Private Foundations Gave $2.6 Billion in Grants to National Donor-Advised Funds in 2021
Private foundations are currently allowed to make grants to donor-advised funds, or DAFs, and to count those grants toward their charitable distribution requirement of 5 percent of their assets each year.
Blogging Our Great Divide
July 06, 2023
Last year, we analyzed the tax returns of electronically-filing private foundations and found that, in total, they had given nearly one billion dollars in grants to national donor-advised funds in 2018. That was the most recent data we could get at the time.
This May, the IRS released an avalanche of long-awaited nonprofit tax filings, so we are now able to update our findings through 2021. We found $2.6 billion in grants going from private foundations to donor-advised funds at national sponsors in 2021 alone.
Private foundations are currently allowed to make grants to donor-advised funds, or DAFs, and to count those grants toward their charitable distribution requirement of 5 percent of their assets each year. As we detailed in our report Warehousing Wealth, DAFs are giving vehicles with little transparency and no payout requirement at all, so this should be concerning to any taxpayer who wants to ensure that the charitable revenue they subsidize moves out to working charities in a timely manner.
This is especially important in the case of commercial DAFs like Fidelity Charitable Gift Fund and Schwab Charitable where the sponsors have a significant financial interest in donations staying put, generating management fees for their affiliated financial institutions.
The DAF granting we found prior to 2020 is almost certainly an undercount, since we only examined giving from private foundations to national DAFs — not DAFs held at community foundations or other nonprofit organizations. And we were only able to analyze the foundations that filed their taxes online — not the ones that filed on paper.
Thanks to a new reporting requirement, however, all foundation tax returns are required to be filed electronically starting in 2020. This means that the grants we found represent about 65 percent of all foundation filings up through 2019, and closer to 95 percent of the foundation filings in 2020 and 2021. And the $2.6 billion going from foundations to national DAFs in 2021 is, by itself, a huge amount of charitable revenue cycling between bank accounts.
Other Key Findings about Foundation-to-DAF Giving
Using the data newly published by the IRS, we identified tax returns for 127,330 private non-operating foundations that filed electronically in at least one year from 2017 to 2021. 3,577 of these electronic filers gave to a national DAF in at least one of these five years. Unless otherwise specified, the findings below are based on these 3,577 electronically-filing, national-DAF-giving foundations.
- Private foundation giving to national DAFs averaged $1.4 billion per year from 2017 to 2021. This giving has been increasing rapidly; foundations gave more than $2.6 billion to national DAFs in 2021 alone.
- When private foundations give to national DAFs, their grants to those national DAFs are much larger than their gifts to other recipients. From 2017 to 2021, gifts from DAF-giving private foundations to national DAFs averaged just over $682,000 each, while their gifts to other recipients averaged just over $88,000 each.
- 713 foundations gave $1 million or more to national DAFs from 2017 to 2021. 138 of these foundations gave $10 million or more to national DAFs over these five years.
- For 167 foundations, grants to national DAFs made up one hundred percent of qualifying charitable distributions — the amount used to evaluate whether the foundation has met its minimum payout requirement for the year. For another 477 foundations, national DAF giving made up 90 to 99 percent of their qualifying charitable distributions over those five years.
Top 25 National-DAF-Giving Foundations
Several of the largest DAF donors—the Zoom Foundation, the 136 Fund, the Quetzal Trust, and the Hollyhock foundation—also appeared in our earlier 2021 analysis, as well as in reporting on the topic by the Chronicle of Philanthropy. For many of the foundations on the list, DAF grants made up all or nearly all of their charitable distributions over these five years.
Top 10 National DAF Recipients
Foundation gifts to commercial DAFs were not evenly distributed: Fidelity Charitable received
the lion’s share, with the National Philanthropic Trust a fairly distant second.
What We Can Do
This sort of transfer shouldn’t count as charity. Donors get tax deductions for putting money into private foundations so that money can go to real charities. And the 5 percent payout requirement is meant to ensure that that happens. But when foundations use grants to donor-advised funds to meet payout, it subverts the public purpose behind that requirement.
