• I am pleased that someone of Professor Rooney’s stature is weighing in on the subject of donor-advised funds. That said, I’m afraid Mr. Rooney misreads and, no doubt unintentionally, misrepresents the critique from those of us who advocate for reform of donor-advised funds. Mr. Rooney uses certain statistics to support the DAF industry, while ignoring others that would shed a more critical light. In the process, he misses the big picture.

    First, regarding double-counting: In my piece (footnoted in Mr. Rooney’s article) in the Chronicle of Philanthropy, my concern is not with how Giving USA counts or doesn’t count gifts to and from DAFs. Rather, I focus on how donor-advised fund sponsors themselves count transfers to donor-advised funds at other institutions.

    That is, if Ann, who has a donor-advised fund at, say, the East Barnswallow Community Foundation, transfers $100,000 from her fund to a DAF she has created at Fidelity Charitable, then the East Barnswallow Community Foundation counts this as a grant – which, technically, it is, because it is going to another public charity. Ann has essentially switched financial sponsors for her DAF, much as she might change banks for her personal checking account. Not a penny has gone out to operating charities. But that transfer counts as a grant and inflates the charitable distribution total for the community foundation by $100,000, which then in turn inflates the overall charitable distribution rates compiled by the National Philanthropic Trust. Professor Rooney cites the National Philanthropic Trust report on donor-advised funds without skepticism, and yet those distribution numbers include these DAF-to-DAF transfers, which inflates the grant percentage. (And we do need to keep in mind that the National Philanthropic Trust is itself a major DAF sponsor. It’s hardly a disinterested compiler of information.)

    Given that a March 2017 article in The Economist — https://www.economist.com/news/finance-and-economics/21719494-rise-dafs-may-be-much-about-tax-charity-philanthropic-boom — showed that the number one and number three charitable beneficiaries of the then three-largest commercial donor-advised funds (Fidelity, Schwab, and Vanguard) were in fact other DAF sponsors, it’s clear that DAF-to-DAF transfers add up to a large number. Not screening them out surely inflates the charitable distribution numbers trumpeted by the DAF industry.

    Second, Professor Rooney ignores the distortion brought about when donors both deposit and distribute funds in the same calendar year. He approves of the National Philanthropic Trust’s methodology of dividing grants made during the year into assets held at the start of the year – what Mr. Rooney calls an apples-to-apples comparison with private foundations. But that doesn’t take into account the situation where a donor contributes $10,000 into her account in February and grants it out in November of the same year. In that case, the $10,000 would count as a charitable distribution, but never as an asset, which further inflates the distribution ratio. We can only speculate on how often this occurs, and at what volume, because the DAF industry has been resolute about not sharing account-by-account information. But this activity artificially increases the reported charitable distribution rate.

    Third, Professor Rooney conflates two very different proposed mechanisms for encouraging more robust distribution of DAF assets to charity. He focuses on a required annual payout, which he correctly says may actually serve to reduce distributions. That is, if the government were to impose, say, a 5% minimum distribution from each individual fund, donors who are giving at a much higher level may slip down, treating the minimum as a de facto maximum. (This is how some foundations reacted to the imposition of the 5% minimum charitable distribution rule in the 1969 tax act.)

    I actually agree with Mr. Rooney that a minimum annual payout is not a good solution. Instead, what I and most DAF reform advocates are urging is a required spend-down over a certain number of years after the contribution. That is, funds contributed to a DAF in 2017, and their earnings, must be distributed to charity by, say, 2027. This is very different from a required annual payout, and a required spend-down would in fact spur faster distributions to operating charities.

    Fourth, and related to this last point: comparing DAFs to private foundations is deeply problematic. Private foundations are a different animal completely. Private foundations are required to be transparent in their operations: every grant, honorarium, and investment is part of the public record. DAFs, because they fall under the umbrella of the sponsoring public charities, are utterly nontransparent. We cannot tell what grants they have made to whom, or if any grants were made at all.

    Moreover, DAFs offer donors vastly greater tax advantages, the most notable being the ability to get a charitable tax deduction at market value for contributions of complex assets (closely-held stock and real estate), as opposed to private foundations, which can only offer a charitable deduction equivalent to the cost basis. This is a major reason why DAFs are so attractive to wealthy donors.

    The reason giving to public charities is so much more advantageous for the donors is because the presumption has been that, upon giving a gift to a public charity, the donor loses control, whereas the donor retains explicit control after giving to a private foundation. DAFs have carved out a gray area that’s now enormously disruptive to philanthropy: donors can get the same full tax advantages as a gift to, say, a soup kitchen or a college, but retain virtual control, utter anonymity, and no requirements for any distributions of any kind. I am not one to defend private foundations – they can be very inefficient and ineffective organizations. But private foundations are forced to be transparent. The reason DAFs should not be compared with private foundations is that they are considered public charities, with all the benefits. That’s why a distribution within a reasonable amount of time to actual charitable organizations is a valid public policy recommendation — and why comparing DAF payout rates to those of private foundations are largely irrelevant.

