With the recent introduction of the House version of the so-called Accelerating Charitable Efforts (ACE) Act, accurate and reliable information on donor-advised funds, or DAFs, is more crucial than ever. The basis for H.R. 6595 and S. 1981 is an unfounded assertion that DAF donors are “stockpiling” funds in these charitable giving accounts and resources are not reaching the ultimate charitable recipients fast enough.
That’s why the Philanthropy Roundtable interviewed one of the authors of a recent research report, “Understanding the Donor-Advised Fund Giving Process: Insights From Current DAF Users.” The authors analyze qualitative data from 48 in-depth interviews with DAF users, resulting in a vibrant picture of why and how donors use DAFs. Based on these data, the report sketches a “giving process” with four phases and multiple decision points and examines common strategies of DAF donors. Overall, this report illustrates the “abundant diversity in individual adaptation for giving through donor-advised funds.”
To get a better sense of the report’s implications, we spoke with corresponding author Dr. H. Daniel Heist, an assistant professor of Public Administration and Nonprofit Management in the Romney Institute of Public Service and Ethics at Brigham Young University. Heist’s research focuses on charitable giving and philanthropy, especially donor-advised funds, as well as volunteering. His nine years of professional fundraising experience inform his research and teaching.
This is the second of three blog posts based on this interview.
One common criticism we hear about DAFs is that donors can transfer funds from one DAF to another, potentially overstating the actual payout rates. What did you learn about the reasons one may contribute to a DAF from another DAF?
There are several reasons why people transfer from one DAF to another.
Donors sometimes use one DAF to liquidate non-cash donations. The money may start at a national DAF where it is easier for the donor to move investment assets into the DAF that is associated with the investment company. Then, the donor will move the money to a community or religious organization to handle the grantmaking. Similarly, some DAFs are better equipped to receive more complex assets, such as closely-held business interests. For example, the Dechomai Foundation specializes in liquidating complex, non-cash donations, then transferring the funds to another DAF. In this way, donors use multiple DAFs for convenience and lower transaction costs.
Once the assets are inside a DAF, it is relatively easy to transfer to another DAF. A common reason for this is the donor’s strong ties to a particular geographic community. Donors transfer DAF money to a DAF at a community foundation that is doing work in their area and may be better positioned to facilitate community-oriented grants. We saw this with COVID-19, when community foundations had existing connections with organizations that were helping relieve the effects of COVID. Some donors found they could more easily direct local relief efforts through a community foundation DAF.
Some donors with religious affiliations transfer DAF money to a faith-oriented DAF sponsor. Donors may have a heightened sense of trust with a faith-oriented sponsor, or feel strongly about community building within a religious context. Faith-oriented sponsors can offer more values-based vetting of grant recommendations.
One insight we had on going from a national to community or religious sponsor is that often donors had social ties to that organization. For example, one donor was on the board of the community foundation. Another donor knew somebody who worked at a local Jewish Federation and wanted the DAF money to go there.
Interestingly, donors may also go the other direction and move money from a religious DAF to a national DAF to make grants that may otherwise be restricted by the faith-oriented sponsor.
Likewise, some donors who start at a community foundation or religious sponsor may not like the platform, the grantmaking process or the investment options at that particular DAF. So they may transfer money to a national DAF because they think it has a better and easier platform.
One insight we had on this reason is that often donors who used a community organization had social ties to that organization. For example, one donor was on the board of the community foundation. Another donor knew somebody who worked at a local Jewish Federation and wanted the DAF money to go there.
Finally, donors transfer money from one DAF to another to encourage philanthropy among family members or because of family circumstances. This could happen when parents transfer DAF money to their adult children’s DAFs. This is becoming more common in the intergenerational transfer of wealth. It could also happen when a married couple goes through a divorce and separates their DAF. It could also happen when parents transfer DAF money to their adult children’s DAFs. This is becoming more common in the intergenerational transfer of wealth.
What about your findings on private foundation gifts to DAFs?
We saw two main reasons why donors transfer money from a private foundation to a DAF. The first is that they are testing the DAF out as a giving vehicle. One donor we interviewed used a family foundation and heard about DAFs and their low overhead. This donor moved some assets to a DAF to test it out and see whether it can fulfill the family’s philanthropic purposes. Some donors close their foundation and move all the assets to a DAF.
It is possible, and has been highlighted, that some donors could move money from a private foundation to a DAF to avoid public scrutiny. We have not come across that, but there would be a social-desirability bias for donors to withhold that motive from us.
Next week, in the third and final blog post in this series, Heist discusses more about his findings on the role of anonymous giving and potential lessons for policymakers. Read the first post here.