Do you have a DAF? How you invest can make a big difference

Donor-assisted funds (DAFs) are one of the fastest-growing forms of philanthropy in the United States, with more than $52 billion awarded to charities in 2023.

One of the many benefits of a DAF is the potential for charitable dollars to grow tax-free, which can have tremendous impact. For example, Daffy’s members gave more than $105 million to charity last year, and since then, their accounts have grown by more than $30 million – an incredible amount raised for charity.

Unfortunately, there is little guidance on developing an investment strategy for a DAF, which is quite different from selecting investments for a retirement account. In a retirement account, the main factors driving investment decisions are usually time horizon and risk tolerance. There is often a single goal: building a nest egg big enough to last until retirement.

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Conversely, the objectives for a DAF can vary widely. Some donors contribute regularly, matching their annual giving with weekly or monthly deposits. Others contribute opportunistically, overfunding their accounts in profitable years to support giving in leaner times. In addition, some donors aim to create a long-term fund that supports annual giving to specific charities for decades or even indefinitely, like an endowment.

As a result, designing the right portfolio for a DAF requires understanding the donor’s giving strategy.

How to match your investment strategy with your giving goals

Let’s explore a few scenarios to demonstrate the different strategies donors might use when investing through DAFs.

A pay-as-you-go plan. Let’s imagine a customer named Leah. Leah uses her DAF to donate approximately $5,000 annually to her child’s school, along with several other local and national charities. She contributed $2,000 upfront to prepare for an upcoming fundraiser for the school and has established recurring monthly contributions of $300 to support her ongoing donation.

Since Leah plans to distribute most of her contributions this year, she would likely benefit from a conservative portfolio allocated to short-term T-bills.

A growth plan. Now consider Neal and Sarah. The couple’s income is pretty steady most years, but Neal’s company went public this year, resulting in a huge return on a per-share basis. They usually donate about $10,000 a year, but decided to contribute $100,000 this year to the DAF to help manage the increased tax burden from Neal’s stock sales. As a result, most of the funds in their portfolio will be invested for five years or more.

For this couple, a globally diversified portfolio of equity and bond funds makes sense. They might even include a small allocation for bitcoin. With a tax-free, automatically rebalanced portfolio in a DAF, their portfolio is at little risk of becoming overweighted with high-risk assets.

Example of an invested DAF portfolio.

(Image credit: Courtesy of Daffy)

An endowment plan. Finally, meet Lakshmi and Ajay, who both have had successful careers and want to create a lasting family legacy through their DAF. They funded their DAF with over $750,000 in low-cost mutual fund stocks that they had held for over 20 years, avoiding any capital gains tax on those investments. They plan to donate $25,000 annually for the next 20 years, with the intention that their children, Justine and Janan, will eventually manage the fund.

Given their long-term outlook, an aggressively diversified portfolio of growth-focused investments may be ideal, ensuring that their philanthropic efforts can last for generations.

Example of an invested DAF portfolio.

(Image credit: Courtesy of Daffy)

The impact of a well-thought-out DAF investment strategy

The beauty of a DAF is that it offers the flexibility to tailor your investment strategy to your giving goals, no matter how short or long they may be. While not all US donor-advised platforms offer clients and advisors the flexibility to customize their portfolio, some, like Daffy, give you the flexibility to select from hundreds of high-quality, low-cost ETFs to fits your donation strategy. (Full disclosure: I’m the co-founder and CEO of Daffy.)

For the 50 million to 60 million U.S. households that give to charities each year, giving isn’t just a one-time transaction. For many households, this is one of the most important financial goals for their family and legacy.

So whether you want to fund immediate charitable contributions, take advantage of market opportunities to maximize future giving, or create a legacy that will benefit generations to come, matching your DAF portfolio with your giving strategy is critical to having a lasting impact.

The information provided is for educational purposes only and should not be considered investment advice or recommendations, does not constitute a solicitation to buy or sell securities, and should not be considered specific legal investment or tax advice. To evaluate your specific situation, please consult a tax and/or investment professional.

This article was written by and reflects the views of our contributing advisor, not the Kiplinger editorial staff. You can check advisor records with help dry or with FINRA.

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Do you have a DAF? How you invest can make a big difference

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