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Are Donor Advised Funds Good for Philanthropy? It Depends On Who You Talk To

Recent months have seen several high-profile philanthropists question the financial vehicle, even as DAFs experience record use.

Donor Advised Funds (DAFs) Illustration by Shutterstock.com

High net worth individuals are increasingly relying on donor advised funds for their philanthropic giving. Yet as the holiday giving season approaches, DAFs, as they are commonly known, are facing scrutiny.

The funds, which are administered through 501(c)3s often operated by large financial institutions such as Fidelity, allow donors to give away money and receive a tax break immediately, while delaying the ultimate disbursement of grants for a later time. DAFs provide immediate tax savings, nimbleness and flexibility to donors, as well as typically lower overhead costs than charitable foundations. However critics, including several high-profile billionaire philanthropists, argue that DAFs risk becoming perpetual motion machines that concentrate money rather than distribute it.

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“I don’t see why philanthropy should be perpetual in nature,” says billionaire philanthropist and CEO of Beneficial State Bank Kat Taylor. Foundations and DAFs “should be spending down as quickly as possible. We only have nine years to prevent one and half degrees for climate change.”

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Indeed, the amount of money concentrated in charitable vehicles is staggering, with $950 billion in private foundations and another $110 billion in DAFs, according to Taylor. Fidelity Charitable, the largest DAF provided, boasted some $26.9 billion as of June 30, 2018 (the most recent auditable date), according to the firm.

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Taylor argues that the administrators of the roughly $1 trillion contained in foundations and DAFs “should get busy grantmaking as rapidly as possible.” Put more bluntly, Taylor believes that many large foundations and DAFs have prioritized growing their assets over grantmaking. “We have been pursuing loans, investments and grants in a way that re-establishes and concentrates a colonized economy and society,” she says.

And Taylor isn’t alone. Billionaire petrol investor and former Enron trader John Arnold recently argued that DAFs allow philanthropists to stockpile fortunes rather than fulfill charitable goals. DAFs are not subject to the 5 percent annual disbursement requirement that foundations are. “DAFs get most of the benefits of private foundations but are not subject to any annual minimum distribution,” Arnold tweeted in July (he followed his Tweets with an article in the Chronicle of Philanthropy in September).

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“You can go an entire calendar year, or years, without giving away any money, and that’s fine. There has to be some giving involved with this so that it’s not just an investment fund,” Arnold told Vox in July, and he argues that DAFs should be legally required to pay out 5 percent. Paradoxically, though, Arnold converted his foundation into an LLC in January, foregoing nonprofit tax breaks but also avoiding such grantmaking requirements or the transparency typically required of charitable givers.

Arnold’s argument may not be entirely accurate. Once funds are given to a DAF, they are no longer under the control of the donor. Instead, they are owned and controlled by the DAF administrators, which are nonprofits and have a fiduciary responsibility and ultimately final say on how those funds are given. Moreover, many administrators have dormant fund rules. “We require all of our donors to be active grantmakers,” says Fidelity Charitable president Pamela Norley. “To the extent that they are not within four years, we will take 5 percent from their account, and if they go over five years, then we flush the whole thing to charity.”

Taylor argues that there is a loophole in that these giving requirements can be met by “simply transferring a donor advised fund asset from one to another donor advised fund,” and that it creates a sort of permanent fire power. “You have this large asset that you can direct to be given, but you don’t have to. And meanwhile, we have to remember when you take that tax deduction at the point of creation, that’s depriving government of critical resources they would otherwise have to fund things like public education, infrastructure and climate mitigation.”

While it is true that funds can be transferred from one DAF to another, there are no additional tax benefits, and the reasons for such transfers can often be as simple as a donor wanting to work with a different provider or having multiple DAFs for different charitable goals. In other words, a donor may have a DAF at Fidelity focused on development work in India and another DAF at Schwab that focuses on another charitable goal and is advised by a son or daughter. In the case of Fidelity, such transfers had no effect on the annual percentage of funds granted, a spokesperson said.

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Yet, while foundations are required to give a minimum of 5 percent of assets annually—although administrative costs and salaries can count towards this—Fidelity Charitable, for instance, averages 20 percent annually. In 2018, when Fidelity Charitable’s assets were $26.9 billion, the nonprofit gave away $5.2 billion, and in 2019 it has already given $5.4 billion. And there are good reasons why high net worth individuals are choosing DAFs over or in addition to foundations.

“What people are missing right off the bat is [a DAF] is itself a registered public charity according to the IRS,” says Judy Spalthoff, UBS executive director and head of family and philanthropy advisory Americas, and funds can be donated to a DAF very quickly and efficiently.

The speed of these transactions can be particularly valuable to investors at the end of the year or to founders who experience a massive liquidity event—such as an IPO—and want to offset their taxes but are not sufficiently organized or focused to set up a foundation or are simply not ready to make a decision about where they ultimately want to direct those funds.

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Moreover, DAFs can accept a variety of assets, including stock, which can then be liquidated by the DAF administrator. “You have the ability to give appreciated securities or complex assets that you typically couldn’t give to your local foodbank,” says Norley. Moreover, they often have very low fees associated with them, “typically less than 1 percent of the account balance,” at Fidelity, for example.

At the end of the day, while DAFs have their critics, they do provide a critical purpose to many investors. Even Taylor and her husband, Tom Steyer, use DAFs, although she cautions that they spend them down very rapidly. “We’re interested in establishing a community of best practices to lead philanthropy,” Taylor says. “It’s boring and complex, but it’s super important.”

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