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Interview with Eileen Heisman

Realizing the Philanthropic Advantage of Donor-Advised Funds in Charitable Planning

 Eileen Heisman, President and CEO of National Philanthropic Trust (NPT).
Eileen Heisman, President and CEO of National Philanthropic Trust (NPT).

When did you last discuss donor-advised funds with one of your high-net-worth clients? If you can’t recall or the answer is “rarely” or “never,” please read on. Donor-advised funds (DAFs) are a highly beneficial tool for charitable giving, allowing donors to contribute cash, appreciated assets, or complex assets and receive an immediate tax deduction for their contribution. The increasing popularity of DAFs is evident from the growing contributions made through them in recent years, demonstrating their effectiveness as a philanthropic giving vehicle. DAFs are the fastest growing giving vehicle in the U.S.

There is small group of vocal DAF critics – largely from politics and academia - who are concerned about balancing the benefits of donor flexibility with the need to ensure timely and effective charitable giving. There is a far larger group of proponents who highlight the flexibility, efficiency, convenience, and potential for increased philanthropy that DAFs offer to donors and charities – benefits which, they argue, far outweigh any perceived challenges.

Chief among DAF proponents is Eileen Heisman, President and CEO of National Philanthropic Trust (NPT). Founded in 1996, NPT is one of the largest national providers of donor-advised funds, having made 640,000 grants totaling more than $25.7 billion to charities globally. I asked Eileen, armed with data from her firm’s 16th annual Donor Advised Fund Report, to provide an update on the current state of donor advised funds. If you haven’t explored DAFs with any of your clients recently, perhaps you should.

What did NPT’s latest research say about the use of donor advised funds?

Our 2022 Donor Advised Fund Report analyzed data from 995 charitable organizations offering DAFs. We found that DAFs have experienced dramatic growth in four key metrics: grants, contributions, charitable assets, and the number of accounts. Our study showed that grants from DAFs to qualified charities grew by 28.2% to around $45.74 billion, representing a substantial increase over the previous year and marking the fastest growth rate on record. The growth in the number of accounts was up 27.6% between 2020 and 2021.

DAFs continue to grow in popularity because they are simple, flexible and can provide significant tax benefits. Donors get an immediate income tax deduction for their contributions in the same calendar year they establish or contribute to the fund. They get the freedom to make charitable donations on their own schedule and recommend grants to their chosen charitable organizations. DAFs simplify the process of managing multiple charitable contributions since donors can consolidate their giving in one account, making it easier to keep track of their philanthropic activities. DAFs also provide donors flexibility by enabling them to contribute a range of assets beyond cash like stocks or real estate. Non-cash contributions - like appreciated stock - counted for 70% of our donations in the last several years. So, we’re moving illiquid capital into social capital.

What do you make of the criticism about DAFs?

It’s natural that when ideas gain success and visibility the increased attention can lead to a higher likelihood of receiving criticism. Some people see the success and they think, okay, there must be something wrong here. We pay close attention to what people are saying. We hear concerns about the timing of distributions, inactive accounts activity levels, and payout percentages, for example. Based on the facts we have – and the data reviewed by others - most of what we’ve heard is unfounded, though.

When it comes to payout percentages, DAFs grant at consistently high payout rates — and consistently higher than private foundations. Our 2022 DAF Report showed the DAF grant payout rate to qualified charities in 2021 was 27.3 percent of the total assets held in DAF accounts. That compares with private foundations which must meet an annual payout requirement of 5%.

Dormant accounts represent a very tiny percentage of DAFs. Often, this is about timing. Typically, a dormant account one year will not be a dormant account the next year. Often a donor might be accumulating some cash because they want to make a larger impact like endowing an academic chair or making a big capital gift of some kind to their favorite entity. Maybe one year they don't make a gift, and then the next year they make double or triple what they have in the past. Regardless, most DAF sponsors have written policies about managing inactive accounts.

Some are concerned that DAFs may delay the distribution of donations to nonprofits that could desperately use the funds. Again, we haven’t found this to be the reality. During the pandemic, when charities were in urgent need, we saw record DAF grant levels. The value of providing DAF donors with distribution flexibility is that they can strategically and quickly time their grants to support nonprofits when their services are needed most.

In other ways, DAFs may accelerate the timing of grant making. You can open and fund a DAF account in a day. It doesn't cost you anything. You can start making grants within a few days. If you want to open up a private foundation, it takes about five months and likely costs legal fees and accounting fees.

What advice do you have for financial advisors about discussing DAFs with clients?

One is that DAFs can help advisors open deeper, non-transactional relationships with their clients. As a financial advisor, if you need to know and acknowledge that your clients might be doing charitable giving already and you’ve got to ask about it. I hear advisors introducing the topic by asking, “What's going on in your life? What causes and charitable organizations matter most to you?” Then they may ask, “With the level of charitable giving you do, have you thought about a donor-advised fund?”

Another essential thing an advisor can do is to help the client find the most compatible DAF sponsor. That may have to do with the mission of the sponsor and your client, and it may have to do with the sponsor’s fees and policies on things like investment options, granting restrictions, and legacy restrictions.

I think advisors need to ask themselves what kind of difference they want to make. At NPT, we feel like we have a lot to celebrate. We start every staff meeting and every board meeting with grant stories and donor stories about why donors are motivated. They're heartfelt and really satisfying to hear. DAFs help you make a difference in your clients’ lives and in the world.


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