A seemingly-technical provision in the Biden administration’s fiscal year 2023 budget would, if implemented, be a first strike against the fastest-growing portion of American charitable giving.
President Biden’s budget would target “donor-advised funds,” into which money can be set aside for charitable giving later, earning interest in the interim. Donor-advised funds (DAFs) have become a growing source of charitable giving in recent years, with payout rates of over 23 percent, far higher than many of America’s largest foundations. The budget would make what appears to be a modest regulatory change through the Department of Treasury — prohibiting private foundations from fulfilling their required 5 percent distribution requirements by transferring money into their own donor-advised funds.
Donor-advised-funds effectively have become small, personal foundations for middle-class Americans without administrative overhead or a minimum deposit. While DAFs have become the latest target of progressive ire for their apparent facilitation of “dark money,” they actually have served to democratize philanthropy.
The change is part of a campaign, including other legislation, based on the idea that DAFs are more of a tax loophole than a desirable vehicle for charitable giving, and that the charitable accounts are a way to hide donations to questionable organizations or “hate groups.”
That campaign has stalled in Congress, because a bipartisan group of members has expressed doubt about the so-called Accelerating Charitable Efforts (ACE) Act. The ACE Act would require DAF assets to be distributed within 15 years, a time limit that does not apply to major foundations such as Ford or MacArthur, which can continue “in perpetuity.” Many such foundations, it’s worth noting, are seeing growth in their financial assets outstrip their grant making. Some are even falling short of the 5 percent payout rule, yet have drawn little to no liberal criticism.
So-called “foundation-to-DAF” distributions do occur and they do make it possible for foundations to distribute funds to a legal charity, the DAF, rather than giving immediately to an operating charity. An analysis by the Institute for Policy Studies identified $934 million in foundation-to-DAF transfers in 2018.
Such transfers are unjustifiably portrayed as nefarious — in no small part because DAF grants, in contrast to those made by foundations, can be made anonymously.
But at a time when support for any number of causes can be portrayed as evidence of extremism and lead to public opprobrium, anonymity may be both a prudent and defensible choice. The charge that anonymous giving can support “hate groups” overlooks the fact that DAF assets can be distributed only to IRS-approved 501(c) (3) nonprofits. Those looking to make such grants public could be looking to pressure foundations, not to support select groups. Nor are such transfers a means to avoid charitable giving altogether; DAF assets can be used for only one thing: grants to bona fide charitable groups.
Moreover, large transfers from foundations to related DAFs may simply reflect a desire on the part of donors whose foundations may be new, or have just received a major infusion of funds, to avoid rushing into grant-making.
Some context: Donor-advised fund accounts have mushroomed in numbers — growing from 241,507 in 2014 to 1,005,099 in 2020 — as have the amount of assets housed in them. They are managed by national financial firms such as Fidelity or Vanguard, hundreds of community foundations, colleges and universities, as well as mission-oriented nonprofits such as the United Way or Feeding America. The total assets in these accounts, which can be used for charitable giving, grew from $110 billion in 2017 to $160 billion in 2020. Total grants from 2019 to 2020 are up 27 percent from 2019 to 2020, and payout rates have increased. While some are controlled by the very rich, including Mark Zuckerberg, the average account holds only $159,000. Foundation-to-DAF transfers are a minor part of this picture.
The broader problem here is this: The Biden budget and related legislation in Congress buys into the narrative that donor-advised funds are suspect and should be scrutinized for regulation. Rather, it is much better to see them as a way for middle-class donors to continue to realize a charitable tax deduction by bunching their contributions to surpass the standard deduction and itemize their tax returns, just as the wealthiest continue to do.
The Biden administration would do well to study a report by scholars Danielle Vance-McMullen of DePaul University’s School of Public Service and H. Daniel Heist of Brigham Young University. In their new-released paper, they examine the giving patterns of 13,00 DAF accounts housed in 21 community and religious foundations. Among their findings: DAFs are useful for those who prefer a long-term giving strategy, such as endowing a local school scholarship program.
Even still, they extrapolate from their data to conclude that 79 percent of DAFs that opened in 2017 would distribute all their assets within 15 years — even without regulation.
Nor should it be forgotten that charitable funds that are “warehoused,” rather than distributed quickly, can be available in terms of duress (such as a global pandemic). As the Vance-McMullen/Heist reports puts it: “In 2020, DAFs were particularly responsive to both the acute needs of the pandemic in April and to year-end needs in November and December.” These funds also, in many cases, outpace private foundation giving. As a 2021 National Philanthropic Trust report put it, DAFs in 2020 “granted half of the dollar amount that private foundations granted while having about 14.5 percent of the private foundation assets.”
Donor-advised funds should be celebrated, not more regulated. If their donors choose to give anonymously — whether to avoid solicitation or the perils of the cancel culture — that should be their right.
Howard Husock is a senior fellow in domestic policy studies at the American Enterprise Institute, where he focuses on municipal government, urban housing policy, civil society and philanthropy.