Time to Move the Money: Independent Research on Donor-Advised Funds

The IPS Charity Reform Initiative is pleased to release several new independent studies on the giving activities of Donor-Advised Funds (DAFs). These three original analyses draw on our IPS Charity Data Lab, a comprehensive data set of IRS digital 990 filings. 

We are concerned that philanthropy has become top-heavy, with declining small donor participation and increasing dominance by wealthy donors. We are alarmed that charitable giving has, in this way, become a taxpayer-subsidized extension of private power and influence for the wealthiest people in the country. 

Wealthy donors reap substantial tax breaks when they put their money into DAFs. But the rules around DAFs are broken. The money stockpiled in them—now estimated at $160 billion—often fails to make its way out to working charities serving the public. And they are ripe for abuse by donors and for-profit actors alike.

Through the charitable tax deduction, we the taxpayers subsidize contributions to DAFs by up to 74 cents on the dollar. So we have an interest in making sure that DAFs are actually used as instruments for the greater good, rather than serving as tax avoidance vehicles for the wealthy. 

The fact that DAFs do not have a payout requirement is one fundamental design flaw. Donors to DAFs receive immediate tax reductions, but funds can sit for generations without coming out. We support legislative reforms to require DAFs to have a minimum payout (or to align the timing of benefits to donors with benefits to charities) and to increase transparency around giving. 

We do not believe that private foundations should be able to count donations to DAFs as part of their payout. This is another loophole that allows taxpayer-subsidized donations to be further delayed in reaching qualified working charities. 

Unlike commercial DAF sponsors or lobby groups for community foundations, the IPS Charity Reform initiative doesn’t have a horse in this race. We believe the charity system should not only work well for donors, but also protect the wider public interest and the nonprofit sector. U.S. taxpayers should not be asked to subsidize the warehousing of charitable dollars.

Urgent Need for Independent DAF Research

Over the last several months we’ve watched private foundations and DAF sponsors mount a defense of the philanthropic status quo. They have attacked proposals like the bipartisan Accelerating Charitable Efforts Act (ACE Act), sponsored in the U.S. Senate by Angus King (I-Maine) and Charles Grassley (R-Iowa), and the Patriotic Millionaires’ Emergency Charity Stimulus—both of which would require DAFs to have some form of payout requirement.

Some DAF sponsors, now on the defensive, are cherry-picking data on DAF activity in their own reporting. For example, DAF sponsors frequently tout how much money flows out of DAFs, but not how much money flows in. As the Chronicle of Philanthropy reported: 

“Both Fidelity and Vanguard released 2021 data about grant making, but neither provided information about how much money that year flowed into the accounts they manage, nor would they provide their total asset levels for 2021. In a response to a request for that data, Fidelity spokesman Steve Austin said Fidelity would release only ’audited’ figures, and those won’t be publicly available until months later, in the IRS tax forms that Fidelity Charitable is required to file.”

Fidelity reports that they gave out 13 percent more in grants in 2021 than in 2020. But what they don’t say is that, by our calculations, they brought in 26 percent more in contributions. 

DAF sponsors also frequently state that their payout rates exceed those of private foundations. We contend that this is not an appropriate comparison, since DAFs were never intended to hold funds in perpetuity. Even if a DAF gives out 20 percent of its assets in one year, that means 80 percent of funds remain warehoused—lamentable performance for an instrument that is supposed to move funds rapidly to charity. 

All of this drives home that there is an urgent need for further independent research on DAF activity.

Overview of Three DAF Studies

The independent research papers below bring needed clarity into the situation. They explore several of the ways that DAFs can serve to divert needed funds from working charities and explain the public interest in correcting it.

More Than One Billion Dollars in DAF Grants Went to Other Commercial DAFs in 2019 (August 19, 2021)

In an analysis of the tax returns of commercial DAF sponsors, we discovered that in 2019 alone, at least one billion dollars in commercial DAF grants went to other commercial DAFs. This is an enormous amount of money cycling between giving vehicles rather than being distributed outright to charity. It also skews any payout rates reported by these institutions, and makes it nearly impossible to evaluate whether DAFs are actually distributing revenue to working charities in a meaningful way. In this paper, we explore the scale of DAF-to-DAF giving, and highlight notable examples.

Private Foundation Giving to Commercial DAFs (March 24, 2022)

Private foundations are currently allowed to make grants to DAFs and to count those grants toward their annual charitable distribution requirement. We examined the 2016-2018 tax returns of private foundations filing electronically to see how many of their contributions went to the 45 largest national commercial DAF sponsors in the U.S, including those affiliated with wealth management firms such as Fidelity Investments and Goldman Sachs. We discovered that private foundation grants to commercial DAFs averaged $737 million per year from 2016 to 2018, and more than $934 million in 2018 alone.

Larger Community Foundations Have Become Heavily Reliant on Donor-Advised Funds (March 24, 2022)

Community foundations take in public donations and distribute those much-needed funds out to local charities. But community foundations have increasingly marketed to donors the option of giving through DAFs rather than to the foundations’ discretionary funds.. According to our analysis, DAFs now account for a quarter of the typical community foundation’s assets, and a third of both incoming contributions and outgoing grants. And larger community foundations are much more heavily reliant on DAFs than smaller ones; for the very largest, DAFs account for nearly half of their assets and three-quarters of their incoming contributions. 

Deeper Background Reading on DAFs

The scale, growth, and nature of DAF giving make it more important than ever to have improved DAF governance and greater transparency. The materials below provide a deeper background on the creation, growth, and effects of DAFs. They also lay out a variety of policy proposals designed to ensure that DAFs provide an adequate return to the taxpayers subsidizing them, that DAFs are not pulling an undue amount of philanthropic revenue away from working charities, and that DAF donors are getting unbiased advice when making their charitable decisions.

Fixing What’s Broken with Donor-Advised Funds

This policy brief outlines the public interest in correcting the design flaws in DAFs, lays out policy recommendations that would do so effectively, and provides estimates for the additional charitable revenue that would result from these solutions.

Warehousing Wealth

This comprehensive report documents the dramatic expansion of DAFs, explores the risks that unregulated DAFs pose to the public interest and the charitable sector, and offers several policy recommendations for mitigating their risks.