My name is Bond Lammey. I’m a prospect development professional, and I’m proud to have a donor-advised fund (DAF).
My name is Lindsey Nadeau. I’m a prospect development professional, and I’m a proud proponent of DAFs.
We both acknowledge that significant DAF regulation is likely to be (and should be) implemented, specifically regarding compulsory payouts and disclosure of gifts. While the lack of regulation is certainly a current challenge in the fundraising community, more regulation seems to be the likely — and logical — next step for the DAF industry.
Yet, a blog post published in the prospect development community unfairly characterized DAFs as a “capitalist incursion” in philanthropy and chastises the rise of DAFs, focusing on the negative aspects of DAFs rather than a holistic perspective. This post neglects to mention several mitigating factors that might lead a reasonable person to resist the urge to throw the baby out with the bathwater. Responses to the three most concerning arguments are outlined below:
- First, the article focuses only on DAFs administered by sponsoring organizations that are for-profit financial investment firms. While these are the largest segment of sponsoring organizations, there is also a more altruistic group of sponsoring organizations that were 501(c)(3)s long before administering DAFs: community foundations, institutional DAFs (e.g., sponsored by The Nature Conservancy) and philanthropic advising offices. Just as gift officers have performance metrics in fundraising, philanthropic advisors at these sponsoring organizations also have performance metrics to ensure charitable funds are being distributed. A lack of federal regulation does not mean that all sponsoring organizations are morally bankrupt. To rail against DAFs without acknowledging the important work these non-profits accomplish is an extremely narrow view of the potential impact DAFs may one day have in philanthropy.
DAFs — especially those at a financial firm — are a sensible option that further propagate a culture of giving by tearing down cost-prohibitive barriers to establishing a giving vehicle and by making philanthropy more accessible for the non-Ultra High Net Worth. DAFs offer appealing features like dashboard integration with a financial firm’s entire suite of services (savings, checking, mutual fund, etc.) and the ability to invite friends and family to make a gift to your DAF, which are poised to resonate with millennials in the decades to come.
- Second, the article also focuses on a concern about sponsoring organizations liquidating complex assets, specifically the erosion of the tax base and the secrecy surrounding distributions. While it’s true the donor receives an earlier tax break by giving to a DAF versus other non-profits, the end result is that the highly appreciated asset is often liquidated without being taxed, yielding even more dollars for philanthropy. DAFs also allow donors to be strategically philanthropic by separating the tax incentive from the charitable event. Donors can receive a tax deduction based on financial benefit/needs but make longer-term philanthropic decisions that focus on impact, outcomes and achieving specific goals.
Regardless, the trend of converting highly appreciated assets to charities isn’t new. If a donor truly wants to conceal the origin of their funds or significantly lessen their tax burden, they will find a way to do it. It pre-dated the rise of DAFs. For the few in the world who engage in these strategies, it’s likely a stretch to broadly apply these concerns to the wider community of DAF donors.
A few other statements from the article require a bit of myth-busting. The author indicates that donors to DAFs get a write-off and “get to keep the money.” This is factually incorrect. Once a donor makes a gift to a DAF, the legal owner of those funds is the sponsoring organization.
The author also grieves an occasional practice where a foundation makes grants to DAFs to skirt their 5 percent distribution requirement, “which amounts to a charitable gift to oneself.” While foundations occasionally make grants to DAFs, one of the few IRS regulations that exist in the DAF sphere is that a distribution from a DAF cannot benefit the DAF donors, whether the donor is a foundation or an individual. If it does benefit the donor, the sponsoring organization and the donor are fined by the IRS.
- Third, in describing DAFs as evil philanthropic forces, such a narrow view of DAFs will have a negative impact on the bottom line of charitable organizations. As prospect strategy experts, it is up to us to seize the opportunity to leverage DAFs to our organizations’ benefit. When it comes down to it, earmarking charitable dollars for philanthropy is never a bad thing. Should a compulsory payout requirement be established? Yes. Does the lack of a payout requirement mean society should ask “then how is [a DAF] charitable?” No. When dollars are gifted from giving vehicles with no payout requirement (e.g., an IRA charitable contribution, securities transfer, or gift of real estate), does that erode their charitable intent? Is my elective gift to my alma mater not charitable because there is no law requiring me to give it? Definitely not. DAF popularity has soared recently due to accessibility and ease of use; it wouldn’t be surprising if trends like gamification, apps and social media act as a force multiplier to further bolster DAF popularity.
In the spirit of supporting the future of DAFs, we’ve each made a donation to the Pinellas Community Foundation.
Bond Lammey is Managing Associate at Bentz Whaley Flesser and the current President-Elect of Apra.
Lindsey Nadeau is Director of Research & Relationship Management at The George Washington University.