    Fifth, Professor Rooney does a good job of listing the advantages DAFs provide to the donors. But he ignores the largest single driver for the growth in commercial DAFs: profits for the financial services industry. Most notably, an individual’s financial advisor has a significant vested interest in having the client’s money move to a commercial DAF account, rather than go out as an outright gift to charity, because then the financial advisor can continue to draw management fees. Moreover, once the assets are in a commercial DAF account, it is in the financial advisor’s interest that the funds remain there, undistributed, providing the financial advisor with ongoing management fees. And, of course, the affiliated for-profit financial services corporations earn significant fees from the investment of DAF assets in their mutual funds. To ignore the financial incentives for the companies and employees of the financial services industry to attract and hold assets in DAFs is to miss why DAFs are growing so dramatically.

    Sixth, Professor Rooney fails to differentiate between organizations like United Ways, which collect funds and then, almost immediately, distribute them to operating charities, and DAFs, which collect funds and hold them indefinitely.

    Seventh, Professor Rooney repeats a familiar line of reasoning when he says that “Philanthropic giving decisions are private decisions.” Well, yes, but they are private decisions heavily subsidized by the government. In fact, for donors in the top tax bracket donating highly appreciated assets, the subsidy provided by the federal government in the form of the charitable deduction and waived capital gains taxes can approach nearly 60%. That gives all of us a speaking part: I as a taxpayer help subsidize a wealthy person’s gift to a donor-advised fund, and I am fully within my rights to offer suggestions for how to make that gift create a more significant social benefit.

    A recent paper by University of California at San Diego economist James Andreoni — http://inequality.stanford.edu/sites/default/files/Andreoni-paper.pdf — offers that kind of analysis: what are the benefits and costs to the public because of donor-advised funds? Professor Andreoni recognizes that philanthropy has public policy ramifications. I agree.

    Eighth, and finally, Professor Rooney is missing the big picture: DAFs are taking over the nonprofit world. When I first started writing about this in 2012, I was aghast to find that by my back-of-the-envelope calculation DAFs were receiving 3.4% of all charitable giving. That seems like quaint times now. According to James Andreoni, in 2014 gifts to DAFs accounted for 10% of all charitable giving from individuals in the US. In the years since, indications are that giving to DAFs has ratcheted up dramatically. Fidelity Charitable has been the #1 fundraiser on the Chronicle of Philanthropy’s Philanthropy 400 for two years running – and that was before the recent announcement that giving to Fidelity went up 68% in the June 2017 fiscal year. Last week’s announcement of the Philanthropy 400 listed six DAF sponsors among the ten top fundraising charities in the country. The Goldman Sachs Philanthropy Fund (yes, Goldman Sachs!) is now the #3 charity on the Philanthropy 400 after a 450% rise in giving. (That is not a typo. The Goldman Sachs Philanthropy Fund enjoyed a 450% increase in donations over the year before.)

    It’s important to note that there is nothing constitutionally sacred about donor-advised funds. DAFs are essentially an unplanned phenomenon that have grown up from a combination of clever manipulation of the tax code, poor oversight by regulators, and unchecked market forces. Their growth is distorting charitable giving, and funds that should by all rights be flowing to operating charities are now ending up in DAFs, impervious to scrutiny, and without any requirement that the funds go to charity this year, next year, or ever. Articles like Professor Rooney’s do a disservice by telling the world that there’s nothing to fear from donor-advised funds. I only wish that were true!

  • Sophie Penney

    Looking at this piece as a fundraising consultant to NPOs and a faculty member teaching aspiring fundraising leaders this is a helpful article and rebuttal. From my perspective both authors touch on a key point, which is the relationship between financial advisors and clients who create DAF’s.

    As Mr. Cantor states, there is an incentive on the part of advisors to encourage donors to create donor advised funds. As Dr. Rooney states, DAFs can ease the giving process, allowing for stock gifts to be made to charities which are unable to accept them (which is the case for the majority of small nonprofits with which I am familiar). I do wonder if the reasons for donors flocking to DAFs is a combination of these two as well as other factors, such as: having a DAF enables me to unsubscribe from NPO mail lists or circular file solicitations without a sense of guilt. As donor age does having a DAF enable donors to do as encouraged not just by financial or legal advisors, but by others who work in elder services, which is to consolidate financial activity?

    Another possibility not mentioned is that, like family foundations, DAFs have the potential to become a family affair, either during the donor’s lifetime or after their death by assigning control of the fund to family. The article does not state and I don’t know the percentage of DAFs that might be passed on to children it may be small. If the percent of DAFs assigned to family upon one’s death is small that tells us something does it not?

    I won’t say last, but not least, but 20% of women between the ages of 51-56 never had children of their own (https://www.philanthropy.com/article/Nonprofits-See-Big/241075). If I were a successful business woman who married (or did not) and never had children, if I were philanthropically minded, and if I had the disposable resources a DAF might look like a quite attractive vehicle to consolidate and simplify giving.

    In closing I do wonder to what degree we might be best served by sharing with those small NPOs that cannot accept stock gifts, as well as other NPOs, clear information about how to market DAFs. DAFs are a significant source of income during the lifetime of donors and after death if they choose to make a nonprofit the beneficiary. While these points may seem self evident, I can say that many NPOs know little about DAFs, why they matter, or how to communicate with donors about using a DAF to make a gift. I would be happy to assist with helping to advise NPOs on this front.