This is a well written and informative piece. However, I think the disconnect between proponents and critics of DAFs has still not been bridged. In my mind, the fundamental issue is the counterfactual of what would happen with the money given to DAFs if they didn’t exist?
This article and many others presume that absent the power of DAFs to market to donors, the money would never reach charities. While that is certainly possible, I don’t think there is any serious evidence to indicate this (most data points to total charitable donations being relatively flat during this time of enormous growth in DAFs). The concern is that DAFs are receiving funds that would have gone directly to operating public charities or they may be getting new money, but they are doing so by “borrowing” from future donations by offering incentives to claim a tax deduction now rather than later. In either case, one should be aware of the opportunity costs of DAFs holding funds that could have been put to use otherwise and be prepared to accept the tradeoffs and/or consider regulations to minimize these opportunity costs.
I should add that while a lack of understanding about DAFs may lead some to have unfounded fears, it is entirely unfair to put either Ray Madoff or Al Cantor in that group. They certainly understand them very well. It’s just that they have a different opinion about their value given the current regulatory environment.
While I admire the bravura of Jack Shakely’s article, I must take issue with it on many levels.
First, I admit that I enjoyed the colorful imagery of “ghoulies and ghosties and long-leggedy beasties.” But as one of the critics of donor-advised funds named in Mr. Shakely’s piece, I have to respond that my critique is not based on a lack of understanding. In fact, I worked for six years in the community foundation world, convincing donors to create donor-advised funds. I’m deeply familiar with donor-advised funds and their history. Mr. Shakely and others may disagree with my conclusions, but my critique is not based on ignorance as to how donor-advised funds work or why they are growing so dramatically.
Second, though I am one of a very few critics of donor-advised funds who are speaking and writing publicly about the issue, I would caution readers not to think that we are cranks or outliers. I can assure you that there are thousands of nonprofit leaders who feel much as we do, but who are reluctant to put their opinions into print. Why? Because there’s an obvious power imbalance. It clearly is not in a nonprofit’s interest to criticize its donors and funders. But silence about donor-advised funds and their astonishing growth should not be taken as approval, or even acceptance.
Third, as Brian Mittendorf points out in the comments above, the growth in donor-advised funds has not translated into growth in overall giving. Mr. Shakely and others would have us believe that donor-advised funds are increasing the philanthropic pie, but there is no evidence of that. Overall charitable giving as a percentage of disposable personal income has remained virtually unchanged since the late 1970s, according to Giving USA. So if more of that giving is going into donor-advised funds, it must not be going somewhere else. Admittedly, some of those dollars might otherwise have gone into private foundations. But it is not as though giving to foundations has dried up: donations to foundations have remained steady in recent years, at about 11 percent of total giving.
The conclusion I reach, and which has not been refuted in any intellectually coherent way, is that money that otherwise would have gone to charitable institutions that provide actual services is now instead flooding into donor-advised funds. Gifts that might have supported soup kitchens, Boys and Girls Clubs, schools, museums, and medical research are instead piling up in investment accounts. (Mr. Shakely mocks my use of the term “warehousing.” Sorry—but that’s what it is. And by the most recent measure, the DAF warehouse holds nearly $54 billion.)
Where I agree with Mr. Shakely is that there is now a vast army of people with a vested interest in promoting this particular and peculiar form of charitable giving. These are the financial advisors and other employees and leaders of the financial services industry, who draw management fees from money invested in commercial donor advised funds. The donors’ financial advisors have a personal financial stake in convincing their clients to give to commercial donor-advised funds, rather than to actual charitable organizations providing mission impact. Moreover, the incentive of the financial services industry and its employees is to have those funds continue to sit in the donor-advised funds for as long as possible, generating fees year after year.
Mr. Shakely sees the involvement of Wall Street and the introduction of its culture of incentives as a positive development for the nonprofit world. I could not disagree more. Wall Street is an invasive species in the charitable eco-system, fundamentally altering expectations, motivations, and relationships. Indeed, if there’s a bump in the night that terrifies me, it’s the takeover of the charitable sector by the financial services industry. At a time of increased demand for services and reductions in government funding, the last thing the nonprofit sector needs are the Wall Street ghoulies and ghosties swooping in for an ever-bigger piece of the action.
