Friday, October 23, 2015
8:30 am-3:30 pm

The University Club
Washington, DC

This public conference brought together Congressional staffers, journalists and people on all sides of the Donor Advised Funds (DAF) issue to explore such topics as: What has been the effect of DAF’s on charitable giving? Should DAFs be subject to a payout rule, and if so, what should that rule be? And, should all sponsoring organizations of DAFs be treated the same?

The Rise of Donor Advised Funds: Should Congress Respond?

Donor advised funds attract a significant share of charitable giving and warrant Congress’s attention. The national sponsoring organization is distinct from other DAF sponsors. The national sponsoring organization’s exempt purpose is to spend money for the benefit of other 501(c)(3) organizations, and is best characterized as a fundraising organization. Given the national sponsoring organization’s exempt purpose, it is already subject to a facts and circumstances based payout. Because national sponsoring organizations fundamentally are vehicles for spending not saving, Congress should apply legislatively the commensurate in scope test and require that national sponsoring organizations spend contributed funds over a specified time period. The goal is to provide a spending period long enough so as not to alienate new donors, but short enough so as not to extend unduly the delay to charity that results when DAFs are used as public charity substitutes. Congress also should note that DAFs increasingly are used for noncash charitable contributions. The positive effect will be to make property conversions more efficient. The negative effect will be to accentuate the broken system for property contributions at great expense. DAFs present an opportunity for Congress to reduce the cost of the subsidy for property contributions and move to a net benefit to charity approach to the deduction.

Congress Should Respond: A Payout for Some DAFs and New Rules for Noncash Contributions

In recent years, donor-advised funds (DAFs), historically a relatively minor part of American philanthropy, have taken on an outsized importance. The dramatic growth of donor-advised funds has been driven not only by the inherent attractiveness of DAFs, but also by the profit margins of the financial services industry and the donors’ financial advisors. As more and more money rushes into DAFs – as of 2013, roughly 7% of all charitable gifts from individuals – the operating nonprofits that supposedly are the beneficiaries of donor-advised funds are losing out. At a time of higher demand for services and reduced funding, nonprofits are looking to individual donors for financial support, but increasingly donors are diverting their gifts into DAFs. This might be acceptable if DAFs were inspiring increased charitable giving, but there is little evidence to support that claim. And, because there is no mandated spend-down requirement, far more money is flowing into donor-advised funds than is flowing out into the charitable community. Wise public policy demands that Congress act to mandate an account-by-account spend-down of donor-advised funds within 15 to 20 years of the date of donation, and to prohibit private foundations from meeting their 5% distribution requirement through grants to DAFs.

Donor-Advised Funds and the Shifting Charitable Landscape: Why Congress Must Respond

<p>Accelerating growth of donor advised funds has attracted vocal advocates and critics whose arguments are fundamentally about definition (the purpose of philanthropy), values (good philanthropy versus bad philanthropy), regulation (government or market), policy (the role and value of tax incentives), and sponsorship (for profit or nonprofit agency). Community foundations assert a special standing as sponsors of donor advised funds (DAF) because of their unique role in communities as anchor institutions whose mission is to serve the interests of their community. The question is, is this role grounds enough to justify and preserve the distinctive value of donor advised funds held by community foundations in their present form?</p>

The Special Standing of Community Foundations as Sponsors of Donor-Advised Funds

Each and every sponsoring organization maintaining donor-advised funds – as well as each donor – is subject to a host of requirements under existing law to ensure that charitable funds are used exclusively for charitable purposes. Beginning with the requirements of the “operational test” for tax exemption and continuing through focused penalty provisions (which are not yet fully implemented), the foundation is in place to enforce compliance and prevent abuses, with much room for additional regulatory guidance and enforcement. Ensuring that charitable funds are properly used depends on rigorous employment and enforcement of these rules of general application, and not on arbitrary classifications and labels imposed on sponsoring organizations.

Donor-Advised Funds: The Case for Consistent Principles

Our conference title assumes that such danger lurks in the increased utilization of donor-advised funds for charitable giving that Congress may need to respond. Statistics from 2013 certainly reveal the broad popularity of this vehicle: 217,000 funds (up from 20,000 in the mid-1990s), charitable assets of $50 billion, and nearly $10 billion in grants. DAF critics choose to describe their growth as “unbridled,” and speak of the “warehousing” of charitable assets, but other observers maintain that DAFs are democratizing philanthropy and fostering more strategic and thoughtful giving.

An Argument Against Congressional Response

The Complementary Roles of Community Foundations and National Donor-Advised Funds

This article argues that the emergence of a specific financial structure called the donor advised fund (DAF) developed in tandem with postwar efforts to extend the private sector’s reach into public welfare through new forms of charitable giving and voluntarism. In charting the gestation, birth, and expansion of DAFs from the late nineteenth century to our present day, it contends that the longstanding tension in American life between state-based regulation and individual freedoms has stood at the heart of debates about charitable tax law. Far from simply reflecting reigning historical forces, DAFs came to shape ideologies about public and private good in American life. A sea change in charitable giving occurred after the passage of the 1969 Tax Reform Act. In response, tax attorneys and charitable organizations sought to extend the designation of “public charity” to protect individuals’ charitable assets from being treated as “private foundations,” which were subject to new tax burdens and reporting obligations. By looking in particular at American-Jewish philanthropic activism during this period, the article concludes that DAFs emerged as one, among a handful, of new financial vehicles that empowered private wealth and decision-making with the privileges of putatively public charitable entities.

Donor Advised Funds in Historical Perspective

For nearly a decade, the Statistics of Income Division of the Internal Revenue Service (IRS) has been the primary source of data on donor advised funds (DAFs) sponsored by nonprofit charitable organizations tax-exempt under Section 501(c)(3) of the Internal Revenue Code. The data, from stratified random samples, show that the number and size of DAF sponsoring organizations has grown substantially since Tax Year 2006. Some 2,121 sponsoring organizations reported nearly $53 billion in DAF accounts for Tax Year 2012. The largest DAF sponsors each held over $1 billion in accounts; meanwhile, about 60 percent of the organizations reported less than $1 million. Though the median DAF payout rate was 7.2 percent for Tax Year 2012, nearly 22 percent of the sponsoring organizations reported no grants made from their DAF accounts. In each year for which statistics have been collected by the IRS, sponsoring organizations have received aggregate contributions in excess of aggregate grants paid. Despite challenges in data collection and analysis, SOI is committed to remaining the best source of data for this important part of the nonprofit sector.

Donor-Advised Funds: An Overview Using IRS Data

Should Congress respond? No. It would be wrong for Congress to respond to the “rise”. Why should a “rise” arouse Congressional action when a “rise” is precisely the expected outcome following Congress’s “legitimization” of donor-advised funds in 2006 by incorporating them into the Internal Revenue Code? We do not even have Treasury Regulations addressing permissible distributions yet. Depending on how those regulations turn out, we could see significant changes in distribution policies. Why would Congress act now when we have not yet seen donor-advised funds firing on all cylinders because we still await the much-anticipated operating guidance?

The Rise of Donor-Advised Funds: Why Congress Should Not Respond

The structure and sources of capital available to nonprofit organizations largely fail to meet the financial needs of the sector. Given the dramatic growth of both the nonprofit and philanthropic sectors, the time to reinvent the “nonprofit capital markets” is now, and donor advised funds should play a leadership role in this process. This article outlines policies and practices with the potential to create new efficiencies in the delivery and investment of capital for the common good.