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For more than a decade, donor-advised funds—commonly called DAFs—have, as NPQ has covered widely, been growing faster than any other type of charitable giving vehicle. Today, DAF sponsors—which hold, invest, and manage nearly $160 billion in these funds until they are distributed to individual nonprofits—rank among the largest recipients of charitable revenue in the country.

In 2020 (the most recent year for which data is available), grants made from DAFs to operating nonprofits were more than double what they were just four years earlier. But contributions to DAFs regularly exceed payouts. According to the National Philanthropic Trust, even as donations from DAFs in 2020 hit a record $34.67 billion, contributions to DAFs were an even higher $47.85 billion. Consequently, and buttressed by a rising stock market, the amount of money sitting in DAF accounts that has not yet made it into the bank accounts of operating nonprofits continues to rise.

We have surprisingly little information about where DAF money goes. For sure, annual reports from industry groups offer aggregate giving numbers and even data on broad giving categories (such as “public benefit” nonprofits). Yet, other than outside voices like our own or that of Ray Madoff of Boston College, there are strikingly few independent data sources.

But that is changing. The DAF Research Collaborative (DAFRC), organized by Dr. H. Daniel Heist of Brigham Young University and Dr. Danielle Vance-McMullen of De Paul University, is rapidly increasing knowledge of the DAF field. As the collaborative details on its website:

Donor-advised funds play an important role in the modern philanthropic landscape. As such, philanthropic leaders and policymakers are highly motivated to enact policies that maximize the public benefit of these funds. However, leaders and policymakers do not currently have access to a robust evidence base to inform these policies. In addition, little is known about how DAFs affect and reflect giving by high-net-worth individuals more broadly. A more robust evidence base regarding DAFs is especially important in the current era of evidence-based policymaking.

Indeed. And not a moment too soon. To date, research on DAFs has largely been shaped by sponsors who have a vested interest in defending the $160 billion now stored in DAF accounts. They find ways of presenting cherry-picked data to support the status quo and to attack more accurate findings that do not.


What We Are Learning—Early Findings from the DAF Research Collaborative

DAFs, as NPQ readers are aware, function like charitable bank accounts. Donors can give money to a DAF and take a tax deduction immediately. They can then recommend grants from that DAF to whatever charities they want, on whatever schedule they want. These tax deductions are subsidized by the American taxpayer to the tune of up to 74 cents on every dollar donated. In fact, the wealthier the donor, the greater the tax subsidy, since charitable giving can be used not only to reduce income taxes, but also estate, gift, and capital gains obligations.

But there is no legal requirement that the money placed in DAFs must be transferred to nonprofits working for the public benefit. DAF accounts are also almost completely opaque. There is almost no way to find out how quickly individual DAF accounts are paying out to operating nonprofits, if at all.

This is what makes DAFRC’s research so important. The collaborative was able to collect account-level data for 13,000 DAF accounts from 21 community foundations and single-issue sponsors (sponsors working in a specific topic area, such as faith-based nonprofits). This is just the kind of data that most DAF sponsors have been reluctant to release and which has therefore been missing from almost all major analyses of DAFs.

The collaborative discovered that the median annual payout rate of the accounts they analyzed was a mere 11 percent—less than half the aggregate rates typically touted by DAF sponsors and their lobbyists. Additionally, 35 percent of the accounts analyzed paid out at less than five percent of their assets, including 29 percent of accounts that gave no annual grants whatsoever. Indeed, 14 percent of DAF accounts paid out nothing—no grants at all—over the entire four years covered by DAFRC’s analysis.

Of the three types of DAF sponsors in the United States, single-issue organization sponsors have historically had higher payout rates than other types of sponsors, and community foundation sponsors have traditionally been thought to do the best job of prioritizing the interests of their communities over the demands of their donors. This is why community foundations received a carve-out in the Accelerating Charitable Efforts (ACE) legislation currently making its way through Congress, which, among other things, would require individual payout minimums for DAFs for the first time. The bill would not subject DAFs held at qualifying community foundations to the same payout requirements as DAFs held at other sponsors. The low payout rates reported in the DAFRC study, however, raise questions about whether such a blanket carve-out is warranted.