The dollars flowing from private foundations to donor-advised funds make for a considerable amount of money delayed in reaching active charities. Foundation DAF giving, as well as DAF giving in general, has been on a steep upward trajectory, and as it grows it has been steadily eating into the revenue that has historically gone to working nonprofits.
Together foundations and donor-advised funds now take in 37 percent of all individual giving every year. The scale, growth, and nature of this kind of giving make it more important than ever to have improved DAF governance, as well as greater transparency into DAF giving.
Addendum: A Response to the Philanthropy Roundtable’s June 22 Post about Foundation-to-DAF Giving
Recently, Jack Salmon of the Philanthropy Roundtable published a post critical of our analysis of foundation giving to DAFs. Salmon gave two key arguments for why we shouldn’t be concerned about foundations giving grants to DAFs.
One was that both DAF and foundation payout rates are relatively high — in the low double digits for DAFs and in the 7 to 9 percent range for foundations, depending on the source you use. The other was that DAF granting makes up a relatively small percentage of overall foundation giving, so that it was hard for them to believe that foundations really are using DAF grants to meet their payout requirements in any major way.
DAF Payout Rates
The Roundtable’s article is based on analyses that calculate foundation and DAF payout using primarily a variety of aggregates and averages, and various alternative asset measures for the denominator of the foundation payout equation.
When looking at payout rates of any kind, we believe it is important to look at medians, rather than either aggregates or averages, since medians are not skewed by outliers at the top or the bottom, and are therefore a better representation of the behavior of the typical foundation or DAF. For example, if the Gates Foundation is included in any data set of private foundations, its astounding $50 billion in assets and its atypically high payout rate — around 10 percent per year, thanks to stipulations made by major donor Warren Buffett — skew the overall averages and aggregates, but hardly affect the medians at all.
Unfortunately, there is no way to get an accurate picture of median DAF payout rates, because DAF sponsors are not required to report on them on the individual account level. The industry standard reporting on DAFs by the National Philanthropic Trust, or NPT, is only able to present aggregate payout rates, because that is the only data available.
However, a handful of studies based on samples of account-level information have given us a glimmer of the underlying truth. An IRS study from 2012 reported that at that time, about a fifth of the DAF accounts they analyzed had made no grants whatsoever that year. A 2021 report from the Council on Michigan Foundations, on a comprehensive sample of community foundations in that state, found that the median payout rate of Michigan’s DAF accounts was just 3.1 percent.
The Roundtable’s piece does cite one study by the DAF Research Collaborative which did indeed find that the median four-year payout rate for individual DAF accounts in their sample was 11 percent — just half the aggregate rate that NPT and other industry reports boast. But the same study also found that 35 percent of individual accounts paid out less than 5 percent in any given year, including those that paid out nothing. And a significant number of the sponsors they analyzed allow their donors to manage “endowed” DAF accounts — accounts which have an average payout of just 4.4 percent per year.
Foundation Payout Rates
As for foundation payout rates, we look at medians whenever possible, and we calculate payout using the same method the IRS uses when calculating the excise taxes a foundation must pay on undistributed income — qualifying distributions divided by the net value of noncharitable-use assets. In previous analyses, we have found that the median payout rate of the typical foundation is very close to 5 percent, the minimum required by law. Candid’s analysis of the same data shows similar results to ours.
Foundations Using DAF Giving to Meet Payout
The fact is that there are foundations — including some of the country’s very largest — that have used their DAF giving to fulfill or nearly fulfill their payout requirements. This is true in our current analysis, as it was true in our previous reporting on the subject. Specific examples of foundations that do this are given in our 2021 analysis as well as in our updated analysis above.
Payout rate complexities aside, however, the most important consideration in all of this is that individual foundations should not be able to meet their payout requirement through DAF grants. Aggregate sponsor-level payout rates notwithstanding, the lack of a payout requirement means that individual DAF accounts can pay out very little — or nothing at all — meaning that funds meant for charity can get waylaid indefinitely.
In some cases, foundations do make contributions to DAFs to contribute to special or pooled funds, which are administered as DAFs. It would be relatively simple to set these up so that they’re not run as DAFs, or to impose strict time limits for when the money needs to move out of the DAF if it’s going to count towards the foundation’s payout, as both the 2021 ACE Act and President Biden’s 2024 budget proposal have done.