I was on Nonprofit Radio last Friday, October 19, talking with host Tony Martignetti about donor-advised funds. A donor-advised fund or DAF is a charitable fund housed within a public charity that allows a donor to make a gift, take an immediate charitable deduction, and recommend, typically with strong persuasive authority, future grants made from the fund. You can read more about the basics of DAFs in our post – Donor-Advised Funds: What You Should Know. Here are some things we talked about (and other things we didn’t get to).
Dispelling Some Common Misconceptions About DAF Laws
A DAF is not an organization. It’s a fund housed within an organization.
A DAF cannot be housed in a for-profit organization. It must be housed in a public charity. Financial institutions like Fidelity, Goldman Sachs, Vanguard, and Schwab do not host DAFs. These for-profits have created public charities in which to house multiple DAFs.
A donor does not have legal control over the funds in a DAF and cannot direct the DAF sponsoring organization on how to invest and/or expend such funds. A donor can only advise the sponsoring organization on DAF investments and grants.
Why Should We Care About Donor-Advised Funds?
Many are concerned that giving to DAFs is reducing giving to charities actively engaged in charitable programming. Some counter this concern by emphasizing that DAFs are more likely to be replacing giving to private foundations set up by their donors. We need more studies to help us understand whether DAFs are increasing giving in a sufficient manner to justify the favorable treatment donors get for making a contribution to a DAF instead of to a private foundation.
This is an issue with important implications for the nonprofit sector. DAFs are now the fastest-growing recipients of charitable giving in the country. The share of total individual charitable giving in the U.S. that is going to DAFs, rather than to other charities, has nearly doubled over seven years – from 4.4% in 2010 to 8.3% in 2016. In monetary terms, donations to DAFs increased from just under $14 billion in 2012 to $23 billion in 2016. In 2016, for the first time ever, a DAF sponsoring organization – Fidelity Charitable Gift Fund – was the top single recipient of charitable giving in the U.S. In 2017, six of the top ten recipients of charitable giving were DAFs. See https://ips-dc.org/report-warehousing-wealth/.
In 2016, the average size of an individual DAF was estimated to be $298,809. See https://www.nptrust.org/daf-report/recent-growth.html.
Why do Donors Like Donor-Advised Funds?
Donors can benefit from an immediate charitable contribution deduction (for itemized filers) while deferring their giving to ultimate charity beneficiaries. This may allow donors to plan their intended charitable gifts more carefully and to build up the funds to be granted within an organization that may be better equipped to accept, manage, and liquidate noncash gifts before granting them out to the ultimate charity beneficiaries.
As a result of the Tax Cuts and Jobs Act, many donors may only be able to reap the benefits of itemized deductions (and therefore the benefits of a charitable contribution deduction) by bunching their giving so they donate only every two, three, four, or five years while taking the standard deduction in non-giving years. Such donors can, however, use DAFs to smooth their giving to charities by having the sponsoring organization make annual grants from the bunched donations.
Donors also have several reasons to prefer giving to a DAF sponsoring organization rather than to a private foundation, including:
- The limit of the charitable contribution deduction is much higher if the gift was given to a sponsoring organization (e.g., 60% of the adjusted gross income (AGI) for a cash contribution vs. 30% if the gift was to a private foundation).
- The deduction for a gift of real estate or closely held stock will generally for the fair market value of the asset as opposed to its cost basis if the gift was made to a private foundation.
- The DAF funds are not subject to private foundation excise taxes on investment income.
- The DAF funds don’t have an annual 5% minimum payout requirement, allowing for accumulation and investment of funds to make a bigger gift to the ultimate charity beneficiaries after several years.
- No entity-level administrative burdens and costs (e.g., corporate formalities, charity registrations, tax filings) associated with a private foundation.
- No fiduciary duties and subsequent exposure to liability for failing to meet such duties.
- Anonymous grantmaking (since the grant will be shown to originate from the sponsoring organization).
Benefits of Donor-Advised Funds
Proponents of DAFs emphasize that DAFs bring billions of dollars into the nonprofit sector. They believe that a substantial amount of these dollars will be lost if DAFs are eliminated or over-regulated. At a time when tax laws have disincentivized giving and are projected to have a major adverse impact on the sector (see The New Tax Law and Its Impact on Nonprofits – Part 1), they argue that ensuring donors still have this increasingly popular option for giving is critically important.
