Donor Advised Funds in the US – An Easy Way to Give but Also a Source of Controversy

By: Krystian Seibert   |   Advocacy and Insight Manager at Philanthropy Australia

Donor advised funds (DAFs) are a form of philanthropic vehicle in the United States. They’re an individually named account sitting within a charity, to which a donor’s tax deductible donations are credited. The funds are managed by the DAF provider, and the donor may recommend which organisations receive grants from the account.

They are like public ancillary fund ‘sub-funds’ or ‘management accounts’ in Australia, and represent an alternative to setting up a standalone private foundation.

DAFs are experiencing a boom in the United States. In 2015 there were 270,000 DAFs compared with 180,000 in 2010, with the value of their assets doubling to around $80 billion during that time.

Although they were first developed by community foundations and continue to be a mainstay of community philanthropy, in recent years commercial providers such as Fidelity, Schwab and Vanguard have become major players. Their growth has been so strong that in 2016 Fidelity Charitable knocked off United Way as the largest charity in the US when measured by donations, with Schwab Charitable and Vanguard Charitable not far behind.

The rise of DAFs in the United States is not surprising. Set up costs are a fraction of those of private foundations, with much less paperwork involved, and they are easy to use.

But they are also controversial and have some critics, of which Ray Madoff of Boston College Law School is perhaps the most prominent – here’s what she thinks of them.

Last week the world’s best current affairs magazine (at least in my opinion!), The Economist, weighed into the debate with its article ‘A philanthropic boom: “donor-advised funds”’ – you can read it here.

The Economist’s article was balanced, but also critical of DAFs. It was comprehensive in its discussion of the issue, and indeed conducted some analysis of its own to inform its conclusions.

I have to admit, I tend to try and see the best in everything and therefore I wouldn’t call myself a DAF sceptic. On the contrary, DAFs seem like an easy and simple way for people to undertake philanthropy.

Nonetheless, The Economist’s analysis does present some troubling findings.

DAFs can give grants to other DAFs, and the single biggest recipient of DAFs’ grants is Fidelity itself (as opposed to charities ‘on the ground’). The third biggest recipient is the American Endowment Foundation, another DAF provider. The Economist’s article states that ‘the providers say this is an innocuous rejigging of personal finances’ but it’s hard to believe that there’s so much rejigging happening. So, this does raise some question marks.

The Economist also examined grants from a random sample of 4000 private foundations. Some 40 of them directed funds to the biggest DAF providers. Whilst this only represented 1 per cent of the value of the total contribution of all 4000 private foundations, The Economist found 11 private foundations that gave 90 per cent of their funds to DAF providers. Again, this is concerning.

On average, DAFs give around 20 per cent of their assets towards charitable causes each year, although this figure is falling. Whilst this is more than the average for private foundations of around 7 per cent, this is not surprising given that private foundations are often set up in perpetuity and so may ration their granting accordingly. However worryingly, The Economist states that in a given year one in five DAF providers don’t make a single grant.

When reflecting on the article, I had two main thoughts.

Firstly, maintaining the legitimacy of philanthropy is critical to ensuring we have a supportive environment for philanthropy to enable it to grow. And, the legitimacy of philanthropy is a precious commodity, which we in the philanthropic sector must carefully cultivate.

Philanthropy benefits from various tax concessions but they will only be maintained if the community respects and values the role of philanthropy rather than questions its motives. If cracks start to appear and people start to wonder whether philanthropy is actually philanthropy, then a backlash could occur, resulting from a loss of legitimacy. Kneejerk reactions can lead to the introduction of highly restrictive and disproportionate regulations or the loss of tax concessions.

Secondly, if we want to maintain the legitimacy of philanthropy and avoid kneejerk reactions, then we need to proactively encourage and promote the adoption of a sensible and proportionate regulatory framework for philanthropy. We need to be on the front foot, encouraging the adoption of regulations which will ensure that the bad actions of the few don’t tarnish the good actions of the many. Effective self-regulation also plays an important role in this regard.

I think that Australia has the balance right. We have a 4 per cent minimum distribution requirement for public ancillary funds, which means you aren’t permitted to distribute from one public ancillary fund to another one, and private ancillary funds can’t distribute to public ancillary funds.

Public and private ancillary funds must report to both the ACNC and the ATO, and those agencies have the resources to monitor compliance and provide guidance and support to facilitate compliance – unlike the IRS in the US which is notoriously under-resourced and can devote little attention to charities.

We can be thankful that the question marks The Economist raise about DAFs in a US context aren’t a problem in Australia. However, it should be pointed out that the rule against private ancillary funds distributing to public ancillary funds does cause some problems for community foundations, as pointed out in this article I wrote last year. These problems need to be addressed if we are to support the growth of community philanthropy in Australia.

It will be interesting to see how the debate around DAFs unfolds in the US. They certainly have many benefits, and I don’t see a reason why those benefits can’t be preserved, whilst ensuring that some of the question marks surrounding them are addressed.

Apr. 04, 2017

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