Commercial DAFs, the third type of sponsor, remain a mystery, since the DAFRC analysis did not include any data from them. This leaves a huge slice of the DAF pie off the table; at last count, commercial DAFs hold $100 billion of the estimated $160 billion in total DAF assets. Five of the ten largest charitable recipients in the country are commercial DAFs, including the largest single recipient of charitable giving, the Fidelity Charitable Gift Fund, which took in $4 billion in donations in 2020 alone. Even if account holders at commercial DAFs are paying out at rates similar to those reported in the DAFRC study, it means that an immense amount of revenue is being sidelined from operating nonprofits and stockpiled in DAF coffers.


Additional Areas of Concern

Our own research bolsters DAFRC’s findings. Over the past year, on behalf of the Institute for Policy Studies, a nonprofit thinktank, we examined three aspects of DAFs: 1) how much grant money flows from commercial DAFs to other commercial DAFs instead of operating nonprofits; 2) how much money flows from private foundations to commercial DAFs instead of operating nonprofits; and 3) how dependent community foundations have become on their DAF programs.

As we did not have access to the dataset that DAFRC has assembled, all the data we used was based on publicly available tax returns for DAF sponsors, private foundations, and community foundations. Based on these Form 990 nonprofit federal filings, we created what we called our Charity Data Lab, a custom-built database of electronically filed nonprofit tax returns, which we used in the bulk of our analysis. Though our data set did not include foundations or DAF sponsors that filed paper returns, it allowed us to analyze the behavior of a wide set of organizations. Starting with tax years ending July 2020, the IRS now requires most charitable returns to be filed electronically, so our data source should become more comprehensive in future years.

In our research on DAF-to-DAF giving, we examined grantmaking by 39 of the nation’s top commercial DAF sponsors, all of which are either affiliates of financial corporations, such as Fidelity Investments or Goldman Sachs, or are clearinghouses of DAFs on a national scale, such as DonorsTrust or the Tides Foundation. We found that in 2019, commercial DAF accounts granted more than $1 billion to other commercial DAF accounts, all of which counted as charitable grants. This type of granting is growing astronomically: just $209 million was transferred between commercial DAFs in 2015. The 2019 figure represents fivefold growth in four years.

In our research on foundation-to-DAF giving, we found that in 2018, private foundations likewise granted nearly $1 billion to commercial DAF accounts, all of which counted as charitable payout for those foundations. Private foundation giving to commercial DAFs averaged $737 million per year from 2016 to 2018, including more than $934 million in 2018 alone. Given past trends, it is quite likely that the total of such transfers today exceeds $1 billion. Meanwhile, grants to commercial DAFs made up 100 percent of all charitable distributions for 157 foundations over these three years, and more than 90 percent of charitable distributions for another 152 foundations.

As for community foundation sponsors, we found that DAFs now account for almost a quarter of the typical community foundation’s assets and more than a third of both incoming contributions and outgoing grants. For the largest community foundation in our data set, the Silicon Valley Community Foundation, DAFs make up a full 88 percent of its asset base and account for 98 percent of both its incoming contributions and outgoing grants. Several smaller community foundations are not far behind.


A Sliver of a Hope for DAF Reform?

Our research—together with that conducted by DAFRC—adds to a growing body of evidence as to why DAF reform is needed. President’s Joe Biden’s 2023 budget proposes one such reform: excluding private foundation grants to DAFs from counting toward the foundations’ annual payout requirements—the amount that private foundations are required to spend each year for charitable purposes—unless that money quickly ends up in the hands of operating nonprofits.

Additional reforms are needed. Certainly, for example, we should set an annual minimum payout requirement for DAFs, and we should prevent DAFs from counting grants to other DAFs as part of that payout. The ACE legislation, mentioned above, would also set some important standards here. Jan Masaoka, Executive Director of CalNonprofits, a trade association of California nonprofits, argues persuasively about the need for firm philanthropic “rules for the road.” Alan Davis, of the Crisis Charitable Commitment, has argued for even more far-reaching changes—such as ending the practice of allowing the evasion of capital gains tax through stock donations.

Seen in this context, the measure in Biden’s budget proposal is exceedingly modest. But at least it would mark a modest step towards keeping the fire burning under the feet of DAF donors, motivating them to move money out of DAFs and into the bank accounts of operating nonprofits, where such money belongs.