Donor advised funds (DAFs) offer tax advantages for donors and reduce nonprofits’ administrative burdens.
Economic factors, tax planning strategies and generational wealth transfers are driving the growth of DAFs.
Nonprofits must integrate DAFs into their fundraising strategies to secure long-term support
Total grants from donor advised funds (DAFs) have grown significantly over the past decade, nearly doubling in the last five years alone. DAFs permit donors to irrevocably contribute assets, including appreciated property, to public charities that own, sponsor and control the funds. Donors obtain an immediate income tax deduction and retain advisory privileges over the investment and distribution of such assets for charitable purposes.
DAFs are popular philanthropic vehicles because they alleviate administrative burdens commonly associated with stand-alone charitable organizations and typically accept gifts of complex assets, among other benefits.
The National Philanthropic Trust’s 2024 DAF Report showed that in 2023, assets in DAFs increased by almost 10%, buoyed by gains in capital markets. But for the second consecutive year, total contributions to DAFs fell, this time by over $15 billion, or 21%. Grants from DAFs also declined in 2023, for the first time on record. So have DAFs reached their ceiling, or was 2023 an anomaly rather than the start of a downward trend.
Our analysis suggests that the 2023 reduction in DAF activity indicates a regression to the mean rather than a long-term decline. For a variety of social and economic reasons, 2021 was a banner year for DAF activity, with a 57% increase in contributions and a 35% increase in grants made compared to the previous year. It is unsurprising that this increase was not sustainable. Over the past five years, contributions to DAFs have increased by an average of over 9% per year. This figure is closer to the long-term average and, in our view, is likely to continue.
We expect Americans, especially in the upper quintile of household wealth, to continue contributing to DAFs as part of their tax and philanthropic planning. Another factor driving future contributions is the aging of the baby-boom generation, which will trigger a large wealth transfer in which a portion of generational wealth will be allocated to DAFs rather than direct inheritance.
These economic and demographic trends, in addition to the long-term growth we predict for DAFs, drive our projections of DAFs for the next decade. We project that assets held in DAF accounts will cross the $300 billion threshold in 2025, and $500 billion by 2031. With DAF payout rates remarkably consistent over the years, this growth in assets may lead to recommendations of $68 billion in grants to nonprofits in 2025, and over $100 billion per year by 2029.
In 2019, before pandemic-driven global social and economic shifts, DAF donors granted $28 billion to nonprofits, amounting to 39% of the amount granted by private foundations. Our analysis, however, projects DAF donors to grant 56% of the amount granted from private foundations in 2025. We also project the average annual increase in grants from DAFs to outpace that of private foundations over the next decade (9.4% vs. 8.4%, respectively). The emergence and growth of DAFs has materially changed the nonprofit fundraising landscape, and nonprofit leaders need to adapt.
We expect the continued popularity of DAFs to drive the growth trajectory in the number of DAF accounts. However, issues such as economic uncertainty, changes in tax policies and regulatory requirements could affect the overall market value of assets held by DAFs and grantmaking from DAFs. Total charitable giving has historically risen during periods of economic growth. The same holds true of grantmaking from charitable vehicles like DAFs. During economic downturns, DAF donors have a unique advantage and have continued to contribute, despite any challenges affecting their personal finances.
Nonprofit organizations should strategize to encourage donors to recommend contributions from DAFs to ensure they can adapt to economic disruptions as they arise. This approach will be crucial for maintaining a steady flow of funds and achieving long-term fundraising success from DAFs.
DAFs have significant amounts set aside for charitable causes, creating an opportunity for nonprofit organizations to deploy fundraising plans that seek and promote contributions from DAF advisors. Nonprofits should reach out to sponsors who manage DAFs to create relationships and attract potential donors. Organizations should also emphasize contributions from DAFs as an option to donors. In addition, nonprofits would benefit from including user-friendly tools on their website to streamline the process for DAF donors. Furthermore, organizations should make DAF awareness part of their process for nurturing, retaining and reengaging donors.
DAFs are a rapidly expanding philanthropy component, making it essential for nonprofits to include DAFs as part of their fundraising strategy. Despite some fluctuations, overall contributions to DAFs and grants made from them have generally increased over the years. This remarkable growth indicates that DAFs will continue to be reliable funding sources for nonprofits even during times of reduced direct contributions and economic downturns.
