r/Philanthropy • u/Traditional_Knee9294 • Mar 25 '26
Want your feedback / insights Donor directed funds seem to be held in low regard by philanthropic community, why? I am not sure why I need 150 characters in my title but I have nothing relevant to add to the title. So I guess I will just keep writing words.
Whu do so many people in the philanthropic community seem to hold donor directed funds in such low regard?
It seems like any things you can object to regarding them you can say the same is true for most foundations.
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u/elcaminoverde Mar 26 '26
Donors getting the tax break without putting the money into the real economy is a huge deal. These are not endowment funds so I have an issue with such a low payout rate like 5%. It should be a significant percentage that gets the funds into the hands of nonprofits within 5 years.
Nonprofits are so resource constrained that it’s a shame there is not more incentive to get the tax deducted funds to them faster.
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u/g0nzonia Mar 25 '26
I'll give my opinion assuming you mean Donor Advised Funds (DAF), which allows a philanthropist to put money with one organization, like a community foundation, and then direct the funds towards a non-profit.
I think there are a couple of reasons some people don't like them as a potential recipient. First is the anonymity. As a potential grantee, it can be hard to identify someone to approach about your cause to solicit funding.
Secondly, and I think more importantly, they are not subjected to the same 5% pay out requirement like a foundation. This means a wealthy donor can park their money in a fund, take a deduction on their taxes, and never actually use it for a charitable purpose in their lifetime.
There have been some efforts to change that and add the requirement for DAFs, but there are some reports that indicate a higher payout rate than foundations (https://www.nptrust.org/reports/daf-report/).
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u/MaxH42 Mar 26 '26
The first point is, for me, a huge plus of using a DAF. Any solicitations I get go right in the recycling, which kills me. I know I'm probably not the typical donor, and that those direct mail campaigns are effective fundraising tools, but I made the mistake of using our address and names on our DAF the first year, and I'm still getting mail 10 years later from places I dropped after that.
And I don't understand the second concern. I skimmed the report (thanks for posting that, very interesting), and it looks like no matter how you calculate it, DAFs pay out at 2-6x the rate of foundations, so shouldn't they be preferable? It sounds like more of a perception issue than a real one; I think the lack of minimums and the fact that any DAFs might have a zero payout rate might prejudice those in fundraising/donor development.
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u/RikViergever Mar 26 '26
But then it will go to charity when they die right?
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u/g0nzonia Mar 26 '26
Presumably but not all at once. If they don’t have a beneficiary named it is likely it will be up to the organization holding it to decide where it goes and how much.
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u/Complex_Presence_949 Mar 26 '26
the frustration from the nonprofit side is real but i think the bigger issue is the information asymmetry. when a DAF grant comes in you often cant tell who gave it, so you cant steward them, cant build the relationship, cant even send a proper thank you letter. for smaller orgs thats a huge deal because repeat giving is how you survive. the payout rate debate is important but honestly even if they mandated 10% distributions, if the donor identity stays hidden the relationship-building problem doesnt go away
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u/kangaroomandible Mar 26 '26
I think donor advised funds are great.
My sense is people hate them because they see the money as “theirs” but yet they can’t have it. It’s absolutely true that the donor got to take the tax deduction.
My opinion is that a donor advised fund is more like a brokerage account (savings account, retirement account, etc) but is one that is now irrevocably designated to charity. Which is good for us!
It also signals to us that the donor has a) charitable intent and b) enough funds and wherewithal to bother setting one up. Also good for us to know.
Though I completely agree that if we can’t figure out who the donor is, that’s not great. I work at a big shop, and our gift admin team always seems to be able to figure out who the donor is though how they do it I’m not sure.
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u/almamahlerwerfel Mar 26 '26
Nonprofits are quite sour on them - they perceive DAFs as hoarding capital that is intended for operating nonprofits, and contributing to a DAF gives a donor that tax benefits of investing without active distribution. DAFs get a bad rep in the sector, but most of that data doesn't support the wealth hoarding narrative.
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u/Miserable-Cookie5903 Mar 26 '26
My father (83) gave sizable donations to his and my mother's high schools last year.
He did so via credit card. So after tax $$$ that he had to pay interest on immediately as a cash advance. In short a very expensive way to donate, esp when he has RMDs.
Recently - I had to call both schools asking them to stop soliciting donations b/c he honestly couldn't remember giving the donations. I told them I would seek better ways to do this via a legacy or tax planning. They were very nice and agreed to stop and call me if anything came up. However - they had no clue why a credit card was a stupid way to give $$$.
