April 26, 2019

With Donor-Advised Funds Philanthropy Is No Longer Limited to the Uber-Rich

You might think the largest charitable organization in the United States is a billionaire’s foundation or a brand-name charity. The truth is, it’s a bank.

In 2016, a division of Fidelity Investments with more than $16 billion in assets became the largest charity in the United States, according to the Chronicle of Philanthropy, thanks to a financial tool that has come to dominate giving in America over the past decade: donor-advised funds.

“They’re a fast-growing philanthropic vehicle for the Jewish community — for philanthropy in general in the country, but especially for the Jewish community,” said Andres Spokoiny, president and CEO of the Jewish Funders Network, a national consortium of Jewish community donors.

Donor-advised funds, or DAFs, are funds held by nonprofit organizations in the name of a private donor, according to the Internal Revenue Service. Although a so-called “sponsoring organization” assumes control over the money, donors can advise it to disburse funds to other nonprofits of their choice. And while donors get the tax exemption upfront, they can disburse their funds at a later date.

Although DAFs have been available to donors since at least the 1990s, they have seen an explosion in the last decade, not least in the Jewish community.

Dan Rothblatt, senior vice president of philanthropic services for the Jewish Community Foundation of Los Angeles, said in an email to the Journal that DAFs make up $536 million of The Foundation’s profile of $1.1 billion in charitable assets, or more than half, as of Dec. 31, 2016.

That number is up sharply from five years ago, with a nearly 50 percent increase since 2012, Rothblatt said.

The national growth rate in DAFs has at times been even greater. Between 2010 and 2015, contributions to DAFs nationally more than doubled, from $9 billion to $22 billion, according to a study by the National Philanthropic Trust.

“DAFs are one of the fastest-growing segments of philanthropy for numerous reasons,” Rothblatt wrote. “They’re quick and easy to establish and avoid the costs and administrative complexities of charitable instruments such as private foundations.

DAFs represent a particularly valuable tool for small and mid-sized donors whose wealth is insufficient to make setting up a private foundation worthwhile, Spokoiny said.

“Let’s say you have $10,000 to give,” he said. “You’re not going to create your own foundation. So the thinking is that a $10,000 donor can actually do philanthropy in an easy and user-friendly way.”

Spokoiny noted that DAFs face a number of practical limitations. For one, a DAF cannot employ staff to issue grants or vet potential donation recipients, he said. Moreover, they fundamentally rely on trust: Once a donor signs over his or her funds to a sponsoring organization, they legally belong to that organization, he said.

Even detractors acknowledge the effect the funds have had on the charitable giving.

Citing federal statutes, tax law professor Ellen April of Loyola Marymount University wrote in an email, “the donor must cede legal control to the exempt organization sponsoring the fund.”

This arrangement can — and does — lead to complications, for instance when a donor wishes to give to a nonprofit seen as contrary to the mission of the sponsoring organization.

DAFs also may be problematic because of a feature that often is seen as an advantage: Unlike private foundations, which are required by law to disburse 5 percent of their holdings each year, DAFs have no such restriction. In a letter to Congress in July, Ray Madoff and Roger Colinvaux, law professors at Boston College and the Catholic University of America, respectively, wrote that even as the amount contributed to DAFs has risen in recent years, charitable giving overall has stagnated. “This suggests that DAFs are not increasing overall giving, but instead are attracting dollars that would otherwise be contributed to active nonprofits,” the professors wrote.

Spokoiny echoed that concern, saying that DAFs could potentially become vehicles for donors to “park money.”

Overall, though, the philanthropic sector remains bullish on the funds. Spokoiny said that all major Jewish community foundations now offer donors the option of setting up DAFs.

And even their detractors acknowledge the effect the funds have had on the charitable giving.

In their letter to Congress, Colvinaux and Madoff wrote, “From their infancy in the 1990s when the first commercially affiliated funds formed until today, DAFs have grown to dominate the charitable landscape.” n