DAFs also allow for and help facilitate collaborative grantmaking opportunities, though it may be difficult to determine how often this occurs, particularly outside the context of community foundation sponsoring organizations. As an alternative to small private foundations, DAFs create efficiencies in giving and enforcement and allow donors to focus more on grantmaking decisions than on administration and compliance.
Many smaller nonprofits also like DAFs because sponsoring organizations have the resources to accept, invest, and manage complex assets that the smaller nonprofits may not have. For example, a sponsoring organization might be able to accept a $10 million painting and properly maintain, store, and even cause it to be displayed for a few years before it is sold to allow for grantmaking to, and use by, a much more resource- constrained grantee charity.
As noted above, DAFs allow donors to provide “anonymous” gifts to charities. The recipient charities will know only that the sponsoring organization made the grant but not the original donors of such funds. In certain circumstances, this can be helpful in protecting a donor from violence (e.g., a donor to Planned Parenthood in a particularly conservative community might want to support the charity but only if the donor can shield her or his identity).
Problems with Donor-Advised Funds
The biggest problem most critics have of DAFs is the lack of a payout requirement. A donation given to a DAF can legally sit there and continually be invested (resulting in plenty of benefit to investment managers) in perpetuity, without a single expenditure for charitable purposes. Proponents of DAFs argue that the payout rate for DAFs is much higher than the payout rate for private foundations, despite not being subject to a similar payout requirement. While one study reveals a 20% payout rate for DAFs at 49 national organizations, it’s difficult to determine what portion of that rate represents transfers between two sponsoring organizations, which may be fairly common.
Critics also note that most of the biggest DAF sponsoring organizations were created by and remain closely affiliated with mega-financial institutions (“Commercial DAF Sponsoring Organizations”). They believe that the leadership of these sponsoring organizations are focused on investing DAF funds and not on any charitable mission. They further believe that these sponsoring organizations are for all practical purposes controlled by their donors’ advice about when and where to make grants, subject only to the grantees being in existence and recognized as charities by the IRS. Meanwhile, the donors reap all the benefits of being in practical control of such funds (which may be long after they contributed them and got a big tax deduction), including the influence those funds give to donors in their private business transactions.
While community foundations that sponsor DAFs are typically subject to less criticism than Commercial DAF Sponsoring Organizations because the community foundations tend to be more active in advising donors and facilitating collaborative efforts, there are some high-profile exceptions. Silicon Valley Community Foundation, the 9th biggest sponsoring organization, was subject to heavy criticism stemming in part from the charge that its leadership focused on revenues above other issues (including employee harassment and grantmaking to the local community).
A DAF’s facilitation of anonymous donations may be problematic because it allows individuals to make very large contributions to fund efforts that can shape public policy without any accountability. For example, a very wealthy individual or corporate donor could make a $10 million gift to a DAF sponsoring organization which could then regrant such funds, as the donor advised, to fund organizations opposed to environmental protections to combat climate change. If the donor made that gift through a private foundation, the donor’s contribution to the private foundation would be open to public disclosure. However, public charities, including DAF sponsoring organizations, are not required to disclose their donors except to the IRS (and perhaps a state charities regulator). The rationale behind making major donors to private foundations and 527 political organizations open to public disclosure is to guard against “dark money” influencing public policy without allowing the public to have knowledge of the source of such funds.
Three Simple Steps to Protect Charities and American Taxpayers from the Rise of Donor-Advised Funds (Nonprofit Quarterly)
Donor-Advised Funds: How to Make Sure They Strengthen Our Communities (Nonprofit Quarterly)
Do Donor-Advised Funds Require Regulatory Attention? (Nonprofit Quarterly)
Opinion: Charities and Taxpayers Deserve More From Donor-Advised Funds (Chronicle of Philanthropy)
A Qualified Defense of Donor Advised Funds (Medium)
The Price of Privacy: Four Problems With Anonymous Giving—and a Case for Reform (Inside Philanthropy)