23 May 2018

Answering Donor-Advised Funds’ Critics

by Sean Parnell, Vice President of Public Policy, The Philanthropy Roundtable

Two major articles were published last week on the subject of donor-advised funds (DAFs), one in The Atlantic (“The Black Hole That Sucks Up Silicon Valley’s Money”) and another in the Chronicle of Philanthropy (“Foundations Move $737 Million to Donor-Advised Funds, Chronicle Study Shows”). Both raise a number of questions about the appropriateness of DAFs and include critiques of their role in the world of philanthropy, some reasonable (if ultimately wrong) and others just wrong.

The Chronicle article focuses on private foundations that give to DAFs and then recommend distributions from those accounts to charities. The Philanthropy Roundtable recently submitted formal comments to the U.S. Treasury on this issue, responding to concerns that this was somehow inappropriate – critics often suggest that this practice is nothing more than a foundation trying to avoid disclosing where the money is going, or to get around the five percent minimum payout requirement imposed on foundations.

There’s actually a grain of truth in first critique, but one that’s readily understandable – some foundations give to organizations in turbulent foreign countries where disclosure of their grants to charities supporting human rights or religious liberties would endanger lives. From the article:

Maclellan Foundation…directed the majority of its giving from 2011 to 2016 through the National Christian Foundation, a donor-advised-fund sponsor.

David Denmark, executive director of the Maclellan Foundation, wrote in an email that much of his organization’s grants “are made in foreign countries, where our work has sometimes been the target of extremely violent, indigenous elements.”

The arrangement, said Denmark, keeps the name of the Maclellan Foundation “out of the direct flow of information in those countries.” He added that the National Christian Foundation also offered important back-office support for complex gifts and due diligence of potential grantees.

The second critique is somewhat baffling however – foundations literally exist to give away money, and it seems that squirreling money away in a DAF with the idea that it allows the foundation to hang on to the money in perpetuity seems more than a little ridiculous – what, exactly, would have been the point in establishing a foundation in the first place if the original donor doesn’t want to give the money to charity? Who joins the board or leadership of a foundation with the idea that they’re not going to give the money away after all?

The complaint about evading the payout requirement also ignores that in cases where a foundation gives to a DAF one year in order to distribute funds in future years it will, in effect, be increasing its payout percentage in those future years.

Suppose a foundation normally gives away $10 million, five percent of its corpus. Now imagine it wants to give $3 million to support renovating a hospital, something that will occur over three years. The foundation might decide it wants to get the money out the door and off its books in a single year, but disburse the funds in $1 million installments over 3 years as the project progresses. So it sends $1 million in the first year directly from the foundation and puts $2 million in a DAF for years two and three.

Assuming the foundation gives another $7 million away at the same time it sends $1 million directly the hospital and $2 million the DAF, it will meet its five percent payout requirement while critics will claim that it really only gave $8 million, supposedly short-changing charities. But even if you accept this analysis, it ignores that in years two and three, when the foundation makes its regular grants of $10 million, it also directs another $1 million to the hospital from the DAF – increasing its payout from $10 to $11 million, according to this critique.

Much of the criticism also ignores the real-world of philanthropy. For example, the Zoom Foundation is singled out for giving almost all of its $100 million thru a DAF between 2014 and 2016. The article also notes that founders of the foundation have given $161 million during that time. So the very real-world expectation should be that if foundations were prohibited from giving to DAFs, then it’s quite likely that the couple behind the foundation would simply direct a good chunk of that $161 million into a DAF established by them personally instead of the foundation, or perhaps simply keep the money themselves and give directly over a time frame that suits them.

In either case, taking the DAF away from the foundation would have no practical effect, no money would find its way to charities quicker, and all that would be accomplished is reducing the ease of giving for these philanthropists, who for reasons determined by and known to themselves have decided that this is how they wish to conduct their giving. Because the DAF ensures that grants are made to qualified charities, it’s hard to see where the danger to philanthropy is.

The article in The Atlantic revisits some similar complaints about DAFs, though it doesn’t touch on their use by foundations. It focuses on the Silicon Valley Community Foundation (SVCF), asking questions and raising points that need to be brought up but also repeating overblown and misplaced criticisms of DAFs or philanthropy in general.

