Donor-Advised Funds Are the Linchpin of Local Charitable Giving (1)

As Americans worried about how they would feed their families, care for their children, and stay healthy in the face of Covid-19, they found an important source of support—their neighbors.

In cities and towns across the country, those who have means have stepped up to help their neighbors in need in the face of the Covid-19 pandemic.

And they have used a popular—and widely misunderstood—tool to help: donor-advised funds (DAFs).

Donor-advised funds are charitable giving vehicles that make it easy for individuals and families to contribute to charity. Once donors contribute cash, stock, or other property into a DAF, they are legally required to give the money to support registered nonprofits. In return, they receive a tax deduction and receive advisory privileges on how and when the funds invested in a DAF are granted to charities.

The first DAF was created 90 years ago by The New York Community Trust—the community foundation in America’s largest city. In the decades since, DAFs have been one of the tools used by community foundations and other sponsors to connect donors with causes in their communities. More recently, a number of national financial companies—including Fidelity Investments, Schwab, and Vanguard—have created charitable arms to provide DAFs for their clients.

As DAFs have gone mainstream, their popularity has soared. Contributions to DAFs totaled nearly $39 billion in 2019, an increase of 80% since 2015, according to the National Philanthropic Trust (NPT). During that time, grantmaking from DAFs to charities increased at an even faster rate—93%—to more than $25 billion.

And that was before the pandemic, when donors rushed to grant money from their DAFs to help their neighbors.

DAF account holders at U.S. community foundations, for example, granted record amounts in 2020. According to a survey by the Community Foundation Public Awareness Initiative, which I represent, DAFs at 84 U.S. community foundations granted more than $6.7 billion in 2020. This figure represented an increase of nearly $2 billion, or 41%, from the $4.8 billion granted from that same group of foundation DAFs in 2019.

But what stands out is the fact that the $6.7 billion granted in 2020 is $500 million more than the $6.2 billion that was contributed to those funds in 2019. Put another way: community foundation DAF donors granted $1.08 in 2020 for every dollar they contributed to their funds the previous year.

This activity is significant from a tax policy perspective because it’s taking place as a group of activists have started lobbying Congress to significantly reform the rules around DAFs. The most high-profile effort, the Initiative to Accelerate Charitable Giving, is being championed by billionaire philanthropist John Arnold and academic Ray Madoff. Arnold and Madoff believe DAFs are sitting on too much money. Their solution is a series of rules that would put time requirements on DAF grantmaking to accelerate how much money goes out the door. At least, that’s their intention.

But their plan—and other major DAF reform proposals that have been floated in the media—offers a solution in search of a problem.

Reformers argue that since DAFs do not have a required payout rate—and because DAF balances have been growing—donors are putting huge sums in DAFs, taking a tax deduction, and then not making grants. But their claim is not supported by any meaningful measure of DAF activity before or during the pandemic. And it is especially not true for community foundations—whose donors are active and engaged in their communities.

Unlike private foundations, which are required to grant 5% of their funds to support nonprofits annually, DAFs have an extraordinarily high annual payout rate of 22%, according to NPT. In other words, the payout rate for DAFs is more than four times the payout rate for private foundations.

DAF critics argue that these high average DAF payouts are illusory, driven by a small number of active accounts. But this just isn’t true. Our survey of 2020 grantmaking activity by community foundation DAFs showed that at many foundations, nearly all of their donors had made recent grants from their funds. At the nation’s oldest community foundation, the Cleveland Foundation, all of its DAFs—100%—established before 2018 made grants during the past two years. The numbers were also high at prominent statewide foundations such as the Oregon Community Foundation (94%) and the Rhode Island Foundation (89%).

For the small number of community foundation funds that aren’t making regular grants, many have very low balances, or their donors have a plan in place to make a large future gift. What’s more, most community foundations have policies to force grants from funds left untouched for a certain period of time.

Even before Covid-19, DAFs have been a proven tool for ensuring that nonprofits receive vital support during tough economic times. A 2019 study found that donors who manage DAFs tend to be more generous with their grantmaking during recessions, especially when compared with other forms of giving.

It’s also important to note who is responsible for this giving. We know there are some high-profile DAF donors, but DAFs generally don’t serve the super-wealthy. DAFs are, in effect, small-asset, low-overhead foundations for middle-class families. The average DAF size nationally is about $200,000—but many DAFs have much smaller balances. At many community foundations, donors can open DAFs with contributions as small as $5,000.

The reality is that DAFs are an important tool for middle-class families who want to be strategic with their philanthropy. Now is not the time to put restrictions on a form of giving that is growing, provides incentives to middle-class taxpayers, and proves time and again to be a critical source of funding during tough times.

We should always be looking for ways to improve tax policy to ensure that it is achieving its intended result and is not being abused. In the case of DAFs, the numbers clearly show that current policy is doing its job.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Jeff Hamond is the former economic policy director for Senate Majority Leader Chuck Schumer (D-N.Y.) and leads the philanthropy practice at Van Scoyoc Associates, where he manages a coalition of more than 130 U.S. community foundations.

Bloomberg Tax Insights articles are written by experienced practitioners, academics, and policy experts discussing developments and current issues in taxation. To contribute, please contact us at TaxInsights@bloombergindustry.com.