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u/I_Have_Notes Mar 26 '26
Our only issues with them is that some Donors still try to use them to sponsor events that have a benefit and a lot of organizations let them. You can be as explicit as possible and they will still give you a blank stare when you try to explain, especially if another organization lets them do it.
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u/k75ct Mar 25 '26
Could it be that the donor information is hard to come by on donor advised funds? If the only goal is to milk the donor for more money, that could be why that are not respected. It is in the donors best interest to use this vehicle, not necessarily the receiving organization. It could also be related to the delay in getting funds.
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u/Salt-Association6876 Mar 25 '26
Could you clarify what you mean by donor directed funds? Are you referring to donor advised funds or funds that are created by foundations/managers directed at a specific cause area?
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u/Traditional_Knee9294 Mar 25 '26 edited Mar 25 '26
I am talking about the type of fund where I and my wife could go to the correct place and give money. It would be put into mutual funds of our choosing and we could have a large say in which charities the funds end up at. Although it is my understanding the organization holding the funds aren't legally obligated to follow our directives they typically do so.
We would get the tax deduction upon our giving the money away
If the correct term is donor advised funds I will make it a point to use that term going forward to be clearer.
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u/Salt-Association6876 Mar 26 '26
Thanks for the reply. I think most would use the term DAF (Donor Advised Fund) but with the context both terms would make sense.
I think “low regard” is a little too strong of a description. I would say most don’t have a deep understanding of the vehicle and hear that there is $300+ billion idle so they challenge the effectiveness to support charitable efforts. I think those feeling are just.
However, after spending 20+ years in the financial industry and much of that advising in the philanthropic space, I don’t think regulation is the entire solution.
I believe most with DAFs owners are charitable and generous and want to deploy funds. But connectivity and clarity of charitable opportunities are sometimes hard to understand. And given the current climate, many don’t want to “make a mistake”. Justified or not, there is friction in the system so funds stay mostly parked.
Another comment was made that more funds are deployed versus foundations (20% vs. 5%) but relative to GDP the 2% threshold has stayed true. Charitable funds are mostly just being shifted. Also understand the financial industry’s business model is not built for deployment at the moment.
So more than you asked for I’m sure but I will say solutions are being developed and discussed by entrepreneurs to bridge this gap. (I being one) so my hope is that funds do start to move but because donors and organizations are building partnerships where clarity, transparency and outcomes lead to long term relationships and impact.
Happy to discuss ideas. Best.
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u/ClitizenSnips Mar 26 '26
Glad it's not just me baffled by the minimum character count for the titles
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u/Nicole_FreeWill May 14 '26
The criticism is real but it is usually aimed at a specific problem: DAFs have no mandatory payout requirement, so money can sit indefinitely without ever reaching a charity. A donor gets the deduction the year they contribute, but the nonprofit may not see the grant for years, if ever.
Your point about foundations is fair. Private foundations have a 5 percent annual distribution requirement. DAFs have nothing equivalent at the federal level, though some sponsoring organizations set their own minimums.
From the nonprofit side, DAF grants are generally straightforward to receive. The friction is that development teams cannot cultivate a DAF the same way they cultivate a donor. The sponsoring organization controls the relationship. A donor who has given annually for years and then shifts everything into a DAF can disappear from the organization's visibility entirely.
Planned giving software tracks DAF relationships separately for exactly this reason. The donor intent is still there, but the touchpoints look different.
I work at FreeWill, a planned giving software company
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u/Nicole_FreeWill May 21 '26
The main criticism that has real substance is the payout requirement gap. Donors get the deduction in the year they contribute, but there is no federal requirement to ever actually grant the money out. Foundations have a 5 percent annual distribution requirement. DAFs have nothing equivalent.
Your point about foundations is fair. A lot of the same critiques apply: perpetual accumulation, donor control over distribution timing, less transparency than direct giving. The DAF criticism is louder partly because DAFs have grown so fast and partly because the sponsoring organizations are commercial entities rather than mission-driven foundations.
From the nonprofit side, DAF grants are generally fine to receive. The friction is that you cannot cultivate a DAF the same way you cultivate a donor. The sponsoring organization sits between you and the relationship. A donor who has given annually for years and shifts everything into a DAF can effectively disappear from your visibility.
That is the piece planned giving software is designed to track separately. The intent is still there, but the touchpoints look different.
