultimately receive your donation. The choice is 100% up to you, and there are no hidden costs or fees. Speaking of fees…
- OUR SMALL SERVICE FEE IS ONLY 2% OF THE DEPOSITED AMOUNT | Any growth of your money, whether it’s a couple cents or hundreds of dollars, is fee-free. All that good goes directly to your designated nonprofit organization(s).
- ACCESS TO HUNDREDS OF VETTED NONPROFITS | We have a network of 500 deeply vetted nonprofits, which means you can be confident your money is going to have immediate impact. (Not sure where to donate? EarthShare will work with you to identify the nonprofits who best align with your environmental goals so you can make the most of your giving account with issue funds.) You’ll also have access to a database of millions of IRS-registered 501(c)(3) organizations.
- REGULARLY UPDATED CONTENT | We’re constantly updating the platform with new content and educational materials to help you become the most informed and strategic environmental supporter.
- ACCESS THROUGH THE GIVING PLATFORM | You don’t have to go far to get to your DAF account; it can be found directly on the EarthShare Giving Platform. One login is all you need; no endless searching for usernames and passwords.
It doesn’t take a lot to make a big difference. Discover what you can do when you invest in the planet by becoming an EarthShare Member.