It’s Time to Stop Whining about Donor-Advised Funds!

The New York Times whined recently about Donor-Advised Funds in an article carrying the headline, “How Tech Billionaires Hack Their Taxes With a Philanthropic Loophole.”

While you personally might not complain about DAFs, you can sure bet some of your organization’s senior staff and board members may line up with some of the experts cited in the misleading piece in the Times.

I’m here to tell you and others that it’s time to stop whining about DAFs. Regardless of how you feel about them, DAFs have been with us since the 1930s, and they’re not likely to go away anytime soon. So, you and your organization will be far better off if you understand how to benefit from DAFs.

I’ll give you six tips. However, as a former newspaper editor, I feel compelled to first bust the myths peddled by the Times.

“Billionaires.” The Times seems to suggest that DAFs are a tool being used by and only available to billionaires. David Gelles writes, “DAFs allow wealthy individuals like Mr. Woodman to give assets — usually cash and stock, but also real estate, art and cryptocurrencies — to a sponsoring organization like the Silicon Valley Community Foundation, Fidelity Charitable or Vanguard Charitable.” While many wealthy individuals establish DAF accounts, so do middle class people. Some sponsoring organizations require just a $5,000 contribution to create one.

As a result of the new tax code, some donors will no longer itemize deductions on their tax returns because of the increase in the standard deduction. However, if they are close to being able to itemize beyond the standard deduction, some will choose to bundle their charitable giving. In other words, they’ll give in some years but not others. In the years they give, they’ll itemize. One way some of these donors will give is to establish a DAF with a large contribution in a given year. Then, they’ll continue to support their favorite charities each year by recommending annual grants from their DAF account.

The bottom-line is that DAFs are not just for the super-wealthy.

“Hack Their Taxes with a Philanthropic Loophole.” The headline in the Times lets you know the reporter’s inappropriate bias right from the start. The wealthy are not doing anything cute, clever, sloppy, or nefarious by creating a DAF. Any donor who creates a DAF is simply following the clearly written provisions of the law.

If giving to charity is a “hack” in the pejorative sense, if receiving a charitable-gift deduction for donating to a nonprofit organization is exploiting a “loophole,” then perhaps we should do away with the deduction for donations all together. However, can we agree that would be stupid?

The bottom-line is that setting up a DAF is no more evil than creating a foundation or trust or, for that matter, giving directly to a charitable organization. Donors who engage in careful tax planning have more disposable income or assets, which has historically led to more giving.

“Charities Can Wait for Funds Indefinitely.” Gelles writes, “So while donors enjoy immediate tax benefits, charities can wait for funds indefinitely, and maybe forever.” He goes on to state that foundations are required to give away five percent of their assets each year, but DAFs have no similar requirement. That’s true, but…

While DAFs are not required to make minimum distributions, the average DAF distributes far more than the minimum required of foundations. According to the 2017 Donor-Advised Fund Report, compiled by The National Philanthropic Trust, DAFs contributed 20.3 percent of assets to charities in 2016, the most recent year for which data is available. For the third year in a row, growth in grants from DAFs has outpaced the growth of giving to DAFs.

Why would a donor just let money sit in a DAF account “forever” after setting up the irrevocable account? While the sponsoring organizations would love that – they earn fees for managing the accounts – a donor derives zero benefit from warehousing money in a DAF, beyond the initial deduction. Instead, donors benefit when that money can be put to good use. Furthermore, they’ll benefit when the recipient charities recognize their support and express their gratitude.

The bottom-line is that most donors have no interest in warehousing their money. They want to use their DAFs to help build a better world. It’s the job of fundraising professionals to inspire these people to recommend grants from their DAF accounts.

“Philanthropy is Becoming Less Transparent.” The article quotes David Callahan, author of The Givers, as saying, “The world of philanthropy is becoming less transparent, and that’s not a good thing.” While I’m not really sure what point Callahan was making, the Times wants us to believe that DAFs are part of the transparency problem as people use them to hide their giving.

A few years ago, I was curious about how secretive DAF grantmakers really are. Here is what I was able to report:

Vanguard Charitable reports that 95 percent of its grantmakers share their name with the charities they support. Schwab Charitable, another large DAF management organization, says that 97 percent of its grantmakers share their name. Fidelity Charitable reports that 92 percent of its grantmakers provide information for nonprofit acknowledgment. This means that charities are able to continue to cultivate and steward these donors.”

The bottom-line is that when donors are inspired to give through their DAF, they almost never do so secretively.

“They’re a Fraud.” The Times article quotes Ed Kleinbard, a tax professor at the University of Southern California: “They’re a fraud on the American taxpayer. They’re a way for the affluent to have their cake and eat it, too.” The article even includes an illustration of the word “charity” in air-quotes.

