Donor-Advised Funds Are Supporting Charities in Time of Need

Donor-Advised Funds Are Supporting Charities in Time of Need

Mar 01, 2021 Elizabeth McGuigan

The following article is part of a Philanthropy Roundtable series examining recent calls for additional regulations on charitable giving and the works underpinning these proposals.

Americans have a long, rich tradition of charitable giving. With the rise of personal charitable giving accounts called donor-advised funds (DAFs), giving to causes we care about has never been easier. Yet, critics of these funds are calling for regulatory changes that would dampen giving in our country. One proposal, the “Initiative to Accelerate Charitable Giving” is fueled by false assumptions that charitable dollars are sitting, untouched, in DAFs.

A recent working paper by James Andreoni and Ray Madoff, “Calculating DAF Payout and What We Learn When We Do It Correctly,” argues that DAFs are not properly regulated because their growth has outpaced that of other charitable funds.

But it is the existing regulatory structure that has allowed DAFs to be so successful.

The Success of DAFs Is Clear

If the social goal is to increase giving, then seeking new regulations on DAFs is a solution in search of a problem. According to the National Philanthropic Trust’s 2020 DAF report, “grantmaking from DAFs to qualified charities totaled more than $25 billion in 2019, a 93 percent increase since 2015. The same rapid growth trajectory also applies to contributions to DAFs, which totaled $38.81 billion in 2019. This represents an 80 percent increase in contributions since 2015.”

In fact, DAFs outpace giving in other ways because they are flexible, accessible to smaller donors and meet the needs of a wide range of donors. With many charities struggling to make up lost fundraising revenue while meeting increased demands, now is not the time to discourage the use of these personal charitable giving accounts.

Because DAFs are growing in popularity and every dollar in them must be used for charitable giving, there are more resources available for charitable giving now and in the future. 

DAFs Play a Unique Role in Giving

DAFs make charitable giving more accessible to Americans of all income levels. Many DAFs require a low minimum to open, and some even have a $0 minimum. While there are certainly financial barriers for many middle-income Americans to start their own private foundations, opening a DAF is accessible to all who wish to donate to charities in thoughtful, strategic ways over a period of time that meets their goals.

Society Benefits from Growth in DAFs

The impact of these accounts is magnified by how they allow for assets to appreciate over time. According to a new report by scholar Howard Husock for The Philanthropy Roundtable and the American Enterprise Institute, this appreciation has created roughly an additional $5 billion from 2015–2019 in DAF assets—all dedicated to charitable giving. If DAFs are forced to pay out faster than they already do, there will be less appreciation and fewer funds for charities in the long run.

DAF Diversity is Good

In their study, Andreoni and Madoff make the point that payout rates differ amongst sponsors. This is true and reflects the diverse goals of donors. Some wish to distribute funds immediately. Some wish to wait and allow their funds to grow, resulting in a larger ultimate gift. Others wish to build their assets for needs in the future, in a sort of “rainy day” fund or, as Husock terms it, an “American Endowment.”

This diversity has made it possible for DAF contributions to help support charities in our current time of crisis. According to one of the largest DAF sponsors, Fidelity Charitable, donors to its DAFs contributed $14.4 billion in 2020. More astounding is the 24 percent increase in grants paid out from these DAFs, which surged to $9.1 billion, the largest total on record. These data echo the findings of the National Philanthropic Trust’s recent survey of DAF COVID grantmaking. According to this survey, DAF donors increased grantmaking support for all charities in the first six months of 2020: “DAF grants to charitable organizations increased 29.8 percent by dollar value in the first six months of 2020 compared to the first six months of 2019. This growth rate is nearly double the 16.7 percent for the prior period for the same DAF sponsors.”

The value of this timing choice is fundamental to DAFs. According to Andreoni and Madoff, “the benefit of DAFs to the public is less certain as there are currently no regulations or time limits on when or how fast DAF funds must be disbursed to charities.” But preserving the freedom to choose how, when, and to whom to donate does not mean these dollars are “resting” or “stockpiled,” as the authors suggest. Grant payout rates from DAFs have exceeded 20 percent every year for which data are available. In 2019, the National Philanthropic Trust reported a payout rate of 22.4 percent, up from 21.2 percent in 2018. These personal charitable giving accounts already far exceed the 5 percent payout requirements in place for private foundations. Forcing further acceleration is shortsighted and would undermine the benefits of appreciation in growing the funds available for charitable organizations. 

DAFs Are Needed

DAFs are appealing to potential donors because they open the door for all Americans to build a legacy of charitable giving. They encourage individuals to become donors as best suits their own goals and financial situations. More charitable giving is an important social goal and the best way to accelerate giving is to protect the features that facilitate the growth in DAFs.  

>> To read the first article in this series, click here: Why Americans Should Cheer the Use of Donor-Advised Funds

>> In the next post, the third in this series, we will take a closer look at the actual payout calculations proposed by the authors, as well as alternatives used by DAF sponsors and other researchers.