More and more of the wealthy are using Donor-advised funds which forces charities to wait for money while receiving all the tax breaks
Americans are a generous people. In 2013 they gave somewhere between $330-400 billion to charitable causes and organizations. Recent global surveys have placed the U.S. at or near the top of giving-per-person. You can practically hear the chorus of cheers from legions of American and international nonprofits.
Consider this a bit of a razzberry.
A whole hunk of the charitable cake now gets stuffed in the oven of investment firms, there to bake until and unless someone decides to make a gift. How big is the piece of cake? About $45-50 billion of the total. This means that out of every dollar nominally given for charitable purposes, some 15 percent is socked away in an investment account and allowed to keep growing – even after the donor gets the full tax write-off for the gift.
These accounts are called donor-advised funds (DAFs). The first one dates to 1931, but in the past few years, they’ve become the fastest-growing form of charitable giving. A DAF is an investment vehicle that allows a donor to make a gift (cash, securities, other assets) to an independently-managed fund, not directly to the charity. The fund, in turn, manages the money, invests it, watches it grow – and oh, by the way, grants the money only when and if the original donor says so.
It’s illuminating to read the list of the top DAFs: Fidelity Charitable, Schwab Charitable Fund, Vanguard Charitable Endowment Fund. Huh? Aren’t those big Wall Street investment firms? Absolutely, the big firms have caught on to this big-money shuffle in a big way.
Let’s imagine that you have a $100 million estate and you want to make major charitable gifts. You could simply write checks, make visits to leading cultural institutions, get placed on boards, maybe (if the check is large enough) or get a wing of the hospital named after your family.
OR you could make a one-time gift to the Schwab Charitable Fund. Here’s what Schwab says you’ll get: an immediate tax benefit for your entire gift. . . tax-free growth of the amount you invest. . .management services so you don’t have to deal with the pesky fundraisers from local charities. . . and plenty of time to decide whether and how much you want to actually give to those charities. When you do finally decide to make a gift, you can do it anonymously.
There are three things about DAFs that give me pause. These aren’t scandals, or egregious fundraising scams. But, they’re questions we ought to raise when we think about the $50 billion wedge of cake in the oven.
First, there’s a big gap between the money the donor gives to a DAF and the amount that actually makes it out the door to charities. Since the tax deduction for the initial gift is immediate, and the investment advisers collect fees for managing the money, a lot of the money sits in the investment account and only a fraction makes its way out to charities. The payout rate from donor-advised funds is only about half the rate of new donations INTO those funds. The overall rate of charitable giving from these funds – the checks actually written on the “advice” of the donors – is about 20 percent.
Second, gifts from DAFs to charities are generally anonymous. This means that a nonprofit agency might get a check from the fund, but not know the original source of the money. I will assume that a small number of these gifts are anonymous because of the modest and self-effacing character of the donor. Mostly though, it’s to prevent a follow-up from the nonprofit and to avoid requests for continued support. Transparency in charitable giving is a good thing. Opacity and anonymity, not so much.
Finally, the impact of the DAFs may be a net negative for the charitable sector. As more people make these tax-advantaged gifts to investment accounts, many of them do so at the expense of direct giving. If our overall “charitable giving rate” is relatively constant, as it has been for some years, but the amount given to DAFs has increased dramatically, it stands to reason that there are fewer actual dollars flowing directly to
charities and nonprofits.
Americans are a generous people. The boom in donor-advised funds is a reflection of another dimension of our character: a chronic, enduring search for ways to minimize our taxes and gain some economic advantage over the other rich guy in the next room. My hat’s off to donors who use the mechanisms of DAFs to get the full tax break allowed under the law, and promptly issue instructions for spending money on causes and organizations that matter to them. But for the donors who park their money in a DAF, take the tax break, then sit on it and watch it grow, my hat stays firmly on my head. You are among the many Americans who want to have your cake and eat it, too.
Art by Oralee Wachter
I started a DAF two years ago primarily for tax purposes. It seems to me that the major objection to DAF’s is the lack of a required payout. I plan to distribute approximately 15-20% of net asset value of the DAF per year so I would support a regulation to that effect.
After I retire in the next 5 years, I want to spend more time on my DAF and increase the distributions. I do think that the existence of DAF’s has made me think more about charity in general and increased my contributions although the payout to organizations will be deferred.
Once funds are given to a DAF, they can sit and sit. There are calls for payout provisions similar to those that affect private foundations, either a time limit or an annual percentage, but so far the warehouse is pretty secure.
Real Question: What happens to the 80% of donor-advised funds that don’t get disbursed through donor “advisements” other than towards fees collected by the managing entities? The donor can’t ever withdraw it other than to donate it, can he/she?