Donor-Advised Funds

Donor-advised funds (DAFs) are a growing and important part of modern philanthropy. Donors make a donation of cash or other assets to a public charity that is a “sponsoring organization,” and those assets are used to set up an account that is controlled by the charity. The funds in the account are typically invested, and over time granted out to other public charities, with the original donor able to recommend grant recipients to the sponsoring organization. Typical sponsoring organizations include community foundations and mission-driven charities that provide guidance and support to philanthropists with a particular interest. Some national financial investment firms have established charitable organizations that are sponsoring organizations, and museums, universities, and other charitable organizations have become sponsoring organizations as well.

DAFs allow a philanthropist to get a federal tax deduction in the year a gift is made, while giving them time to decide over a number of years how to direct their charitable giving. This is particularly helpful to donors who have a one-time infusion of cash they want to dedicate to charity, such as through the sale of a company or other asset, but cannot decide immediately where to direct all of their giving. Many sponsoring organizations also provide support and guidance to donor advisors with regard to grant recommendations. Private foundations also find DAFs helpful in pursuing their philanthropic missions.

Another value of DAFs is that sponsoring organizations are typically more capable than most charities of handling gifts of assets that are anything other than cash. Artwork, stocks and bonds, land, partnership interests in private companies, and other assets can be a challenge for most charities to accept. DAF sponsoring organizations are typically accustomed to handling such gifts, and for a donor wanting to give away these hard-to-handle assets it can be easier for all involved for the assets to go to a DAF and then have the sale proceeds granted out to charities.

Because DAFs are controlled and administered by sponsoring public charities, their management costs are much less expensive than those needed to establish private foundations. Additionally, because funds from DAFs can be quickly disbursed, they are ideal for funding emergency situations and disaster relief. Recent research shows that giving from DAFs is more resilient in times of economic distress, decreasing less than giving by individuals and foundations.

The popularity of DAFs has continued to grow in recent years. A recent report by the National Philanthropic Trust said the following:

In 2017, there were 463,622 individual donor-advised funds across the country. Donors contributed $29.23 billion to these donor-advised funds and used them to recommend $19.08 billion in grants to qualified charities. Both grants and contributions reached record highs. Charitable assets in donor-advised funds totaled $110.01 billion, surpassing the $100 billion mark for the first time.

The growing popularity of DAFs has drawn some critics who see a number of potential problems. Most of them are ill-founded and based on a misunderstanding as to what DAFs are, or the criticism is often not supported by the evidence.

Below are some common myths about DAFs, followed by a factual explanation:

DAFs are “warehouses of wealth” and slow the flow of funds to charities.

The evidence shows that DAFs have much higher payout rates compared to private foundations (about 17 percent to less than 6 percent, according to National Philanthropic Trust), and the “flow rate” is about 87 percent (money given to DAFs compared to money granted out to other charities by DAFs). There is little reason to give to a DAF if the intent is to stockpile money – gifts to DAFs are irrevocable, and most sponsoring organizations do not allow funds to sit over long periods of time without grants being made.

Gifts made from DAFs are not transparent, unlike foundation giving.

This is a misguided statement. .When the DAF sponsoring organization makes a grant to a public charity, the gift is disclosed, but the name of the donor advisor recommending the grant is not. When a private foundation makes a grant, that information is publicly disclosed. But the criticism misses one key point – DAFs are not private foundations, any more than a private individual who does not have to disclose their personal charitable giving. It also ignores that the grant is made by the sponsoring organization, which has full legal control over the funds in the DAF and can decline to accept the recommendation of the donor advisor.

Private foundation giving to DAFs avoids payout requirements.

Most private foundations give directly to eligible charitable organizations. Some do find it helpful on occasion to establish DAFs, but there’s little evidence that it is to avoid the 5 percent minimum payout that is imposed on them.

Reasons private foundations may use DAFs include:

Giving to a DAF means less money going to support current needs.

There is no guarantee that money given to a DAF would otherwise be given to a charity focused on current needs if DAFs weren’t available. Many times DAFs are used because someone has received a large one-time infusion of cash or they have a hard-to-donate illiquid asset that most charities aren’t capable of accepting. Eliminating the ease of giving to a DAF sponsoring organization means some gifts simply won’t be made, either because the tax consequences simply leave less available to give or the hassle of giving illiquid assets makes it not worth the trouble. This would result in less money given for charitable purposes.

In addition, money put into DAFs today will actually increase charitable giving in the future – and that future is now. In 2013, for example, total funds in DAFs reached $50 billion for the first time after generations of giving (the first DAF started in 1931 at New York Community Trust). That $50 billion included not just the funds and assets donated, but the investment returns over many decades, which help to boost giving today above what it would have been if those DAFs had not been established in the past.

DAFs have become an integral part of today’s philanthropic and charitable landscape, adhering to reasonable regulations that ensure funds put into them are used exclusively for charitable purposes, whether today or tomorrow. While there may be some opportunities for modest changes to improve regulation of DAFs, they should remain as flexible and widely-available as they are today.

You can read more about DAFs at these links:

National Philanthropic Trust: The 2018 DAF Report

Answer Donor Advised Funds’ Critics

Money From Donor-Advised Funds Is at Work Improving Communities