Efficient Philanthropy: Why DAFs Don’t Need to be Over-regulated

In early September, the Hewlett Foundation published a Listening Post by Vice President Fay Twersky titled  “Demystifying DAFs,” in which she discusses donor-advised funds and their utility as a philanthropic tool. Ms. Twersky points out some important realities about the effectiveness and resilience of DAFs, concluding that “DAF sponsors are not the evil hoarders some make them out to be.”

Ms. Twersky recognizes the following: 

  • DAFs are an efficient tool to distribute funds and “have proven generous to nonprofits in perilous times.” They have shown record increases in grantmaking in the face of COVID-19 and racial justice, and historically, DAF holders tend to give aggressively in tough times.
  • More regulations, even if intended to boost charitable giving from DAFs, could ultimately lead to a reduction in giving and fewer resources set aside for future crises.
  • A variety of donors contribute to DAFs, from the wealthiest to “those of more modest means who appreciate their ease of use.” Which means DAFs are more accessible to more donors than a traditional private-foundation giving structure.
  • When a donor gives to a sponsoring organization, the funds become the property of that charity and are no longer under the donor’s legal control, meaning those funds must go to charitable organizations. In other words, a donor receives no benefit from leaving DAF assets untouched.  

The ultimate question that Ms. Twersky asks and answers is: “Are DAF donors dawdling?” She comes to a similar conclusion as we have: not necessarily. According to the National Philanthropic Trust, the average payout rate from DAFs for the last five years has exceeded 20%, meaning DAFs have an average asset turnover of about five years. And virtually every major DAF sponsoring organization has a “dormant fund” policy that ensures individual DAF accounts remain active in grantmaking.

Unfortunately, after recognizing these positive attributes of DAFs, Ms. Twersky makes two suggestions that would seem to undo their benefits.

First, she suggests DAF sponsors should publicly identify DAF holders and their advised grants, as well as create searchable grant databases on sponsor websites. While this would be appropriate on a voluntary basis (which many sponsors already utilize), mandating this type of disclosure could threaten donor privacy, which many donors might prefer for religious reasons or when giving to controversial causes. To read more about the donor-privacy issue, take a look at TPR’s briefing on the issue here.

Ms. Twersky goes on to mention the possibility of creating a two-tier DAF structure, where donors can either delay the receipt of a charitable deduction until money is granted out from their DAFs, or they can agree to a 15-year DAF, from which funds must be granted out within 15 years of donation. This would put the payout onus on a donor instead of the charity that owns the funds (the sponsoring organization), and would have the effect of undoing the legal structure of DAFs and DAF sponsors that Ms. Twersky properly mentioned as a being a positive.

When one looks at the data, DAFs have an impressive 20% average payout rate. It’s not clear why they need further regulation. 

Overall, Ms. Twersky makes a compelling case for why DAFs are important and efficient philanthropic tools. Given that they seem to be working well as is, why fix something that isn’t broken? 

For more on donor-advised funds and their effectiveness, check out Joanne Florino’s latest blog on  “Three Good Reasons Why Donors Might Postpone Releasing DAF Dollars.”