Donor Advised Funds (DAFs) have become a convenient solution for donors to make large, single-year tax deductible charitable contributions, while also directing charitable gifts for years to come. Changes to the tax code in 2016 raised the bar on itemized deductions, making DAFs even more attractive to individuals seeking to make tax-beneficial gifts.
Despite the tax benefits, DAFs have their issues.
DAFs are financial accounts that allow high-net-worth individuals to give money to charity over time, but allow the donor to take a larger, single-year lump sum charitable deduction for tax purposes. The donor contributes to a sponsor (such as a community foundation) and takes a charitable deduction in the year of the contribution. Over time, the donor directs the sponsor to make distributions to specific charities.
Since the 2000’s, DAFs have proliferated. In recent years, commercial investment companies – Vanguard, Schwab, Fidelity, and others – have gotten into the business by setting up non-profit wings to sponsor DAFs. The Chronicle of Philanthropy reported that in 2018 the top recipients of DAF funds were Fidelity and Schwab, with the National Philanthropic Trust (a non-profit) coming in 3rd place (“10 Largest Donor-Advised Funds Grew Sharply in 2018,” Dec. 19, 2019).
The Unfortunate Drawbacks of DAFs
Yet, DAFs have their drawbacks, both for our communities and our charitable organizations.
The problems with DAFs:
- DAFs create a layer between the donor and the charity that costs money and insulates donors from doing the hard work of identifying and getting to know good charities to support.
- They delay money from getting into the community to do good work. DAF regulations do not require a 5% annual distribution as with private or public charitable foundations, so donors can park their money in a DAF and make no distributions for years.
- DAFs sponsored by a community foundation are guided by volunteer community boards and professional staff whose mission is to support real community needs – museums, human service agencies, public school foundations, health, homeless, emergency services, etc. Meanwhile, commercial investment companies generally lack community boards. Instead, money managers ensure DAF investments achieve high returns and make distributions as guided by donors. Money managers may be more motivated to collect fees than to help DAF donors assess and support worthy charities.
Some communities are beginning to push back on this trend of parking funds in commercial investment vehicles, often sidelined for years. According to the Chronicle of Philanthropy, a bill in the California State Legislature would require organizations that sponsor DAFs to report specifically who the donors are, how much they gave, and what charities have received DAF support. “Donor-Advised-Fund Bill Sparks Fierce Lobbying Clash in Calif” (Jan. 23, 2020). As reported, (and as usual) powerful voices on both sides are emerging due to the large dollar amount involved.
Everyone Wins When Donors Get Involved
Every chance I get, I advise donors to become directly involved in their favorite charitable organizations by volunteering, attending events, and serving on boards. I encourage them to invest in DAFs sponsored by their own community foundations or by charitable organizations themselves. Or, to set up an endowment at a favorite charity.
Our charitable organizations are best served by high-net-worth individuals becoming directly involved. Involvement breeds interest, attraction, and the network effect. More individuals get involved by proximity, and our charitable organizations benefit.