The Truth About Donor Advised Funds
A recent Chronicle of Philanthropy article, “Shattered Trust: $21 Million DAF Lawsuit Threatens Donor Confidence,” struck me as a remarkable demonstration of the acute lack of understanding (or acknowledgment) of who benefits from DAFs and how they work. The focus was on a donor suing a DAF sponsor for not following his grant recommendations, but the case truly exposes how DAFs are just another form of wealth protection.
There is $326 billion held in DAFs, and we would all be better off with more understanding of them.
What people need to know about DAFs:
It’s no longer your money - Once contributed to a DAF, the assets are legally controlled by the sponsoring organization, not the donor.
It’s their choice how/when to spend it - Donors retain advisory privileges, but sponsors have final authority over grants and investments.
They don’t have to spend it at all - DAFs are not subject to the same 5 percent annual payout rule that applies to most private foundations.
For whom the money grows - DAF assets are often invested while awaiting grantmaking, so donors should understand whether those investments align with their values.
Who is really getting paid - When dollars remain in DAFs rather than being granted out, the public benefit is delayed, while financial institutions and managers may continue to earn fees and investment markets continue to benefit from the capital.
Charity can wait - The assets held in DAFs are irrevocably charitable, but when distributions from DAFs are delayed while the donor receives a full tax deduction, the public interest is not being prioritized.
Schrodinger's charity? – DAFs’ lack transparency (no public, account-level payout reporting is required) raises questions about whether current incentives lead to optimal charitable benefit.
Ethical vs. legal? A double standard.
“Nonprofits need to go beyond just what the law requires and try to deal with their stakeholders in ethical ways.” says Dan Heist, co-founder of the DAF Research Collaborative. He is referencing the nonprofit sponsor of the DAF and the donor stakeholders in this comment. Aren’t the potential grant recipients’ stakeholders too? Aren’t they owed the same ethical standard?
Proponents of DAFs argue that holding assets for several years can serve the public interest through compound tax-free growth; strategic, long-term giving; and the preservation of capital for future crises. But those arguments don’t hold up.
Compound tax-free growth – grantee organizations could be given the choice of deploying the capital immediately to serve their mission or investing it themselves.
Strategic, long-term giving – These decisions are made by the donor class, not those closest to the problems in need of solutions. The fact that donors can take the tax benefit immediately and retain the ability to direct the grants at their leisure makes DAFs feel equivalent to an endowment for wealthy donors.
Preservation of capital for future crises – Who should decide when and what problems should be prioritized? Sequestering money in DAFs to grow for some unknown future giving exacerbates the urgent problems affecting the public interest, such as economic anxiety, healthcare affordability, and climate risks. There need to be more restrictions placed on structures handling money that’s meant to benefit the public interest. The current DAF structure allows wealth managers and donors to control when capital is deployed and to whom, which clearly favors certain classes and is not in the best interest of most people.
This sounds like wealth protection to me, not philanthropy. I’m not saying we shouldn’t have DAFs, but we need more transparency, and payout mandates or spend down requirements, or both.