DAFs: What They Are, Which Misguided Orgs Oppose Mild Legislations on Them, and Why You Should Care

[Image description: An adorable black-footed ferret, standing upright in the snow, looking at the camera. They have a cream-colored coat, brown legs with black feet, small round ears, and dark, liquid eyes that steal your heart. No, this ferret has nothing to do with DAFs. Image by Rohan Chang on Unsplash.]

Hi everyone. Donor-Advised Funds (DAFs) is not the most riveting of topics, I will admit. Sometimes, when I have insomnia, I read about DAFs, and that usually does the trick, especially when combined with some melatonin. However, they are rapidly growing as a vehicle for charitable giving, have almost no regulations whatsoever, and are rife with inequity. So we all need to care about them.

It seems though that some colleagues are still confused by DAFs and what the problem is and so don’t want to tune in to this conversation. I’m going to explain it simply for those not familiar, so that you don’t fall asleep; apologies to colleagues who are more knowledgeable in this area than I am.

Imagine that you made millions of dollars selling naturally fermented pickle products. After buying yourself a yacht, you think “Huh, I should probably donate some money to charity. That will help people and also prevent me from paying so much in taxes, win-win.”

So you decide you will donate $1,500,000. But you don’t know very much about philanthropy, being a pickle tycoon and all. Luckily, there are organizations that can help you. “Hey, open a Donor-Advised Funds with us and put your $1.5M there,” says your local community foundation, “we’ll take a percentage of that as administrative fees and will help you find the most amazing nonprofits to give to!” You open a DAF of $1.5M. You get a tax break that year, yay! Things are going great so far!

But you’re still not sure which causes to give to. And there is no law that says you have to give out any of the money you put into a Donor-Advised Fund EVER. 10 years pass, and each year you give out a little bit of money because the community foundation encourages you to. You decide to dribble out a bit of that 1.5M each year to the private school your kids attend. You still pay the management fee to the foundation, but that’s OK since your original amount is actually growing because it’s being invested. Maybe, one day, you’ll find an amazing cause that resonates with you. Until then, your growing 1.5M is safely in the DAF; you can keep adding to it every year and reducing your tax burden each time.

Meanwhile, it turns out that you came from a wealthy family, which is how you were able to have the capital to start the pickle business in the first place. Your family has a private foundation. It’s been run by your sister Dilly, who gets a nice salary for managing it. It has an endowment of 100M, so by law it has to spend at least $5M out each year to meet the 5% payout rate in the US. But this year, for whatever reasons, it was only able to spend out 4M, including Dilly’s and other staff salary, along with other expenses the foundation incurs, such as the retreat where Kenny Loggins was hired to perform his classics (Yes, under current laws, Kenny Loggins’s performance fee can count toward the 5% payout rate, since it was for a foundation-related function). Dilly calls you up, freaking out for failing to meet the 5% legally required payout. “Chill, Dill,” you tell her, “it may seem jarring, but you’re not in a pickle; just park 1M in a DAF, and you’re good!”

While you and your family are trying to be philanthropic though, some mean, cranky people decided to spoil everyone’s fun. They are pushing something called the Accelerate Charitable Efforts (ACE) Act. This law would affect a few things, namely:

1. If you put money into a DAF this year, you can take a tax break this year, but you have to give it out to nonprofits within the next 15 years; or you can wait up to 50 years, but you can’t take a tax break until you actually give the money out. (If you start a DAF at a qualified community foundation, this proposed new policy won’t even apply to you unless your DAF is at least 1M.)

2. Private foundations can no longer count the money they park into DAFs as part of their 5% legally required payout rate. So that 1M you advised Dilly to put into a DAF would actually NOT be countable toward the 5%. She would have to find some other way to spend the 1M, hopefully by actually giving it out to nonprofits.

3. Family members’ salaries and travel expenses can no longer count toward that 5% payout rate. A family foundation can still hire a cousin or niece or whoever and pay them whatever it wants, it just can’t count it as part of that 5%. So the salary Dilly gets each year can’t count toward the 5%.

OK, I hope that helps paint a picture and makes it more concrete for colleagues who are not familiar with DAFs and private foundation payout rates, because right now a battle is brewing regarding the ACE Act, which is surprising and frustrating, considering how completely mild and common-sense it is. Seriously, if I were in charge, I would force DAFs to be spent out within 5 years; require foundations to double their payout rate; ensure that the only money foundations can count toward that rate is the money they give out (not what they spend on salary and operations); make it illegal for foundations to hire their own family members; and a whole bunch of other related stuff, like changing the tax code so that people don’t have that much money to hoard into DAFs in the first place.

So yes, even with this no-brainer set of policies, there is opposition. The organizations against it are coming up with all sorts of spurious arguments, which our colleague Al Cantor rips apart here. Arguments like DAF actually encourage people to give out more money, or have higher payout rates than foundation, or democratize philanthropy. They really don’t. Says Al, “Look at the Michigan report. Last year was the definitive rainy day for America. Not only did 35 percent of DAFs distribute nothing at all, but 57 percent of Michigan DAFs distributed less than 5 percent.”

