3 Different Ways your Clients May be Using their Donor-Advised Funds
Did you know that donors who set up a donor-advised fund (DAF) usually fall into three “behavior” categories? Using a water analogy, these donors can be described as “tub donors, tank donors, and tower donors” indicating how much and how often they “fill” and “drain” their charitable “water” vessel, AKA their DAF.
Tub donors usually fill up the DAF “tub” with money each year or two and drain those funds within that same time frame. Then, they fill it up again. For these donors, this can act as a charitable budgeting exercise. These donors may be aware of the tax benefits of making the charitable donation, but often care less about how those funds are invested because the funds will be spent out of the account in a relatively short period of time. These donors also tend to be more mindful of DAF sponsor fees.
Tank donors usually donate more money into their DAF than they intend to spend in 1-2 years (many have a 5-10 year timeline in mind). Often, these DAFs are set up as a result of a liquidity event or other major financial event. These donors tend to be more sensitive to the tax benefit that comes from donating to the DAF and in all likelihood, their CPA or financial advisor suggested they contribute a relatively large lump-sum into a DAF to offset their taxable income that year. Tank donors may take more time initially deciding where to give but most are actively grantmaking each year. Many of these donors make additional contributions to their DAF over the years, in addition to the larger first donation.
Tower donors often set up their DAF to essentially act as a private family foundation, usually with one initial large lump-sum. These individuals plan to donate these resources for 10+ years, to be spent down during their lifetime, or to be passed on to their heirs to continue the grantmaking. These donors may care more about the asset allocation of the funds within the DAF to ensure the stability and, hopefully, growth of the funds over time. Many tower donors set a goal of giving away 5 or 10% of the funds each year, much more in line with the “behaviors” of private foundations.
Want to learn more about these three types of DAF donors? Read the full paper (“Tubs, tanks, and towers: Donor strategies for donor-advised funds giving”) here.
