Three Good Reasons Why Donors Might Postpone Releasing DAF Dollars

We were pleasantly surprised this week by an opinion piece from the Stanford Law School Policy Lab on Donor-Advised Funds that appeared in the Fall 2020 issue of the Stanford Social Innovation Review. Titled “Are Donor-Advised Funds Good for Nonprofits?”, the article carried a subtitle that immediately captured our attention: “Critics claim that DAFs unduly postpone funds needed by charities, but the vehicle offers many benefits that may outweigh its costs.”

While acknowledging that “nonprofit organizations that deliver services to disadvantaged communities understandably want funds as soon as possible,” the authors suggest that because the monies in DAF accounts typically grow faster than inflation, “the tradeoff posed by delay is not a dollar now versus a dollar later; in most times, it’s a dollar now versus something more than a dollar later.” Moreover, the article notes, “society may have strong justifications for supporting donors’ choices” when they do put off recommending gifts from their DAF accounts. This is a most welcome change from the more common accusations that DAFs are “warehouses of wealth” that serve primarily as “tax hacks.”  

The authors identify three good reasons why donors might postpone releasing DAF dollars:

  • Donor effectiveness – A donor new to philanthropy may need time to identify both mission and strategy. Delay may provide both “greater personal fulfillment’ and “a decision that delivers greater social good.”
  • Cause effectiveness – A donor may choose not to respond to the most immediate needs in a crisis or a disaster in order to preserve resources for longer-term needs, which often draw less financial support.
  • Legacy reasons – A donor may utilize a DAF to train children and grandchildren in philanthropy and thus “perpetuate practices of altruism that benefit society”.

Even practices roundly criticized by those demanding greater regulation of DAFs are cast in a different light by the authors. The acceptance and monetization of complex assets by DAF sponsors translates into “democratization” when resulting donations go to grassroots organizations unable to process such assets on their own. Donors who “maximize the value of the charitable tax deduction” in the ways they start and utilize their DAFs are likely to give more because they have lowered the “after-tax price” of giving. The authors of this piece also remind readers that the average DAF annual payout rate (at least 15 percent) is three times the annual payout required of private foundations, that gifts from DAFs are more likely to provide the unrestricted revenue that nonprofits prize, and that donor-advisors continue to give during economic downturns since DAF funds are already committed to charity.

The article does end with the caveat that this “positive assessment does not rule out reforms targeted at specific holes in the DAF regulatory structure” which will be addressed in the future, and we note with concern that one of those “holes” is donor anonymity. For now, however, we applaud the Stanford Law School Policy Lab on Donor-Advised Funds for its “thumbs-up” on these increasingly popular giving vehicles.

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