In my 2020 book Philanthropy Revolution, and in my seminars and podcasts, I often talk (or write) about Donor Advised Funds. I’m passionate about these programs, as I’ve used a DAF since we became regular donors and it’s been very helpful. I think that DAFs are the vehicles that give more money to nonprofits, and to give it more efficiently and easily. That’s been my experience.
I understand, though, that we have a problem with how DAFs are used — witness the approx. $150B that is currently “sitting” in Donor Advised Funds, with only a small amount finding its way to NPOs in a “reasonable” amount of time.
In chapter two of my book, I write about this:
That DAFs are called ‘charitable vehicles’ is a tad misleading, mind you, in that charities aren’t seeing a whole lot of that pile of DAF money. It’s estimated that between 5 and 20% is actually getting passed on to any kind of charitable organization annually. Some of the money is in community foundations, where a portion of the fees (fees that themselves are a percentage of the balance in the fund!) goes back to the community – a very good thing. But most of it sits in the big financial institutions that have created these funds for their clients. Yes, the organizations housing and managing the funds are charitable in their own right, otherwise, the DAF wouldn’t work, but, for the most part, the funds sit there until the donor, who retains advisory privileges, decides where the money should go. How long before the money has to be transferred to a charity? Legally, as long as you want. A month, a year, a decade, more – all kosher in the world of DAFs. This might be okay if a donor, for the sake of argument, has come into money suddenly, and wants to take time to do some research and apportion it thoughtfully. This is a perfectly reasonable use of a DAF. But letting money sit because you don’t want to deal with it is a problem. Maybe you don’t want to deal with the fundraisers – the pitches, calls, lunches, and so on. Maybe you also know that, when giving to an organization via a DAF, your name is often on the check or transfer, which means that you then have to manage the ongoing pressure to donate to that organization again.
My point, for now, is that many prospective donors just don’t want to enter the slipstream. So it’s better to take the tax deduction and let the money (the amount of which is undisclosed, typically, remaining anonymous until it’s dispersed to charity) flow only when you’re ready.
For the truly charitable donors among us, DAFs are a double-edged sword in that the institutions that house them have zero motivation to help us choose which charities to support. Remember, the fees these institutions get are a percentage of the balance in DAF accounts, which arguably curtails their motivation to disperse the money.
After years of various legislation being proposed (at both state and federal levels) to “reign in” DAFs, there is now a piece of legislation that might actually become law. The Accelerating Charitable Efforts (ACE) Act was just proposed, but one of the bill’s sponsors, Senator Angus King (I-Maine) seems to have the right goal in mind, saying “America’s philanthropic sector is an unquestioned force for good across the globe, investing critically-needed resources in charities working to improve life for those in need.”
Take a look at the summary of the Act at the link above, or read the full Bill, if you like. This round of proposed legislation is pretty modest in scope, but we should all count on a fight anyway. $150B is a lot of money, any way you look at it!
I’m Saving Giving by providing a clear path to success, supported by data, statistics, and interviews. You can find more of me lifting the lid on the charitable sector here on Philanthropy 451, in my bestselling book, Philanthropy Revolution, or on socials at Twitter, Facebook, and LinkedIn.