In a recent article on donor-advised funds, their critics, and related legislation, the Associated Press missed five crucial truths.
Here are the points that must be clarified:
- Donor-advised funds, DAFs, aren’t just for the wealthy. The article opens with an assertion that, “Wealthy philanthropists have long enjoyed an advantageous way to give to charity,” without acknowledging that DAFs are broadly and widely accessible to givers of all income levels. With low or no minimums to open, these charitable savings accounts allow average Americans to give thoughtfully and over time, without the resources needed to create their own private foundations. This is why they have been called a democratization of giving.
- DAFs – like all charitable giving avenues – are deliberately advantageous to both the givers and recipients. In the quote cited above, the article labels DAFs as an “advantageous way to give to charity,” but misses the fact that encouraging giving to charity is best achieved by making it mutually beneficial. The U.S. tax code has a long-standing charitable tax deduction with the goal of incentivizing charitable giving and with the acknowledgment that once an individual gives his or her money to a charity, it cannot be consumed as their own income. In other words, we don’t tax donors on money they give away. That is advantageous to those who choose to give to charities, and certainly advantageous to charities and those they serve.
- Funds in DAFs are irrevocably committed to charitable giving. The AP missed the mark when the article said, “Using something called a donor-advised fund, they’ve been able to enjoy tax deductions and investment gains on their donations long before they give the money away.” The key to understanding the value of DAFs is understanding that donors to DAFs do “give the money away” once it is contributed to a DAF and irrevocably committed to charitable giving. DAF donors can’t take it out and buy a boat. The funds no longer belong to the donor and may only be used for donations to charitable organizations.
- There is no evidence of stockpiling. According to the article, critics argue, “that because DAFs provide no financial incentive to quickly donate the money, much of it ends up sitting indefinitely in the accounts rather than being distributed to needy charities.” Yet, DAFs regularly pay out around 14-20% a year, even under DAF critic Ray Madoff’s overly conservative calculations. During times of great need, such as the COVID-19 pandemic, DAFs show their value as rainy-day funds and pay out at even higher rates. That is not to say that every DAF donor distributes a significant amount every year. That is also by design. DAFs are so popular because they allow donors to save over time and watch the charitable funds grow with appreciation in order to make larger gifts in the future or to create a legacy of giving for generations to come. Whatever the chosen timeline, charities and those they help are the beneficiaries of larger, thoughtful gifts.
- The article claims that S. 1981 aims “to speed donations to charities,” but the bill would actually hurt the charities it seeks to help. As we have written here before, the bill would increase complexity, remove incentives for giving and punish the very activity that the sponsors seek to encourage: charitable giving.
When considering changes in the treatment of DAFs or any charitable giving vehicle, it is crucial to rely on evidence-based solutions to well-defined problems. S. 1981 faces an uphill climb as it presents weak solutions in search of problems.