This article introduces a three-part series: Saving Philanthropy: Creating Rules of the Road for Donor-Advised Funds. Coproduced by the Charity Reform Initiative of the Institute for Policy Studies and NPQ, this series examines how to facilitate giving while ensuring donor funds reach operating nonprofits in an efficient and effective manner.
Every year, more donor dollars are diverted to donor-advised funds (DAFs), while nonprofits on the ground struggle harder for donations. In the absence of adequate oversight, DAFs are ripe for abuse.
Historically, the annual DAF Report published by the National Philanthropic Trust (NPT) has been the main source of DAF data. But NPT is one of the country’s largest DAF sponsors, which raises questions about its objectivity. Moreover, there’s no way to independently verify the report’s results because their dataset is confidential.
Nonprofits need a comprehensive picture of DAFs to identify and correct flaws in the system. In an effort to create an independent, transparent report on the state of the DAF industry, we wrote one, along with our coauthors Bella DeVaan and Dan Petegorsky.
What Are DAFs and Why They Matter
The use of DAFs is growing fast, especially among wealthy donors. A donor can put money into a personal DAF and get a tax deduction for it because they’re technically giving to a 501c3 nonprofit. In return, the organization that manages the DAF, which is called a sponsor, gives the donor almost unlimited advisory privileges to recommend grants and often lets donor choose where to invest their assets before they are distributed as grants as well.
Nonprofits need a comprehensive picture of [donor-advised funds] to identify and correct flaws in the system.
DAFs can make donation planning easier. When people want to donate to nonprofits but haven’t yet decided where to give, DAFs let them set money aside in advance for that purpose. But because DAFs have no payout requirement, their assets don’t always move to operating nonprofits in a timely way. Moreover, because DAFs offer donors complete anonymity, they allow foundations to get around their minimum payout requirements and are a major conduit for donors to funnel support to groups with extreme views, while evading public scrutiny.
With each passing year, DAFs consume more of the nonprofit donation pie in the United States. DAFs now take in a sixth of all individual giving each year, and DAF sponsors are the nation’s top three recipients of charitable contributions.
Why We Need Independent Evaluations of DAFs
For a long time, nonprofits have had to rely primarily on the NPT report for information on DAFs, but relying on one of the largest DAF sponsors in the country for data is problematic.
One reason is that, as a major DAF sponsor, NPT has a vested interest in presenting DAFs in the most positive light possible. This arguably manifests itself in unrealistically large payout rates and unrealistically small account sizes. For example, NPT includes both mass-scale contribution administrators like workplace giving funds and crowdfunding donation processors—a rapidly expanding subsector of the DAF industry—in its national sponsor category. The huge accounts at commercially affiliated national sponsors bear little resemblance to accounts set up to process small-dollar crowdfunding donations, however, by grouping these sponsors together, misleadingly small account sizes can be presented as national sponsors.
NPT also releases its report before the extended Internal Revenue Service (IRS) filing deadline for annual charitable returns, so it has to use estimates for late filers instead of actual data. And the NPT report doesn’t account for DAF-to-DAF grants, which means that those internal transfers not only pad payout rates, but they are also counted twice as both incoming contributions and outgoing grants. (Our own estimates, as well as those of Giving USA, are that DAF-to-DAF grants amount to billions of dollars every year.)
But perhaps the greatest issue with the NPT report is that their data isn’t public. There is no way for readers to know which sponsors are included and whether data is comparable from report to report.
Our report offers a counterweight to these issues. We are neither employed by nor serve on the boards of DAF sponsors. We use the payout rate calculation that we believe best judges charitable throughput. We separate donation processors into their own category to eliminate their diluting effect on national sponsors. Our data consists entirely of actual data from IRS returns. We provide estimates of DAF-to-DAF transfers, and, most importantly, we provide a downloadable public link to our data.
What We Found
The report we helped to write is based on data from the tax year 2023. Below are some leading findings:
- DAF assets are growing rapidly.
Contributions to DAFs have closely followed fluctuations in the stock market over the past four years. Despite this, total DAF assets grew 67 percent, from $152 billion in 2020 to $254 billion in 2023. - DAF accounts are sizable.
The median DAF account size across all sponsors was $135,086 in 2023. - National sponsors dominate the field.
These sponsors are those with no specific geographic or cause-based mission, and they include the very largest charities in the country, including many that are affiliated with wealth management firms, such as Schwab, Fidelity, and Vanguard. This group’s assets grew by 92 percent from 2020 to 2023, much faster than any other sponsor type. Even though they represent just 3 percent of all DAF sponsors, national sponsors held 70 percent of the assets, took in 73 percent of the contributions, and gave out 61 percent of the grants in 2023. They also had the largest account sizes, at a median $390,541 in 2023. - Donation processors act like true revolving doors.
Donation processors support mass-scale workplace and crowdsourced giving programs by processing thousands of small-dollar donations. They are the only sponsors that hold less in assets than they get in contributions or give out in grants. They also have by far the smallest average account sizes, at a median of $305 in 2023.
By grouping national sponsors with donation processors, industry reports like those from NPT may be understating national sponsor account sizes by as much as 80 percent. In 2023, for example, if we had used NPT’s account size calculation—total DAF assets divided by the total number of DAF accounts—national sponsors would have had an average account size of $384,785 by themselves, but when combined with donation processors, they had an average account size of just $63,332.
