Calculating DAF Payout and What We Learn When We Do It Correctly

Abstract

Donor-advised funds (DAFs) have enjoyed explosive growth in recent years, causing legislators and policy analysts to become increasingly interested in whether DAFs should be subject to more regulation and/or disclosure requirements. DAFs are a form of charitable giving in which donors transfer their cash or property to a DAF sponsor, giving up legal ownership but retaining “advisory privileges” which allow the donor (or other designated advisor) to make decisions about the investment and disbursement of DAF assets. Donors get an upfront charitable deduction because the DAF sponsor is itself a 501(c)(3) organization and the donor technically gives up dominion and control over their donation. But, because of the advisory privileges, DAFs operate in practice like a combination of a charitable investment, savings, and checking account. The donor decides whether or where to invest DAF funds and when, if ever, to disburse them to charities.

This short paper examines the following arguments around DAF payout:

First, and most importantly, this paper addresses the claim that DAF sponsors regularly payout in excess of 20%. Second, we apply this formula to the 2017 tax returns for all DAF sponsoring organizations, the most recent year for which a complete set of returns are available. We show that the formula used by DAF sponsors increased payout rates by 53% for all DAF sponsors (and by 56% for commercial DAF sponsors) over the payout rate that would have been derived using the proper method for calculating payout. Third, we explore the relatively new concept of flow rate. Finally, we explore how the existing measurements of DAF payout and flow rates overstate their benefits to charity because of the failure to account for DAF-to-DAF transfers.