A growing trend in philanthropy involves the use of donor-advised funds (DAFs). These instruments were intended to help donors invest and pool their donations in order to increase their impact. Through DAFs, donors invest money earmarked as contributions to public charities. This option has some clear tax advantages over foundations that make them appealing to many donors. However, DAFs have come under increased scrutiny amid the coronavirus pandemic, as major donors continue to make gifts that do not actually go to the people for whom they are intended to help. While this issue existed prior to the pandemic, the growing needs of groups around the world have brought more attention to the problem.
DAFs Come Under Increased Scrutiny
One of the best examples of how DAFs can impact charitable endeavors is exemplified by Larry Page, a Google cofounder. At the end of 2017, he made two major donations, one worth $80 million and a second worth $100 million. However, now that two-and-a-half years have passed, it is unclear whether any of this money actually funded charitable work and seems to still be sitting in DAF accounts controlled by Page. While the money is invested and is collecting interest, it is not actually helping anyone during a time when charities across the world are in crisis. When a recent news article highlighted this issue, Page and the two DAFs that were funded, Schwab Charitable and the National Philanthropic Trust, declined to comment.
The people who criticize DAFs often refer to them as a form of zombie philanthropy. The problem relates to the fact that no payout requirements exist so money can sit in the accounts for decades without actually going toward any philanthropic endeavors. The issue is particularly concerning given that DAFs have emerged as the fastest-growing form of charitable spending in the United States. As of 2018, more than $120 billion was in DAFs across the nation, up from about $45 billion in 2012. While most DAF executives say that the potential abuses of these accounts have been exaggerated, wealthy DAF users have begun expressing their own concerns in recent months about the management of these funds.
Wealthy Philanthropists Confront DAF Policies
One of the most outspoken individuals expressing concerns is David Risher, who formerly served in executive positions at both Microsoft and Amazon. In May 2020, he started the #HalfMyDaf campaign, which is intended to encourage donors to pay out at least half of the money they have in their accounts during this year. Risher points to the dire position of many charities that are doing more work with relatively little income coming in to support them. While most people who have money in a DAF have a plan for it, the pandemic has affected most of the plans. For this reason, Risher and his wife, Jennifer, are challenging philanthropists with DAFs to step up in these unprecedented times.
The Rishers are not the only ones speaking out about DAFs. Another prominent voice is Kat Taylor, a banker and philanthropist who has supported drafted legislation in California that imposes more obligations on these funds and calls for greater transparency. The criticism of DAFs traces back to 1969, when Congress rewrote the tax code to favor public charities ahead of private foundations. The revision imposed more taxes on private foundations and required them to issue more public information. Community foundations were also granted public charity status, which paved the way for DAFs as a vehicle to save on taxes and maintain control over the money. The first DAF was Fidelity Charitable. Since its inception, people have been concerned about using fundraising rules for small community foundations in this new way.
DAF Operators Respond to Criticism
DAF operators such as Fidelity have little motivation to see the resources in the accounts that they put to use. After all, the operators are able to invest the money in the funds and charge management fees to investors. In 2017, Fidelity made more than $46 million off of the $21 billion in assets in Fidelity Charity. Many people are now calling out this loophole as poor public policy. At the same time, Fidelity Charity does pay out more than 20 percent of its assets annually and gave $7.3 billion to charity last year. This rate is much higher than the average for private foundations. The National Philanthropic Trust also pays out more than 20 percent of assets each year, according to its chief executive.
While these numbers sound promising, some individual have pointed out that these “payouts” sometimes involve moving money from one DAF to another rather than to a charity. A 2017 Economist analysis found that two of the three largest recipients of DAF charitable spending were other DAFs. People often move from one DAF to another for better fees or investment opportunities. Much of the problem comes down to a lack of transparency. Without transparency, it becomes difficult to trust that DAFs are making the sort of difference for which they were originally intended, and continued refusals to comment coming from account managers builds anxiety. Regardless, the clear message being sent to the philanthropic community is that donors should be mobilizing more money than perhaps they had intended given the pandemic.