Donor-advised funds are most assuredly NOT philanthropic warehouses. There is absolutely no evidence of that. The National Philanthropic Trust research that shows that donor-advised funds contribute three times as much to charity as do private foundations as a percent of assets is evidence that the “warehousing” label is pure fiction.
Here is why Mr. Cantor’s fears will never be realized: when a person contributes money to a donor-advised fund, that money is forever dedicated to providing gifts and grants to tax-exempt charities. The donor may never retrieve the money nor may it be spent for anything other than charitable purposes. All of us have philanthropic obligations and wishes, and because donor-advised may be used only for charitable purposes, a donor is likely to recommend contributions out of that philanthropic pool first, rather than last.
Yes, it’s true that on average donor-advised funds distribute significantly more than private foundations. But using private foundations as the measure distorts the perspective. Private foundations, which are held to a 5 percent distribution minimum, are singularly inefficient and ineffective at meeting the needs of the community. The 5 percent distribution from private foundations a) is far too low for societal good, and b) clearly sets up foundations to be perpetual entities.
For donor-advised funds to be more generous than private foundations does not say very much. The true comparison for donor-advised fund distributions is not the private foundation distributing 5 percent, but the operating nonprofit that applies 100% of money given to it to its mission. My argument, articulated in my articles and in the comment above, is that much of the giving to donor-advised funds would otherwise have gone to direct charitable purposes. I unapologetically assert that giving 100% of one’s charitable dollars to help people and the planet today is a vastly better use of the charitable dollar than putting the money into a donor-advised fund with no required distribution whatsoever.
Meanwhile, you state that the money given to a donor-advised fund is “forever dedicated to providing gifts and grants to tax-exempt charities.” Well, yes, that’s the only distribution permitted from donor-advised funds, and the money cannot revert back to the personal accounts of the donors. But the key point here is that the distribution to charity is not mandated. The funds can sit in a particular donor-advised fund indefinitely.
I find it extraordinary that donors can receive the same tax deduction for making a gift to a donor-advised fund as they would for giving to the local soup kitchen, though the funds never need to be distributed. The notion behind the proposed seven-year required spend-down of donor-advised funds is to say that, yes, a donor can get the charitable deduction at the time of the gift to the donor-advised fund, but the money needs to do some actual good within seven years. Most people who are not closely tied to the donor-advised fund industry, including many of the donors themselves, consider a required seven-year spend-down a reasonable proposal. Arguably seven years is too short. But allowing the funds to sit forever is, from a public policy perspective, way too long.
Finally, we need to be cautious about averages. I know many people who use donor-advised funds as a back shop, in a sense, to facilitate their charitable giving. They contribute large blocks of appreciated stock at a time that is advantageous to them, and then they essentially give all the money away within a year or two. These donors then re-fill their donor-advised fund, and again give the money all away. (As you can imagine, that kind of behavior, to my mind, is an excellent and appropriate use of the donor-advised fund.)
But let’s pause to think about averages. Let’s say there are ten people, each of whom on January 1 has a $100,000 donor-advised fund. Two of these people do what I describe: they give away all $100,000. The other eight don’t give away a singe penny. Collectively, this group of ten donors has given away $200,000 of their $1 million in donor-advised funds, or 20%—the total that the National Philanthropic Trust says is the average annual distribution. You mock me in your piece for complaining about the funds from which no money is distributed. But don’t you admit that having the government subsidize contributions to donor-advised funds through the charitable deduction, and then having the funds sit there indefinitely, helping no worthy cause whatsoever, is a bit of a problem?
As someone who created a Donor Advised Fund over 10 years ago, and is currently on the board of a local community foundation, my experience mirrors Mr. Shakely’s. While Mr. Cantor describes a worst case scenario that could occur, I certainly don’t see it in my city.
We have seen significant increases in charitable giving after individuals (and couples) have created DAF’s, and our donors typically donate a significant portion of their assets each year, and replenish the fund when needed.
