Tough Questions about Donor Advised Funds

© Hugo Félix - Fotolia
© Hugo Félix – Fotolia
Many fundraisers and donors are concerned about the as-yet still largely unknown impact of donor-advised funds (often referred to as DAFs) on the philanthropic economy, particularly their ethical and policy implications. “I think the discussion about donor advised funds, like the discussion of overhead, is long overdue,” says Karla A. Williams, M.A., ACFRE, principal of The Williams Group in Charlotte, North Carolina. While there may not be an economic argument against saving money instead of spending it, Williams believes there are other, more compelling arguments against doing so. “Given the historically low patterns of charitable distribution in this country, we need to look at the charitable distribution of donor advised funds,” Williams says. “If the money is not being distributed, is it, or is it not, a charitable act?” The available evidence suggests that DAFs may not, in fact, be boosting charitable giving as much as advocates have hoped.

While public foundations report that the average annual disbursement of advised funds is significantly higher than the federally mandated 5-percent floor required of private foundations, this number is an aggregate of the entire corpus of donor advised funds. According to the 2012 study An Analysis of Charitable Giving and Donor Advised Funds from the Congressional Research Service, more than 70 percent of DAFs paid out less than 5 percent annually, and more than half made no payments at all. In practical terms, the explosive growth of DAFs mean that while a lot of money is still being designated for charities, a lot less of it is being distributed to them.

“In a world of urgent needs, we are encouraging the saving of money, not the spending of it for charitable purposes,” Williams says. The rapid rise of charitable savings accounts, she argues, is forcing the profession to confront a novel, but vital, ethical question: Do the benefits of saving money outweigh the benefits of spending it?

One way to ensure that donor advised funds are distributed is to set a time limit on them. Ray D. Madoff, a professor at Boston College Law School, suggests requiring funds to pay out completely in seven years. When he was chair of the House Ways and Means Committee, Michigan Representative Dave Camp proposed a five-year cap on DAFs. In his article “Avoiding Misuse of Donor Advised Funds” (Cleveland State Law Review, 2010), Michael J. Hussey of Widener University argued for reforming DAFs along the lines of IRAs, requiring penalties if regular distributions are not made after a certain period, and termination of the account four years after the death of the donor.

Alan Cantor, principal at Alan Cantor Consulting LLC in Concord, New Hampshire, is an advocate of the required payout approach. “Donor advised funds serve a purpose, but ultimately the money has to go out the door to fulfill that purpose,” Cantor says. “I don’t think the money should be kept in perpetuity. I believe in investing in people and mission now.”

Cantor also argues that savings vehicles like DAFs, endowments, and private foundations are being oversold to donors at the expense of the nonprofits they are designed to support. He argues that, ultimately, the issue is one of public policy, not of economics. “Investing money now lessens the need to invest even more later,” he says.

In addition, Cantor is calling for greater transparency and accountability in public foundations with ties to commercial financial firms to ensure that the interests of the fund advisers aren’t at odds with the philanthropic interests of the donors or the ethical standards of the fundraising profession. Do the management fees that fund advisers receive, for example, violate the AFP Code of Ethical Principles and Standards? Without proper oversight, says Cantor, fundraisers can’t be certain that they do not.

Are such solutions feasible?

“All the proposed solutions either don’t address the problem, or address it badly,” says Eugene Steuerle, Ph.D., an Institute Fellow and Richard B. Fisher Chair at the Urban Institute. According to Steuerle, there are three key questions that must be answered before an effective solution can be determined:

  • Do the objections make sense?
  • Do the proposals align with the objections?
  • Can the proposals be implemented reasonably and fairly?

And, where does this leave fundraising professionals?

This post was adapted from “Deciphering DAFs: How the Simplicity of Donor Advised Funds May Be Creating Complex Issues for Fundraising Professionals,” by Paul Lagasse, Advancing Philanthropy, Summer 2015 (reprinted with permission). You can read the whole article here.