It is not “fraud” to engage in the legal transaction of creating a DAF. Yes, the affluent receive tax benefits for their charitable giving. The wealthy also donate the vast majority of money donated each year. Among high net-worth individuals, approximately 91 percent give to charities donating an average of $25,509 in 2015, according to The 2016 U.S. Trust Study of High Net Worth Philanthropy. That’s ten-times more than the average of $2,520 for the general population. Furthermore, we know that the top one percent of wealthy individuals contribute nearly one-third of individual charitable gifts.

The bottom-line is that the wealthy are not the enemy of philanthropy. If it weren’t for high net-worth donors, the nonprofit sector would be devastated. We should be encouraging their philanthropy rather than accusing them falsely of fraud. Furthermore, the wealthy are not the only ones creating DAF accounts, as stated earlier.

DAFs are a “Game.” In his article, Gelles writes, “Donor-advised funds in their current form have been around since 1991, and drew light attention from Congress in 2006.” He seems to imply that they’re a new “game” the rich use to simply avoid taxes. The reality is that DAFs have been around since 1931. Policy makers have had a longtime to evaluate DAF regulations. Along the way, the federal government has made changes to the rules.

The bottom-line is that DAFs have been around for nearly a century and have been reviewed by the government. DAFs are not some sort of sneaky game played by the wealthy in the shadows.

DAFs are increasingly important to philanthropists and to charities. In 2016, there were 284,965 (up 6.9 percent) DAF accounts holding $85.15 billion (up 9.7 percent) in assets. Annual contributions into DAFs were $23.27 billion (up 7.6 percent) in 2016, continuing their growth trend. Donors recommended grants from DAFs totaled $15.75 billion (up 10.4 percent) to charities in 2016, outpacing the asset growth rate. The average DAF account size was $298,809 (up 2.6 percent) in 2016, according to The National Philanthropic Trust report.

Given that DAFs are with us for the foreseeable future, given that donors like them, given that charities are benefiting from them more each year, let’s leave the DAF bashing to the misguided while we look at what you can do to attract more DAF grants. Here are six tips I’m happy to share again:

1. Talk with your donors. When you communicate with your donors, particularly your major donors, ask them if they’ve established a Donor-Advised Fund. However, you can ask all of your donors if they have a DAF account by providing a checkbox on your gift forms and/or asking the question in a donor survey.

2. Let donors know that your organization accepts DAF grants. Don’t assume that your donors know this. Instead, make sure they understand that your organization accepts and welcomes DAF grants.

3. Include a DAF-giving checkbox on your gift forms. While you can simply ask if the donor has a DAF account, you can also give donors the option to make a gift commitment via your gift form. Notice I said “commitment” rather than “pledge.” That’s because DAFs cannot technically be used to satisfy pledges.

4. Include a DAF widget on your website. You can find information about this great tool and get your own FREE DAF widget by clicking here. By putting the widget on your website, your donors will know a) your organization accepts DAF gifts, b) they can give from their own DAF account, c) they can link easily to their DAF sponsoring company from your website which will make giving simple while they’re thinking about you.

5. Publish a story about a DAF donor in your newsletter. This is a great way to recognize a donor while letting others know that your organization encourages DAF grants. The article can also educate donors about how a DAF works. Don’t assume that just because someone has created a DAF that they fully understand how the grantmaking process functions.

6. Appeal to your donors. Either as part of a regular funding appeal or as a standalone direct mail appeal or face-to-face visit, you can ask your donors to provide a grant from their DAF account should they happen to have one. If you know which of your donors have a DAF account, you can approach them with a specially targeted appeal.

DAFs can be a great source of philanthropy for your organization. Don’t fall for it when people tell you DAFs are a problem for the nonprofit sector. Instead, invest the energy necessary to attract gifts from DAFs.

The Giving USA Special Report – The Data on Donor-Advised Funds is available for purchase by clicking here. Prepared by the Indiana University Lilly Family School of Philanthropy, the report fills in the gaps in data and understanding about these important giving vehicles and takes a rigorous, new, in-depth look at where the money goes.

What are you doing to inspire donations from DAFs?

That’s what Michael Rosen says… What do you say?

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7 Responses to “It’s Time to Stop Whining about Donor-Advised Funds!”

  1. Thanks for passing on the info about the DAFwidget!

  2. Michael, this is the best factual discussion on the topic of “DAFs” that I have seen. The typical press, and shall we say more liberal view point on DAF, is fraught with falsehoods and outright disinformation. I appreciate the fact based points here and believe that DAFs are an opportunity and not a detriment to grow future giving.

    • Kelley, thank you for sharing your thoughts. I can’t say I was really surprised by the tone of the Times article. It certainly fits with the newspaper’s general narrative about wealthy people.

      When I was a newspaper editor, I had the chance to work alongside of one of Murrow’s Boys. He was an amazing, old-school journalist. He hated what had become of mainstream journalism. That was decades ago. If he were still alive today, I can’t imagine what he would say about the state of journalism now.

  3. Great piece, Michael! Informative and educational.

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