Last week, Helen Flannery, a researcher at the progressive Institute for Policy Studies, took to Twitter to share a misleading take on IRS data on private foundation grants to donor-advised funds (DAFs). According to Flannery, tax return data from 2021 suggests that $2.6 billion in private foundation grants were contributed to national DAFs. We know there are myriad reasons for a foundation to give through DAFs. But Flannery argues this practice is somehow nefarious as it allows foundations to count these grants toward their 5% payout requirement while bypassing the obligation to move the money to public charities this year. Looking beyond the Twitter rhetoric to the dataset itself reveals that Flannery’s claim about grants to DAFs being used to bypass the 5% payout requirement is baseless.
What the Data Tell us
DAFs are powerful giving vehicles. Numerous studies on DAF account activity consistently demonstrate that funds are donated out of DAFs to charities at robust rates each year. Sponsor organizations that oversee DAFs strictly regulate inactivity and ensure money is allocated to charitable causes. In fact, DAF payout rates are often remarkably high, with median payouts surpassing 11% and average rates ranging from 15% to 30%. These figures rise further when we exclude endowed DAFs and newly established DAFs from the equation. When private foundations use DAFs to help meet their missions, they are using an effective, nimble tool for giving.
But is there any merit to the argument that they are misusing DAFs as an end-run around payout requirements? The data show private foundation contributions to DAFs represent a small fraction of their total giving. To put things into perspective, the $2.6 billion in grants contributed to DAF accounts represented less than 3% of all private foundation grants in 2021. In total, foundations distributed a staggering $90.88 billion in grants that year. This clearly shows the funds allocated to DAFs make up a tiny fraction of the overall grantmaking efforts. Flannery’s suggestion that foundations are using DAFs to meet their minimum payout requirement is simply unfounded.
Moreover, the average foundation payout rate typically exceeds the 5% minimum requirement, hovering around 7% to 9%. Even if we subtracted the $2.6 billion in DAF grants from the payout rate, it would only reduce it by a minuscule 0.2%. Clearly, the notion that foundations are relying on DAFs to meet their payout requirement holds little water when we analyze the data.
Foundations Use of DAFs: Amplifying Philanthropic Impact
It is crucial to understand that private foundations have legitimate reasons for utilizing DAFs as part of their philanthropic strategies. The fact remains – once a dollar is put into a DAF, it is irrevocably dedicated to charitable giving. There is no way for any donor to personally benefit from such a gift.
Private foundations may opt to make grants to DAFs in order to increase the impact of their grantmaking. By pooling resources from multiple donors, DAFs can distribute larger grants than a single donor could, allowing the foundation to support more projects or organizations than it could on its own.
Another reason private foundations choose to utilize DAFs is to save time and administrative costs. DAFs can handle the day-to-day tasks of grantmaking, such as identifying and researching potential grantees, writing grants and tracking grantee performance. This frees up the foundation’s staff to focus on other priorities.
Some private foundations also use DAFs as a means of engaging their donors more directly in the grantmaking process. Donors who have established DAFs can recommend grants from their funds, giving them a say in where the foundation’s resources are directed. This involvement enhances donor satisfaction and strengthens the relationship between the foundation and its supporters.
DAF sponsors often provide expertise and support in grantmaking. They possess knowledge of the charitable sector, due diligence processes and legal requirements. Private foundations can leverage this expertise by partnering with DAFs, ensuring their grants are effectively allocated and utilized.
Furthermore, DAFs offer a quick and easy way for foundations to respond to emerging needs. In times of crisis or natural disasters, for example, a foundation can make a grant to a DAF that is focused on providing relief and support in those specific areas.
Additionally, DAFs can serve as a platform for foundations to test new ideas and approaches to grantmaking. They provide a flexible space for experimenting with innovative strategies, such as social impact investing or funding projects with unconventional solutions. This allows foundations to assess the viability and effectiveness of these ideas before committing significant resources.
Unintended Consequences of Limiting Use of DAFs
It is essential to recognize that imposing new regulations, restrictions and payout requirements on private foundations’ use of DAFs would have unintended consequences. Rather than benefiting the charitable sector, such measures would hinder the flow of dollars to public charities and the communities they serve. The flexibility and efficiency provided by DAFs play a crucial role in supporting philanthropic efforts and addressing pressing needs.
Critics often overlook the fact that DAFs serve as strategic tools for private foundations, enabling them to achieve greater impact, save resources and engage donors effectively. The use of DAFs complements and enhances the philanthropic ecosystem by leveraging the expertise and networks of sponsor organizations.
In sum, the claims made by Flannery regarding private foundation grants to DAFs require closer scrutiny. The data reveal that the funds allocated to DAFs represent only a small fraction of total foundation grants, and the suggestion that foundations are using DAFs solely to meet their payout requirements is unsupported. Furthermore, DAFs do pay out to public charities, and studies consistently demonstrate high payout rates in these funds.
As we’ve laid out, private foundations have valid reasons for utilizing DAFs, and imposing restrictive regulations would reduce support for charities and people in need. Preserving the advantages of DAFs is crucial to ensuring a vibrant and effective philanthropic sector.