Let me add a word or two to Al’s remarks about numbers. The comparison Jack makes between DAF’s purported payout rates and private foundations is inapt for another reason (besides the point, as Al says, that 15% should be nothing to crow about). We now have a couple of academic studies showing that private foundations with living donors making regular, active contributions have spending profiles that look a lot like the reported aggregate DAF numbers. Foundations with deceased donors tend to spend at or close to the 5% statutory minimum. So the DAF to PF comparison is not really apples to apples. Since there are few DAFs whose original supporters are now gone, we don’t know what payouts will look like at DAFs in the future. I would argue that the PF data give us a pretty good prediction. I don’t know if it’s a “beastie,” but it isn’t all sun and roses, either.
I started an account in a DAF at Bank of America two years ago. Since then, I have become interested in the phenomenon of the spectacular growth of DAF’s that Mr. Shakely describes. It seems to me (and I have suggested such to Mr. Cantor in his own blog) that if you want to understand this growth better, the world of non-profits and/or the academics who study philanthropy need to get out there and survey the attitudes and desires of those of us who are fueling this growth. From that data. one can then debate the merits/dangers of DAF’s.
For me personally, the decision to fund a DAF was due to 1) the tax break it affords, and 2) the desire to give more in the future after I retire and can spend more time on charitable research and donations. Whether I am representative of others or an outlier can only be determined by a scientific survey of DAF account holders.
I agree with Mr. Cantor that there should be some rule for the spend down. As he indicates in his comments, looking at aggregate totals can be misleading; what you really want to examine is the spend down percentages of individual accounts - ideally, it would be centered at some target percent (say 20%) with a tight variance.
COMMENTS
BY Jack Shakely
ON May 14, 2015 04:16 PM
I welcome comments.
BY Anna
ON May 14, 2015 05:52 PM
So well written and informative, Jack. Bravo!
BY Mike Yeaton
ON May 14, 2015 07:19 PM
Great historical perspective and analysis - thank you.
BY BJ duncan
ON May 14, 2015 11:20 PM
you certainly made this seismic shift
clear. well-written treatise!
enjoyed the piece.
BY Brian Mittendorf
ON May 15, 2015 01:32 PM
This is a well written and informative piece. However, I think the disconnect between proponents and critics of DAFs has still not been bridged. In my mind, the fundamental issue is the counterfactual of what would happen with the money given to DAFs if they didn’t exist?
This article and many others presume that absent the power of DAFs to market to donors, the money would never reach charities. While that is certainly possible, I don’t think there is any serious evidence to indicate this (most data points to total charitable donations being relatively flat during this time of enormous growth in DAFs). The concern is that DAFs are receiving funds that would have gone directly to operating public charities or they may be getting new money, but they are doing so by “borrowing” from future donations by offering incentives to claim a tax deduction now rather than later. In either case, one should be aware of the opportunity costs of DAFs holding funds that could have been put to use otherwise and be prepared to accept the tradeoffs and/or consider regulations to minimize these opportunity costs.
BY Brian Mittendorf
ON May 15, 2015 02:23 PM
I should add that while a lack of understanding about DAFs may lead some to have unfounded fears, it is entirely unfair to put either Ray Madoff or Al Cantor in that group. They certainly understand them very well. It’s just that they have a different opinion about their value given the current regulatory environment.
BY Alan Cantor
ON May 16, 2015 12:44 PM
While I admire the bravura of Jack Shakely’s article, I must take issue with it on many levels.
First, I admit that I enjoyed the colorful imagery of “ghoulies and ghosties and long-leggedy beasties.” But as one of the critics of donor-advised funds named in Mr. Shakely’s piece, I have to respond that my critique is not based on a lack of understanding. In fact, I worked for six years in the community foundation world, convincing donors to create donor-advised funds. I’m deeply familiar with donor-advised funds and their history. Mr. Shakely and others may disagree with my conclusions, but my critique is not based on ignorance as to how donor-advised funds work or why they are growing so dramatically.
Second, though I am one of a very few critics of donor-advised funds who are speaking and writing publicly about the issue, I would caution readers not to think that we are cranks or outliers. I can assure you that there are thousands of nonprofit leaders who feel much as we do, but who are reluctant to put their opinions into print. Why? Because there’s an obvious power imbalance. It clearly is not in a nonprofit’s interest to criticize its donors and funders. But silence about donor-advised funds and their astonishing growth should not be taken as approval, or even acceptance.