For example, the article complains that:

Transparency is also an issue. While foundations have to provide detailed information about where they give their money, donor-advised funds distributions are listed as gifts made from the entire charitable fund—like the Silicon Valley Community Foundation—rather than from individuals. Donor-advised funds can also be set up anonymously, which makes it hard for nonprofits to engage with potential givers. They also don’t have websites or mission statements like private foundations do, which can make it hard for nonprofits to know what causes donors support…

Mitsch, the funds development manager at Sacred Heart, said it’s difficult to solicit donor-advised funds to make up for the drop in donations her organization is seeing, because it is hard to build relationships with sponsors, especially if they create donor-advised funds anonymously. This was something I heard from many nonprofits—unlike family foundations that have mission statements or websites outlining what causes they support, donor-advised funds don’t provide much information about what causes their donors support.

True enough, but DAFs aren’t foundations, just like individuals aren’t foundations – neither are required to disclose to whom they give charitable gifts. I’ve written extensively on the subject of donor privacy (see here) so I won’t rehash the topic now, other than making fundraisers’ jobs easier isn’t a great justification for stripping philanthropists of the right to keep their giving private.

The article also makes the oft-heard claim that there’s no incentive for donors who put money into a DAF to ever actually recommend grants to be distributed:

Though donors receive a big tax break for donating to donor-advised funds, the funds have no payout requirements, unlike private foundations, which are required to disperse 5 percent of their assets each year. With donor-advised funds, “there’s no urgency and no forced payout,” says Heather McLeod Grant, one of the authors of The Giving Code…

Fund managers also receive fees for the amount of money they have under management, which means they have little incentive to encourage people to spend the money in their accounts…

As noted earlier, however, it’s hard to imagine that donors have much reason to simply stash money away in a DAF and then walk away – what would be the point? And the charge is somewhat refuted by the experience of another DAF critic that is cited and quoted in the article:

Rob Reich, the co-director of the Stanford Center on Philanthropy and Civil Society, set up a donor-advised fund at the Silicon Valley Community Foundation as an experiment. He spent $5,000—the minimum amount accepted—and waited. He received almost no communication from the foundation, he told me. No emails or calls about potential nonprofits to give to, no information about whether the staff was out looking for good opportunities in the community, no data about how his money was being managed. (Donors choose how aggressively they want fund managers to invest their money in the stock market.) One year later, despite a booming stock market, his account was worth less than the $5,000 he had put in, and had not been used in any way in the community. His balance was lower because the foundation charges hefty fees to donors who keep their money there.

Assuming again that the original donor’s intent when giving to a DAF is to support charitable work, it’s hard to imagine putting money into a DAF and then just walking away to watch it evaporate over time as account fees cut into the balance. The experience of Rob (who was kind enough to come The Philanthropy Roundtable’s Annual Meeting last year to discuss the role of philanthropy in a democratic society) actually demonstrates that there is an incentive to push money out of DAFs and into other charities, contrary to the assertion that there is no incentive.

The article in The Atlantic raises questions about whether SVCF specifically has done a good job of pursing its charitable mission (and I am agnostic on that question). But in terms of its generally negative view of DAFs, it does a disservice to readers by neglecting to explain how many philanthropists find them to be valuable and helpful tools as part of their giving strategy.

The critics of DAFs quoted in both articles also should be asked a simple question – if the use and flexibility of DAFs were to be sharply curtailed by, for example, imposing a 5-year limit for funds to be disbursed, how would this increase giving, or at least increase the effectiveness of giving? Most DAFs are established by individuals, and in many cases it seems certain that restricting DAFs will simply mean less money going into them and more money remaining in the donor’s personal bank account, or being given out quickly and without the sort of due diligence that I think most people would hope is done regarding philanthropic giving. At best, all that would happen would be a time-shift in the money given – more this year, but less next year.

There are important questions to be asked and answered about how any specific DAF sponsor is pursuing its charitable mission as well as how these entities fit into the world of philanthropy in general. But too many of the critiques seem to come down to the fact that DAFs look more like individual donors than foundations in some ways, something that seems to me to be a feature and not a bug.