The economic headwinds blowing across the U.S. economy have presented challenges for the charitable sector. Despite inflation, a stock market plunge and rising unemployment, Americans broke records for giving to charity in 2021 through donor-advised funds (DAFs), or personal charitable giving accounts. As Congress looks to its to-do list in this new session, it should strike out new restrictions on DAFs entirely.
DAFs have exploded in popularity as an alternative or complement to private foundations. The National Philanthropic Trust recently provided encouraging data on the growth and impact of these giving vehicles. In 2021, DAFs grew and did a lot of good. Increasing in number by 28% from last year alone, there are reportedly 1.3 million DAFs and they granted an all-time-high $45.74 billion to charitable organizations. Donors contributed a record $72.67 billion to DAFs in 2021, up 46.6%, which eclipses the second-highest annual rate of increase that occurred in 2012. The report contextualized this increased giving as occurring “in 2012 when the U.S. government faced a ’fiscal cliff’ of potential broad spending cuts and expiring tax cuts that threatened the charitable tax deduction.” Charitable assets under DAF control rose just shy of 40%–also a new record–to $234.06 billion in 2021, reflecting market gains and increased giving by donors.
We can hope that the strength of 2021’s giving will accelerate in 2022 and beyond, but current economic headwinds create significant uncertainty. At 7.1% inflation continues to challenge charities with greater demand for services and increased costs to supply them. The stock market plunge last year wiped out $9 trillion of household wealth.
Hobbling a powerful philanthropic tool, as some seek to do to DAFs, will hurt the people and causes charities serve at a time when every dollar matters.
Money donated to DAFs must be used for charitable purposes and it certainly is not sitting idle in these accounts. Grants from DAFs to charities grew by more than 60% in the past two years and by over 400% in the last decade–undercutting the criticism of some that DAFs are warehouses for charitable funds.
Many DAF donors are committed to longevity and view DAFs as a strategic form of giving over time. Unfortunately, the benefit to charities of sustained, long-term giving is at risk if Congress passes a bill called the “Accelerate Charitable Efforts Act.” The charitable giving community has many concerns with this bill, one of which is how it would undercut long-term, strategic giving by placing a time horizon on DAF gifts. The ACE Act requires that all DAF funds be paid out within 15 years. Alternatively, if a donor delays claiming a tax deduction for his or her gift, then the payout limit is extended to 50 years. Donors face a stiff 50% tax penalty for missing payout deadlines, which would have a chilling effect on giving for donors who utilize DAFs for long-term strategic giving, to the detriment of charities.
Critics of these flexible funds should pay attention to just how quickly charitable dollars are going out the door (i.e. the payout rate) to see there is no need for new regulations on these charitable giving vehicles. In 2021, the percentage of total charitable assets granted from donor-advised funds to charity reached a record 27.3%. The 2021 payout rate surpassed the second-highest year of 2010 during post-Great Recession recovery and when large-scale natural disasters afflicted 300 million people globally: the earthquakes in Haiti and Chile, Russian wildfires and the flooding of 20% of Pakistan. Impressively, for every year on record, grant payout rates exceeded 20%.
Individual DAF-sponsoring organizations also report historic giving milestones. In 2021, Fidelity Charitable donated more than $10.3 billion to more than 187,000 organizations. Giving this year is outpacing last year, not counting on Giving Tuesday, and Fidelity expects that for the first time since 2018, the value of DAF grants will exceed DAF contributions. Through Vanguard Charitable, donors have granted more than $15 billion to nonprofits over the past two decades. The biggest beneficiaries have been human services (29%), charities on the frontlines of providing assistance for short-term and long-term needs.
These monumental gains arguably were spurred by the U.S. economy’s re-emergence from pandemic lockdowns and restrictions of 2020. The widespread deployment of vaccines and boosters, business openings, 5.7% inflation-adjusted annual economic growth, unemployment collapse as workers returned to work and a blockbuster stock market rebound all helped.
As we look ahead to an unpredictable future, DAFs are the perfect way to shore up needed funds for times of crisis while still allowing giving when and where it is needed each year.
Patrice Onwuka is an adjunct senior fellow at Philanthropy Roundtable.