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Digital Distribution Will Aid Adoption of Tax-Efficient DAFs

May 11, 2022, 8:45 AM

Donor advised funds, or DAFs, are now the fastest-growing philanthropic vehicle in the US. With more than one million funded DAF accounts, these charitable-giving vehicles now hold about $160 billion in assets.

An important reason for the growth in DAFs is that they provide unique tax benefits.

DAFs allow a donor to receive tax deductions in the year you contribute to your DAF, regardless of when you actually grant the assets to recipient charities. This gives you the flexibility to take advantage of tax deductions appropriately even as you take more time to find the right charity. For example, windfalls can bring a heavy tax burden. By “bunching” or making a larger than usual donation to your DAF in a single year, you can reduce your tax liability in that year while breaking up and spreading out your gifts over several years between multiple charities, family members, and causes. DAFs can also accept appreciated assets or securities and save you the potential capital gains, and DAF assets can continue to grow tax-free to maximize your giving dollars. Finally, DAF assets can also be invested for high impact even before you grant them.

These benefits are applicable to everyone. Yet personalized DAFs, where you can shape how the assets are both managed and granted—not just granted—largely have been reserved for ultra-high-net-worth individuals and families. The high cost of a truly personalized experience is the result of the DAF infrastructure. Traditional administration is fraught with frictions leading to time-consuming manual processes, high fees, and high minimums. This limits access to personal DAF accounts to the wealthiest of donors, leaving out entire segments of charitably minded families.

The future of DAFs needs to align with the future of giving. And modern fintech promises to democratize personalized giving. An immediate segment to cater to is the giving experience of financial advisers and their clients. In the US, around 47 million individuals are advised, and many of them are charitably minded and have the resources to give. This is where the democratization of giving is most relevant and impactful for the social causes we collectively care about.

In fact, financial advisers offering philanthropic services saw three times more growth and had a 5% higher share of wallet for their clients, according to Fidelity Charitable. These impressive benefits that accrue with the existing communal DAFs only highlight the incredible and untapped demand of a truly personalized giving experience.

Fintech and values-based investing can help realize this impressive potential for individual impact.

First, a modern application programming interface, or API, and cloud-based technology infrastructure can inherently shift the economics of DAF administration. This can lead to low-to-no minimums and low fees. Much like how technology has changed the accessibility of traditional brokerage services through zero-commissions and no-minimum trading, DAFs are ripe for disruption.

Second, a digital, modern, human, and user-centric experience can inspire adviser clients and their families. This is all the more important as next generations of families are getting more involved in a family’s money decisions. As is well documented, millennials are digital natives with growing consciousness about the impact they have on the world. The importance of collective giving in families is reflected in a recent study of philanthropic trends in 2022 by UBS. They predict that family philanthropy will strengthen as wealthy families increasingly leverage charitable activity to bring the entire family together, particularly as a nearly $73 trillion generational transfer of wealth is set to occur over the next 25 years.

Finally, DAF assets can now be managed using the ever-growing list of cause-based investments and environmental, social, and governance—or ESG—solutions. This allows each family to tailor their DAF for the causes they care and give to. They no longer need to be forced to invest in generic and collective pools.

In the world we live in today, many more of us want to give in efficient and personal ways. Fintech and investment management can together facilitate a shift to this better world. It is time.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Vinay Nair is CEO and founder of TIFIN, an AI-powered fintech company that leverages data science, investment intelligence, and technology to help deliver engaging and personalized investor experiences. He is a former Wharton professor.

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