- Community foundations increased grants in the face of declining contributions.
From 2020 to 2023, these sponsors were the only ones to have had a net (9 percent) decrease in contributions. Their assets also grew the least, up only 21 percent. In spite of this, they increased their grants by 56 percent.
So How Much Do DAFs Really Pay Out?
The jargon-laden term “payout rate” refers to the speed with which money gets from DAFs to operating nonprofits. It is one of the most important metrics for evaluating DAF behavior. It ought to be simple to calculate, but it’s not. And DAF providers have used that complexity to overstate how quickly DAF funds get disbursed to operating nonprofits.
Even though they represent just 3 percent of all DAF sponsors, national sponsors [affiliated with investment firms] held 70 percent of the assets.
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How does this occur? One problem is there is no way to calculate the median payout rate, since sponsors aren’t required to report individual account data, which means that DAF accounts that pay out little or nothing can hide behind DAF accounts that pay out at high rates. Another problem is that it’s possible to make sponsor-level aggregate payout rates look higher or lower depending on the formula used and, thus, more or less favorable to sponsors.
Some sponsors calculate payout by dividing grants by the amount of assets at the beginning of the year, while others divide grants by assets at the end of the year.
What’s important about those choices is that because assets usually grow during the year, dividing by the assets held at the beginning of the year inflates payout rates.
For our report, we use the formula used by the IRS: grants divided by the sum of year-end assets plus grants. As the IRS explains, this rate best reflects how much donors gave out of the amount they had available.
It sounds technical but the difference is profound. Using the IRS formula, we found that the median DAF payout rate has hovered around 9 to 10 percent for the past four years—and was 9.7 percent in 2023. By contrast, dividing total DAF grants by total DAF assets at the beginning of the year—the formula NPT uses—the payout rate would be 19.7 percent. (Their actual reported overall DAF payout rate for their dataset in 2023 was 23.9 percent.)
It is also clear that payout rates vary significantly depending on the type of DAF involved. Specifically, we found the following patterns:
- Donation processors have by far the highest payout rates.
These sponsors paid out around 82 percent in any given year and 83.6 percent in 2023. There were 2.3 million of these accounts across 10 sponsors. - Community foundations have the lowest payout rates, at around 8 to 9 percent in 2023.
The DAF Research Collaborative found that community foundations are more likely to offer “endowed” DAF accounts that limit grantmaking to a very small percentage of assets, which may help explain their lower rate. - National sponsors have the highest payout rates outside of the donation processors.
The median payout rate for national sponsors was 16.3 percent in 2023 and ranged from 14.5 to 18.0 percent over the past four years.
It is worth mentioning here, too, that if we had instead calculated an average payout rate the way NPT did—by dividing total DAF grants by total DAF assets at the beginning of the year—the payout rate for national sponsors would have been 23.1 percent in 2023. And if we had included donation processors in the national sponsor category—again, as NPT did—that payout rate would have jumped to 30.5 percent.
The Anonymous Elephant in the Room
We have long warned that without adequate guardrails, DAFs can easily become taxpayer-subsidized donation warehouses rather than conduits of donor dollars to operating nonprofits. But there is another reason to be concerned about the current lack of DAF oversight: the loss of public accountability.
DAF sponsors don’t have to disclose their major donors, and they only have to report their outgoing grants in aggregate instead of by specific account. Sponsors and grantees may know who gave a particular grant but only if the donor so chooses. And it’s impossible for oversight agencies to trace DAF gifts from donor to recipient.
This has big implications for democratic institutions. Because sponsors don’t have to disclose their major donors, those donors can use DAFs to funnel money anonymously to political causes and even hate groups. In fact, DAFs have become one of the main vehicles for funding right-wing organizations, spurring Mother Jones to call one sponsor “the dark-money ATM of the conservative movement.”
It’s not just individuals who can benefit from the anonymity. Private foundations must disclose their major donors and grant recipients, but they can subvert this transparency requirement by funneling their grants through DAFs. Last year, we found that foundations had given at least $3.2 billion in grants to national DAFs in 2022.
Without adequate guardrails, DAFs can easily become taxpayer-subsidized donation warehouses.
DAFs’ opacity also makes it easier for donors to use them for self-dealing. Conservative power broker Leonard Leo, cochairman of the Federalist Society, may offer a stunning example of this: the 85 Fund, a Leo-connected nonprofit, paid his public relations firm CRC Advisors more than $54 million over three years for consulting services. And the Concord Fund, an advocacy nonprofit run by his allies, has paid millions to Leo-owned companies since 2016. But because Leo allegedly uses DAFs to make his donations, the money flow is obscured.
Last, but certainly not least, DAF anonymity also makes fundraising from DAF donors more difficult for smaller nonprofits. Those without sophisticated major donor cultivation tools can be left out of the DAF boom entirely.
Holding DAFs Accountable
The US nonprofit donation system is predicated on a quid pro quo: Taxpayers receive tax deductions, and, in return, those donations are supposed to support nonprofits working for the public good. This is why the nation has payout and disclosure rules for private foundations. There are no such rules for DAFs.
In the two articles that follow, series authors explore what to do about this. This begins with a look at best practices at “DAFs done right” and concludes with an examination of how to set some DAF “rules for the road.”
