Donor-advised fund (DAF) critics are seeking to gain traction in the media recently. Between a misleading Bloomberg report and calls for restricting DAFs in The Chronicle of Philanthropy, critics are maintaining a steady if misguided drumbeat against the popular charitable giving vehicles.
On the policy front, officials in California have expressed skepticism about the value of DAFs. In 2021, the state attorney general’s office required DAFs based in California or registered there to complete an audit survey. We finally have the results, and the data illustrate what we already know: DAFs are a flexible, accessible way for Americans to give generously to the causes and communities they care about.
The nearly 40-page report out of California covers data from 57 DAF sponsors of various types, including commercial, mission-based and community foundations. These sponsors alone report managing 416,259 DAF accounts in one year, giving out nearly $20 billion in the last year covered. The report is worth a read in full, but to answer some common DAF critiques, we’re highlighting the California data in comparison to three attacks made by former foundation director Craig Kennedy in a recent article in the The Chronicle of Philanthropy.
1. Payout Requirements
Assertion: “DAFs do not have a distribution requirement. … As a result, donors can literally stockpile their charitable money even after receiving various tax benefits. … The result is a massive influx of money into DAFs and a comparatively paltry amount for nonprofits.”
California Data: “Grants from DAFs to charitable organizations rose steadily across all three reporting periods. The combined total value of grants to charitable organizations ranged from $12.7 billion in Year 1 to $19.8 billion in Year 3. For all DAF sponsors combined, the fund flow ratio was 61% for Year 1, 55% for Year 2 and 72% for Year 3.”
According to the California report, grantmaking was robust. While commercial DAF sponsors showed the highest amount of grantmaking for each year, the report outlined a strong flow rate across the board. Calculated as the amount of grants divided by the total contributions for the same year, this flow rate is likely undercounting the actual payouts – for reasons we have talked about here before. But even with that in mind, the flow of rate of money out of DAFs grew from 61% in Year 1 to 72% in Year 3. It’s true there is no distribution requirement for DAFs. But why impose a requirement of 10%, as Kennedy suggests, when nearly three-quarters of contributions into DAFs are being granted out each year? The data, again confirmed by the California report, simply do not support the need for new regulations.
Even by another flawed measure, grant ratios, the data show roughly 75% of DAFs had payout rates over the 10% that Kennedy calls for in his article. Forgetting about the fact charities gain in the long run when funds inside a DAF appreciate and yield larger gifts, setting a threshold for DAF payouts will likely create a ceiling, not a floor. At the end of the day, these types of solutions are in search of problems and will mean less resources for charities … and the most vulnerable in our communities.
2. Private Foundation DAF Gifts
Assertion: Kennedy proposes the government “prohibit private foundations from making grants to DAFs,” asserting foundations that “adopt this approach, whether for reasons of secrecy or because they want to stockpile resources, are clearly not doing so to advance the public good. The practice should end, along with all transfers from private foundations and DAFs to 501(c)(4) groups. Many of the largest (c)(4)s are overtly political, supporting efforts that help a particular candidate or promote controversial legislation.”
California Findings: Before we dive into the California data, let’s review some of the legal, valid and pro-charity reasons that private foundations may choose to give through DAFs. In our hyper-politicized and divisive culture, foundations may want to protect their staff and families from harassment by donating anonymously through these giving vehicles. From a practical standpoint, some foundations choose to give to international causes, which DAFs help to facilitate by taking care of the paperwork and due diligence requirements. Moreover, during crises like hurricanes or COVID-19, foundations may wish to issue one-time, off-mission grants without signaling they are open to future solicitations. The list goes on.
Now onto the California survey results. With all the attention recently being paid to the private foundation use of DAFs, it is interesting to note these gifts account for only about 5% of total contributions captured by the California survey. This should raise questions about why attention is focused on a small fraction of DAF contributions – particularly as the greatest proportion of these are going into community foundation DAFs, where private foundations may be pooling resources with others or taking advantage of the charitable services community foundations help provide. Are policymakers really being asked to threaten charitable giving merely to crack down on rare, legitimate use of DAFs by private foundations?
And on the ability to direct DAF gifts to 501(c)(4) nonprofits for “political causes,” Kennedy is simply wrong. The tax code does not allow donors to give from a DAF to a 501(c)(4) unless they have the ability to ensure those funds are not used for political or lobbying activities, or what the IRS terms “expenditure responsibility.” As such, it would be uncommon for a DAF sponsoring organization to be willing to take on such penalty risk and compliance burden.
To his argument that DAF gifts may go to “controversial causes,” we would hope Kennedy reads the Roundtable’s new paper on why policy-related philanthropy is a crucial complement to humanitarian giving – and is equally protected under the Constitution. Freedom of speech and voluntary association make America uniquely free. Kennedy’s ill-conceived argument to curtail giving is not supported by data, the tax code or the Constitution.
3. Fees for Management and Investment Services
Assertion: “Without a distribution requirement, DAF donors have no legal reason to put the funds in the hands of charities. The same is true for the primarily for-profit DAF sponsors, whose fees for management and investment services are linked to the size of the account.”
California Findings: This is a common theme among DAF critics. Sponsors charge fees, therefore, they are not interested in facilitating payout. But, again, there is no evidence to support the claim DAF sponsors are “warehousing” charitable funds for their bottom lines. In fact, just the opposite is true: DAF sponsors – whether national, single-issue or community-based – are all 100% committed to granting funds to those in need as quickly as possible.
The California survey found two important facts that undermine Kennedy’s argument: 1) the vast majority of sponsors have policies in place to ensure grants are disbursed within a given time frame and to prevent self-dealing grants; and 2) administrative fees are low. How low? Administrative fees are about one quarter of 1% of DAF assets or less than 1% of DAF contributions in a year. Commission fees, shown on the table below (highlighted in the California report), are even less than that. The data here speak for themselves. DAFs are charitable giving vehicles, not cash cows for their sponsors.
Focus on the Evidence, Not Soundbites
When it comes to calls to limit any type of charitable giving tool, it is critical to understand whether there is valid evidence supporting such proposals. DAFs have been maligned by some in the news media searching for a sensational narrative or by billionaires who put their charitable assets into other vessels like limited liability corporations … but the reasons to restrict their use don’t add up. On the contrary, DAFs are popular with givers – and while not all generous Americans can afford the overhead of a private foundation or LLC, they all deserve the ability to give thoughtfully and strategically over their lifetimes and, if so desired, give anonymously. DAFs make it possible for givers of every income level who care passionately about giving back to donate to any cause or community that matters most to them.