If you are passionate about philanthropy and want your charitable dollars to align with your values, a donor-advised fund (DAF) could be an ideal tool for you. A DAF is a charitable giving account offered by a public charity. You can contribute assets (of all kinds, including appreciated securities and property, even crypto) to the fund, receive an immediate tax deduction, and then recommend grants to charitable organizations over time. Increasingly, donors want to see their charitable dollars aligned with their values even before they recommend a grant, this is where impact investing comes in. Most DAFs allow donors to take some steps to align their investments with their social and environmental values but knowing what types of impact investing you want to do can help you open a DAF with the right partner.
Many people think of DAFs solely as tax-efficiency and organization tools. However, they are much more! A DAF can act as a bridge between your charitable giving and your long-term impact goals. To get the most out of your DAF, consider your goals and plans upfront to avoid potential limitations down the line. If you are interested in incorporating impact investing it is important to ask the right questions up front.
Key Questions to Ask Before Opening a DAF if You Are Interested in Incorporating Impact Investing
1. What is the size of the DAF account you are planning to open, and what options for impact investing do they have for an account of your size?
Here are some guidelines on what to expect:
- Less than $1 million
- Look for a provider that offers thematic impact investment pools, which are curated public funds investing in companies that meet high standards for environmental, social, and governance practices and other impact metrics. These funds may focus on broad impact or be thematically focused on an area like the environment, gender equity, or social needs.
- Look for providers that allow for recoverable grants. These grants allow you to fund high-impact projects with the opportunity to recover the granted funds if desired impact and financial milestones are achieved, so you can recycle your philanthropic dollars for future giving.
- $1-$5 million
- At many DAF providers with an account of this size, you can access the impact options listed above, as well as private impact investments. These investments often target mission-driven funds that deliver measurable social or environmental benefits alongside financial returns.
- Over $5 million
- With a larger DAF account, if you want to, you can look for a provider that has the capacity for direct investments in addition to the options listed above. Direct investments allow you to invest in specific projects, companies, or initiatives that resonate deeply with your philanthropic mission.
2. How can the DAF provider support your philanthropic priorities and interests not just in your grant making, but in how the funds are invested?
- Are you interested in solving a particular type of problem, such as access to food for school age children, or housing for veterans?
- Ask the DAF provider if they have a selection of impact investments readily available to donors that touch on your area of interest, if they are open to you bringing your own investment recommendations, or what resources they might have to help you identify unique opportunities.
- Are you interested in a particular geographic location?
- You may want to consider a community foundation. They may offer unique local investments and have strong connections to the local community and its needs.
3. Do you need support finding opportunities?
If you are interested in making recoverable grants or private impact investments, consider whether you have specific opportunities in mind or if you need guidance to find opportunities that fit your interests and strategy. Ask yourself:
- If you have opportunities in mind:
- Are custom investment options allowed, or are you limited to pre-selected portfolios?
- If custom options are available, are they associated with additional fees?
- If you do not have opportunities in mind:
- Can your DAF provider suggest opportunities that will align with your goals?
4. What are the nuts and bolts?
To avoid surprises, ask what impact investing and recoverable grant options cost. Most of the time these services are not baked into your DAF administration fees.
- Are these annual fees or one-time fees?
- What services do they cover?
- Will you get regular performance reporting?
- What about impact reporting?
- Who is responsible for monitoring and reporting?
Setting Yourself Up for Success
Opening a donor-advised fund is a significant step in your philanthropic journey. If you would like to continue that journey into impact investing, make sure you ask the right questions. Whether you are focused on environmental sustainability, social equity, or another cause close to your heart, a well-chosen DAF provider can help you turn your values into action.
Start a conversation with us to help identify DAF providers that can support your philanthropic and impact investing journey or check out our resources to learn more.
CapShift does not endorse or receive compensation from any donor-advised fund provider in exchange for this post. This information is for educational purposes only.