Third, as Brian Mittendorf points out in the comments above, the growth in donor-advised funds has not translated into growth in overall giving. Mr. Shakely and others would have us believe that donor-advised funds are increasing the philanthropic pie, but there is no evidence of that. Overall charitable giving as a percentage of disposable personal income has remained virtually unchanged since the late 1970s, according to Giving USA. So if more of that giving is going into donor-advised funds, it must not be going somewhere else. Admittedly, some of those dollars might otherwise have gone into private foundations. But it is not as though giving to foundations has dried up: donations to foundations have remained steady in recent years, at about 11 percent of total giving.
The conclusion I reach, and which has not been refuted in any intellectually coherent way, is that money that otherwise would have gone to charitable institutions that provide actual services is now instead flooding into donor-advised funds. Gifts that might have supported soup kitchens, Boys and Girls Clubs, schools, museums, and medical research are instead piling up in investment accounts. (Mr. Shakely mocks my use of the term “warehousing.” Sorry—but that’s what it is. And by the most recent measure, the DAF warehouse holds nearly $54 billion.)
Where I agree with Mr. Shakely is that there is now a vast army of people with a vested interest in promoting this particular and peculiar form of charitable giving. These are the financial advisors and other employees and leaders of the financial services industry, who draw management fees from money invested in commercial donor advised funds. The donors’ financial advisors have a personal financial stake in convincing their clients to give to commercial donor-advised funds, rather than to actual charitable organizations providing mission impact. Moreover, the incentive of the financial services industry and its employees is to have those funds continue to sit in the donor-advised funds for as long as possible, generating fees year after year.
Mr. Shakely sees the involvement of Wall Street and the introduction of its culture of incentives as a positive development for the nonprofit world. I could not disagree more. Wall Street is an invasive species in the charitable eco-system, fundamentally altering expectations, motivations, and relationships. Indeed, if there’s a bump in the night that terrifies me, it’s the takeover of the charitable sector by the financial services industry. At a time of increased demand for services and reductions in government funding, the last thing the nonprofit sector needs are the Wall Street ghoulies and ghosties swooping in for an ever-bigger piece of the action.
BY Jack Shakely
ON May 16, 2015 01:19 PM
Donor-advised funds are most assuredly NOT philanthropic warehouses. There is absolutely no evidence of that. The National Philanthropic Trust research that shows that donor-advised funds contribute three times as much to charity as do private foundations as a percent of assets is evidence that the “warehousing” label is pure fiction.
Here is why Mr. Cantor’s fears will never be realized: when a person contributes money to a donor-advised fund, that money is forever dedicated to providing gifts and grants to tax-exempt charities. The donor may never retrieve the money nor may it be spent for anything other than charitable purposes. All of us have philanthropic obligations and wishes, and because donor-advised may be used only for charitable purposes, a donor is likely to recommend contributions out of that philanthropic pool first, rather than last.
BY Alan Cantor
ON May 17, 2015 05:46 AM
Thanks, Jack, for the quick response.
Yes, it’s true that on average donor-advised funds distribute significantly more than private foundations. But using private foundations as the measure distorts the perspective. Private foundations, which are held to a 5 percent distribution minimum, are singularly inefficient and ineffective at meeting the needs of the community. The 5 percent distribution from private foundations a) is far too low for societal good, and b) clearly sets up foundations to be perpetual entities.
For donor-advised funds to be more generous than private foundations does not say very much. The true comparison for donor-advised fund distributions is not the private foundation distributing 5 percent, but the operating nonprofit that applies 100% of money given to it to its mission. My argument, articulated in my articles and in the comment above, is that much of the giving to donor-advised funds would otherwise have gone to direct charitable purposes. I unapologetically assert that giving 100% of one’s charitable dollars to help people and the planet today is a vastly better use of the charitable dollar than putting the money into a donor-advised fund with no required distribution whatsoever.
Meanwhile, you state that the money given to a donor-advised fund is “forever dedicated to providing gifts and grants to tax-exempt charities.” Well, yes, that’s the only distribution permitted from donor-advised funds, and the money cannot revert back to the personal accounts of the donors. But the key point here is that the distribution to charity is not mandated. The funds can sit in a particular donor-advised fund indefinitely.
