Study Shows Rarity of DAF-to-DAF Transfers
Donor-advised funds, or DAFs, are increasingly under fire by critics and are the target of a Senate bill, S.1981. A recent study offers an interesting look into a common critique about fund transfers. DAFs have high payout rates, but since donors are allowed to transfer money from one DAF to another, how much of the money flowing out of DAFs is contributed to another DAF, rather than to a charitable organization?
The report, authored by Helen Flannery and Chuck Collins at the Institute for Policy Studies, approaches the question with a clearly defined opinion that there is a “fundamental design flaw with donor-advised funds (DAFs).” They see the “flaw” as being a lack of requirement for funds to be gifted out of a DAF to a charity. The data on DAF payout contradicts this opinion though, as the roughly 20% payout rate for DAFs far exceeds the 5% requirement for private foundations. Clearly, a “requirement” isn’t always the most effective way to encourage giving.
But Flannery and Collins are right in the fact that DAF funds may be gifted to another DAF, as DAF sponsors themselves are public charities. The real usefulness of this analysis, albeit limited, is to demonstrate how infrequently that occurs. While donors have tax incentives to contribute to DAFs, there is zero incentive to simply shift funds from one DAF to another without a reason. No additional benefits are accrued, as the initial contribution took the funds out of the donor’s control (apart from being allowed to recommend where the funds are paid out).
The authors look at five years of tax returns for 39 of the larger national DAF sponsors who filed electronically to see what share of their contributions went to other national DAFs. We can quibble with their characterization of these DAFs as “commercial.” Some are ideologically driven organizations, such as DonorsTrust or the Tides Foundation. Others are the charitable arms of major financial institutions, but they themselves have 501(c)(3) status and often have lower management fees than their community foundation counterparts. There’s no evidence that anyone is misusing their DAF sponsor status for nefarious reasons simply because they collect fees.
Apart from the nomenclature, the authors take a logical approach, while sprinkling in biased commentary throughout. For example, they suggest there is a particular concern with a free-market focused DAF, DonorsTrust:
“The scale of the DAF-to-DAF transfers to DonorsTrust are of particular concern, because DonorsTrust was set up specifically to support organizations advocating for regressive, free-market, anti-taxation economic policy. As a DAF, they enable their donors to do this with complete anonymity, and have fought hard against efforts to increase the transparency of DAF donations.”
This critique is confusing. Several other DAFs included in this study were formed for distinct ideological missions, such as ImpactAssets or the Tides Foundation. Why would the authors attack only a conservative option for givers? We’ve covered the importance of donor privacy here in the past. And the Supreme Court agrees that the right to give anonymously must be protected.
Similarly, the authors focus on the fact that, in 2019, Fidelity Charitable Gift Fund “was the largest grantor to other commercial DAFs, and was the largest recipient of commercial DAF grants as well.” Sure. That makes sense, since Fidelity Charitable is, in fact, the largest DAF sponsor. Why consider only dollar values, rather than a larger look at gifts made to other DAFs on a relative basis? The $448 million of Fidelity DAF grants that were contributed to other DAFs that year is a tiny share—just 6%—of the total $7.28 billion in grants donors with DAFs at Fidelity made in 2019. Certainly, the fact that 94% of the DAF gifts – roughly $6.8 billion – went to non-DAF charities is worth a mention.
Overall, the authors concluded that “the $1 billion in DAF-to-DAF granting in 2019 accounted for 4% of all DAF grants.” To anyone reading this report without a grudge against DAFs, that sounds pretty good. Their data suggest the vast majority, 96% of all funds flowing out of DAFs, are going to their ultimate charitable destination. We know there are valid reasons for the DAF-to-DAF transfers that do occur. So where is the problem?
Valid Reasons Drive DAF-to-DAF Gifts
The report has a great section on why DAF-to-DAF grants occur. They cover reasons such as:
- Giving goals: “Donors switch from commercial DAFs to community foundation DAFs to have closer engagement with their community or more qualitatively informed guidance about giving.”
- Lower fees: “Donors switch from community foundation DAFs to commercial DAFs to take advantage of lower fees or higher yields.”
- Ease of giving: “Donors switch between commercial DAFs when they change banks, because having their personal portfolio and their DAF held in the same institution makes management easier.”
- Donor privacy: “And donors switch between commercial DAFs because doing so allows them to drop their name from grants out of the recipient DAF, giving them complete anonymity.”
These are just some of the true, legal and valid reasons to grant funds from one DAF to another. Nowhere here is there evidence of malicious shifting around of assets that already have been irrevocably committed to charitable giving.
Authors Stretch for Biased Conclusion
Just in case the perspective of the authors was too subtle to pick up on throughout the report, they clarify their goals in the final section. First, they malign the ability for “the wealthiest people” to reduce their tax liabilities by giving away their money to charities. They argue that the American public subsidizes donors’ tax deductions and “in return, DAF revenue is supposed to be granted out in a timely fashion, and used to support charities working for the public good.” We’ve discussed at length here before why, thanks to appreciation, quicker isn’t always better for charities to receive DAF gifts and why private gifts are not government property.
They go on to ignore their finding that DAF-to-DAF grantmaking is rare and done so for a reason, and claim this creates “an increasingly larger and distorted loop in which money intended for charity instead cycles indefinitely between financial institutions.” That’s why they are calling for increased regulations on DAFs:
“The rules governing DAFs are the only mechanisms by which the taxpayer can ensure an adequate return on their subsidy of the charitable tax deduction. Given the scale of DAF giving and the importance of this revenue to working charities, we cannot leave that societal return up to personal donor discretion, or to the discretion of DAF sponsors. We must create and enforce stronger rules to guarantee that the revenue going into DAFs is indeed used for charitable purposes. It is time to modernize the rules governing DAFs to discourage warehousing of funds and increase the flow of revenue to active charities.”
To recap, DAFs pay out at a strong rate. The occasions of DAF-to-DAF gifts are rare, and driven by valid reasons. The ultimate beneficiary of the growth in DAFs is our charitable sector. There are no data in this study to suggest we should take away the reasons these charitable giving accounts are so popular. More giving benefits charities and the communities they support.