A colleague told me he was in a meeting with a Senate staffer who was commenting on the level of opposition to this very moderate ACE Act he was encountering on the Hill from the philanthropic establishment and right-wing orgs. “It’s disgusting the lengths they’re going to defend spending nothing,” says the staff.

Here they are, the organizations in our sector that are opposing the ACE Act:

Council on Foundations (COF): The new strategic direction the Council is touting is all about how “awake” they are, seeking to build trust, relationships, equity, etc. So how about instead of blocking efforts like the ACE Act, they follow the lead of WA BIPOC ED Coalition, whose number one call is to double payout to 10%? Or Give Blck, which supports the initiative on which the ACE Act is based?

National Philanthropic Trust (NPT): NPT has been using all sorts of misleading and distorted information in defense of DAFs, as this article by Dan Petegorsky documents. “The ACE Act would actually mandate a minimum requirement that is far, far below the payout levels NPT says DAFs already meet. So why is NPT so defensive about it? Because even as NPT uses concocted payout rates to argue that money is readily flowing out to charity, their own figures show that, on average, 76 percent of DAF funds in fact remain warehoused.”

Philanthropy Roundtable (PR): Philanthropy Roundtable is a conservative organization vocally disdainful of Critical Race Theory and loudly proclaims that racial justice is irrelevant to philanthropy. It is no surprise that they would be opposed to anything that damper rich people’s ability to hoard money and spend it on what pet causes tickle their fancy.

United Way Worldwide. Why would a major charity oppose initiatives that would move more money to nonprofits? Probably the fear of alienating big donors. Sad, considering the important role United Way has played in our sector.

Community Foundation Public Awareness Initiative (CFPAI): I love community foundations, they do a lot of good work, but the ones who oppose this ACT sadden me. You are often more fervent opposers of DAF regulations than even for-profit DAF-holding institutions like Fidelity. Please remember that you represent the community, not just wealthy donors who might be annoyed that if this Act passes, they’ll only have FIFTEEN YEARS to spend out money they warehouse through you after taking a tax break.

While we have this unholy alliance above that wants to protect the inequitable status quo, I am glad and grateful for the leaders who are taking a stand IN SUPPORT OF ACE, including:

State nonprofit associations, such as CalNonprofits and Minnesota Council of Nonprofits: It is not easy publicly supporting legislation that might incur the wrath of philanthropy when you depend on philanthropy to continue your work. Here’s CalNonprofits’s letter supporting the ACE Act and reminding us that “nationwide more than $1 trillion sits in private foundations and $140 billion in DAFs, rather than being used to support working charities.” Here’s MCN: “It is critical we acknowledge the current system is broken, and it is predominately white, wealthy donors benefiting from the lack of regulation.”

Lots of foundations: While a whole bunch of foundations are misguided, many others are taking a stance in support of ACE. Here’s a coalition supporting the ACE Act, including Ford, Hewlett, Kellogg, and Kresge. Rural community foundations are also on board. Here’s Telluride Foundation in Colorado and Foundation for Appalachian Kentucky reminding everyone of the importance oftoday’s dollars being used to confront today’s challenges.”

Global Citizen!: Yes, they’ve gotten a lot of flak for the fiasco that is The Activist. At the same time, cofounder Michael Sheldrick wrote this important piece, As Endowments Rise And Billionaires Gain Wealth, The World’s Poor See Little Relief. “Leaders in philanthropy should respond to the urgency of this moment by paying out more — not less — to fuel an equitable global recovery and committing to reforms that ensure inequality and wealth disparities are not allowed to continue unchecked indefinitely. To do so, they need to critically examine the use of DAFs, urge their peers to give more and to give more quickly, and ultimately begin a conversation to question the idea of perpetual philanthropy.”

Bill Schambra, a senior fellow at the Hudson Institute: Bill and I don’t always agree on things, but we are in agreement that philanthropy needs to stop fighting these very mild reforms. In this NYT article, How Long Should It Take to Give Away Millions?, he says “DAFs are an enormous whirlpool sucking that money away from charities into accounts that are institutionally inclined to be reluctant to disburse money.” I can’t agree more.

The ACE Act, even with its common-sense proposals, will struggle to become law. Philanthropy has managed to derail every single effort to impose even the lightest of regulations. I am disappointed at those opposing the bill, and I hope they change their minds.

Because this is a test for philanthropy, to see if it could regulate itself, to see if it could change after decades being entrenched in its archaic and destructive practices. It is a test to see which national organizations and leaders will defend the status quo that allows rich, mostly white people to continue hoarding money while leaders of color continue begging and screaming for change as the walls of inequity close in on Black and brown, disabled, and other marginalized communities during one of the worst health and economic crises of our lifetimes. If philanthropy is looking for a chance to demonstrate that it is willing to change—as Kenny Loggins would say, this is it.

Go here to find and email your elected officials to encourage them to enact legislations preventing foundations and Donor-Advised Funds from hoarding so much money.

Write an anonymous public review of a foundation on grantadvisor.org