Preserving DAFs, the Rainy-Day Funds of Philanthropy

A new way of setting aside and distributing charitable dollars has taken off over the past 15 years: donor-advised funds. They can be thought of as individual charitable accounts that allow Americans to set aside funds for charitable giving and to disburse them over time, as they grow in value before donors decide how they should be used. They are America’s new charitable rainy-day fund.

Their growth has been sharp and their impact significant. According to the National Philanthropic Trust, the number of these individual charitable accounts grew from 241,000 in 2014 to 728,00 in 2018. Giving from DAFs was just $7.6 billion in 2007. By 2018, it more than doubled to $23 billion, even as overall charitable giving increased by only about one-fifth of its previous total.

There is potential for much more. Financial assets set aside in these accounts have grown from $70 billion to $121 billion. Under tax law, these funds cannot revert to the donor—they are reserved for charitable giving. They constitute a charitable endowment for America.

Such growth in giving has sparked some concern—specifically that the individual account funds may not be quickly directed to operating charities. This concern has taken the form of a proposal by philanthropist John Arnold and law professor Ray Madoff to require new donations to be disbursed within 15 years or not qualify for the charitable tax deduction.

The proposal can be thought of as a solution to a problem that doesn’t actually exist.

Donors who put funds in their individual charitable accounts already tend to disburse them quickly. A University of Pennsylvania study found that some 85 percent of funds deposited into the accounts flow out the same year.

The proposal to regulate DAFs is a solution to a problem that doesn’t actually exist.

Significantly, that rate goes up during hard times. The same study found in response to the Great Recession of 2008, more funds went out from DAF accounts than went in. The flow rate went up to 103 percent, and funds that were set aside in reserve for emergencies were put into action.

The proposed time limit would put all this at risk.

There is no doubt that 15 years is a long time—and it may be that those considering establishing a donor-advised fund will not be put off by such a time limit. But there are additional complications that could well inhibit charitable giving in states where DAF accounts appear most popular.

These include California, Florida, Indiana, Michigan, New York, Ohio, and Texas. The numbers are impressive: California alone has more than 88 organizations that “sponsor” (manage) donor-advised accounts, Florida has 44, and Texas has 40. In 31 states, there are at least 15 such organizations—and often many more.

Source: National Philanthropic Trust

Under the proposed regulation, management fees for the individual accounts would inevitably go up, as “sponsoring organizations” faced the red-tape headache of tracking which funds had been deposited at what time—and whether they had been disbursed within the required time limit. Higher management fees will mean less money is available for charities.

Large national DAF-sponsoring organizations—such as the charitable arms of the Fidelity, Vanguard, and Schwab financial-management firms—may be able to absorb such new compliance regulation. But just as community banks are burdened by the compliance costs of the Dodd-Frank legislation passed in the wake of the 2008 financial crisis—with many forced to close their doors—so, too, would time-limit-compliance tracking burden the hundreds of local community foundations that serve as umbrellas for thousands of local DAFs. Those donors have entrusted funds to the local foundations to direct to those most in need.

The proposal to set a time limit on account giving would harm philanthropy not just in the states where DAFs are most popular, but across the country.

Donors with reserve charitable funds during hard times do not limit their giving to their own states. Fidelity Charitable, the nation’s largest sponsor of DAFs, reports that fully 25 percent of its donors plan to increase their giving in 2020 in response to the COVID-19 pandemic.

Backers of proposed DAF rule changes have not modeled the potential effect on donor behavior. History shows that behavior to be positive for America and not in need of change.

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