Using Donor-Advised Funds for Impact Investing

Impact Finance Center was created to answer the question: How do we best align our investments with our values?

Let us introduce you to the power of donor-advised funds.

Donor-advised funds (DAF) are powerful tools that have democratized philanthropy by aggregating donors and enabling them to invest a variety of asset types (i.e. cash, stocks, bonds and real estate) into organizations that they care about, while reaping a number of tax benefits, such as avoiding capital gains taxes and enjoying a federal income tax deduction of up to 50% of adjusted gross income for cash contributions.

One option is to open a DAF through your local community foundation.

Since its inception in 2008, the Community Foundation of Utah has provided more than $55 million in grants to a myriad of efforts throughout the state and beyond. Much of that giving can be attributed to their sponsorship of donor-advised funds.

However, fund-holders interested in using their DAF dollars beyond grant-giving, can also use their donor-advised funds to invest in sustainable, mission-driven, market-based solutions.

Realize Impact, a volunteer-run, public charity whose mission is to fund and support impactful startups, accepts donations from DAFs to make investments into nonprofits and mission-driven enterprises on behalf of the DAF fund-holder.

When DAF fund-holders at the Community Foundation of Utah voiced a desire to use their funds as impact investments, Ian Shelley, the Executive Director of the Community Foundation of Utah, had to come up with a way to deliver.

As the director of a community foundation, Ian’s organization did not have the expertise or capacity to operate and manage direct investments. Thus, he partnered with Luni Libes at Realized Impact for an experienced third party that he could defer to.

Ian also appreciated Realize Impact’s fee structure. Unlike other organizations, Realize Impact charges one low, flat fee of $500 for investments of $10,000 or more, and no fee for any smaller investment. Ian knew his clients are averse to burdensome charges and fees, and this model was a refreshing reprieve.

Realized Impact allows DAF funder-holders to make direct impact investments as opposed to traditional grants. But, Ian and Luni agree that grants and mission-related investments are more similar than one might think.

Luni encourages donors and investors to rethink that dichotomy. “In the world of startups, most investments fail. So almost every investment you make is, in fact, a grant. You just don’t know it yet when you make the investment.”

Ian has found that when people consider mission-related investments, they spend a lot of time thinking about risk. They ask, “What if the company folds and you lose charitable dollars?” Which Ian admits, “is an absolute[ly] valid concern.” But what surprises Ian, is that this same question is not applied to grants. “You could give a grant to a nonprofit, and they could totally squander it,” said Ian. Yet, the fund-holders don’t show the same concern for losing grant dollars as they do towards investments. In his role, Ian tries “to help donors see mission-related investments and grants to nonprofits as very similar things.”

The two also affirm that donor-advised funds can be a powerful tool to de-risk your investments. “If you’re gonna dabble in high-risk impact investments, you might as well use your DAF to get your tax deduction upfront,” Luni said. “And then if it’s working, you can follow it with tax deductible money. You can do the next round of investing with your savings account if you want. You can de-risk things with your DAF money.”

But ultimately, whether one chooses to use their donor-advised fund to pursue grants or mission-related investment opportunities, they’re both powerful, meaningful ways to invest in philanthropic causes. Ultimately, “[Both grants and mission-related investments are] investments into an organization that is striving to do good in the world. There’s a tax structure difference and there’s an operational difference. But it’s essentially the same thing,” said Ian.

As an individual investor, you can use Realize Impact to distribute funds from your DAF. All it takes is filling out a short form and paying their flat $500 fee if your investment exceeds $10,000.

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