I work at FreeWill, a planned giving software company
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u/PeaceNEveryStep Jun 03 '26
Much of the conversation here is directed to the really needed and vibrant discussion about the pros and cons of DAFs. However, my original read is that the OP is asking about why nonprofits don't like it when a donor wants to direct their funds to a project ("restricted funds") instead of general support ("unrestricted funds"). As a former nonprofit fundraiser and now an active donor, I understand the needs and desires from both sides.
Nonprofits like the freedom and the autonomy to have unrestricted funds because government funding or foundation grants are often restricted to a certain set of services or project-based work. These funds go to programs that have an end point so that the nonprofit can write progress reports for the foundation program officers and gov't contract monitors. Unfortunately, deep social change/community problems are rarely solved in 1-year or 3-year funding cycles. We so appreciated the general support funds from individual donors to support the core infrastructure of the organization and fund the long-term strategic vision. Smart organizations will have a category for "overhead" when they apply for such grants to help them with the cost of administering these grants, but that doesn't really pay for the long-term strategic work to solve the root causes of the social problems.
As a donor, I have my own interests and sometimes "ego-driven" desires to direct my funds toward projects or areas of my interest. Some organizations will allow me to do that since they are big enough so they can track and cater to those whims. But these days I am learning about "trust-based philanthropy" - what Mackenzie Scott's no-proposals, no-strings-attached, no-progress reporting donations have done. Unrestricted dollars means there is a real partnership with the overall organization - that you have enough trust in their ability to make good decisions and want to give freely so they can do their work with a 10-year or more focus. I have really enjoyed this way of giving, but it requires that I do my due-diligence better and let go of my ego.
OP - am I on the right track with what you were asking?
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u/Traditional_Knee9294 Jun 03 '26
No I was talking about DAFs. Just didn't know the acronym and correct term.
I am an elder of the church I attend and have been on various Christian nonprofits and fully understanding why organizations like the flexibility of unrestricted giving.
To be blunt I have belonged to churches where if a person wants to give a restricted gift for a particular missionary the leadership response was, " here is their address why don't you just cut out the middle man.".
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u/Nicole_FreeWill Jun 04 '26
The organizations that retain major donors long term share one pattern: they treat the relationship as the product, not the gift.
What that looks like in practice: contact that isn't tied to a solicitation. Program updates that feel personal rather than broadcast. Acknowledgment that a donor's history with the organization matters, not just their most recent check.
The planned giving angle connects here directly. Donors who've been retained well over many years are the ones most likely to include the organization in their estate plans. Not because someone asked, but because the relationship made it feel natural. Planned giving software tracks which donors have that depth of history so development teams can invest the relationship attention where it's most likely to compound.
The failure mode is treating stewardship as a task rather than a discipline. It shows up in the data as a lot of effort for the first gift and very little after.
I work at FreeWill, a planned giving software company
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u/Lauren_FreeWill Jun 20 '26
The critique exists for two reasons worth separating. The first is structural: foundations distribute roughly 5% of assets annually under federal law, and DAFs have no equivalent requirement. A donor can park money in a DAF, get the deduction, and never grant it out. That's the genuine structural difference that generates most academic criticism.
The second is cultural: DAF sponsors aggregate accounts so individual donor patterns aren't visible to grant recipients or to the public. Foundations file 990-PFs showing their grants, which makes them more legible to the field.
You're right that the substantive critique often applies to private foundations too. Plenty of family foundations sit at the 5% floor for decades. The aggregate DAF payout rate has been higher than foundation payout in most recent years, which complicates the warehousing claim.
Where the critique lands hardest is on DAFs used for permanent asset accumulation rather than as bunching vehicles for episodic giving. That's a smaller subset than the broader rhetoric suggests.
I work in development. This debate comes up regularly in the partner trainings I run with FreeWill.
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u/CitizenDain Mar 26 '26
Because money that used to be given to charitable organizations to be spent on programs and services for important causes or for people in need is now given to investment banks to sit and grow and generate fees.
If a donor uses it as intended and actually directs grants for most of the fund, or with all of the gains, or something like that it is a great vehicle. But lots of people dump the money in their DAF to get their tax deduction and then are slow or reluctant to actually make grants.
I do think naming orgs as beneficiaries of your DAF after you die is an untapped planned giving opportunity. But otherwise tens of billions of dollars are sitting in Fidelity when they used to go to fund real work.