I find it extraordinary that donors can receive the same tax deduction for making a gift to a donor-advised fund as they would for giving to the local soup kitchen, though the funds never need to be distributed. The notion behind the proposed seven-year required spend-down of donor-advised funds is to say that, yes, a donor can get the charitable deduction at the time of the gift to the donor-advised fund, but the money needs to do some actual good within seven years. Most people who are not closely tied to the donor-advised fund industry, including many of the donors themselves, consider a required seven-year spend-down a reasonable proposal. Arguably seven years is too short. But allowing the funds to sit forever is, from a public policy perspective, way too long.
Finally, we need to be cautious about averages. I know many people who use donor-advised funds as a back shop, in a sense, to facilitate their charitable giving. They contribute large blocks of appreciated stock at a time that is advantageous to them, and then they essentially give all the money away within a year or two. These donors then re-fill their donor-advised fund, and again give the money all away. (As you can imagine, that kind of behavior, to my mind, is an excellent and appropriate use of the donor-advised fund.)
But let’s pause to think about averages. Let’s say there are ten people, each of whom on January 1 has a $100,000 donor-advised fund. Two of these people do what I describe: they give away all $100,000. The other eight don’t give away a singe penny. Collectively, this group of ten donors has given away $200,000 of their $1 million in donor-advised funds, or 20%—the total that the National Philanthropic Trust says is the average annual distribution. You mock me in your piece for complaining about the funds from which no money is distributed. But don’t you admit that having the government subsidize contributions to donor-advised funds through the charitable deduction, and then having the funds sit there indefinitely, helping no worthy cause whatsoever, is a bit of a problem?
BY Jack Shakely
ON May 17, 2015 10:48 AM
Twice you have accused me of mocking you. I mean no mockery. We can disagree as gentlemen.
BY Alan Cantor
ON May 17, 2015 06:09 PM
Agreed, Jack. Thanks.
BY Gary DeLong
ON July 30, 2015 03:29 PM
As someone who created a Donor Advised Fund over 10 years ago, and is currently on the board of a local community foundation, my experience mirrors Mr. Shakely’s. While Mr. Cantor describes a worst case scenario that could occur, I certainly don’t see it in my city.
We have seen significant increases in charitable giving after individuals (and couples) have created DAF’s, and our donors typically donate a significant portion of their assets each year, and replenish the fund when needed.
BY Brian Galle
ON August 7, 2015 07:32 AM
Let me add a word or two to Al’s remarks about numbers. The comparison Jack makes between DAF’s purported payout rates and private foundations is inapt for another reason (besides the point, as Al says, that 15% should be nothing to crow about). We now have a couple of academic studies showing that private foundations with living donors making regular, active contributions have spending profiles that look a lot like the reported aggregate DAF numbers. Foundations with deceased donors tend to spend at or close to the 5% statutory minimum. So the DAF to PF comparison is not really apples to apples. Since there are few DAFs whose original supporters are now gone, we don’t know what payouts will look like at DAFs in the future. I would argue that the PF data give us a pretty good prediction. I don’t know if it’s a “beastie,” but it isn’t all sun and roses, either.
BY Roy Tamura
ON August 14, 2015 07:32 AM
I started an account in a DAF at Bank of America two years ago. Since then, I have become interested in the phenomenon of the spectacular growth of DAF’s that Mr. Shakely describes. It seems to me (and I have suggested such to Mr. Cantor in his own blog) that if you want to understand this growth better, the world of non-profits and/or the academics who study philanthropy need to get out there and survey the attitudes and desires of those of us who are fueling this growth. From that data. one can then debate the merits/dangers of DAF’s.
For me personally, the decision to fund a DAF was due to 1) the tax break it affords, and 2) the desire to give more in the future after I retire and can spend more time on charitable research and donations. Whether I am representative of others or an outlier can only be determined by a scientific survey of DAF account holders.
I agree with Mr. Cantor that there should be some rule for the spend down. As he indicates in his comments, looking at aggregate totals can be misleading; what you really want to examine is the spend down percentages of individual accounts - ideally, it would be centered at some target percent (say 20%) with a tight variance.
Good article and discussion.