The National Philanthropic Trust’s 2020 DAF Report provides an upbeat overview of donor-advised funds (DAFs). While DAFs have an important role in the charitable landscape, this data can easily be misinterpreted to showcase that the charitable tax system is “working” and new rules are unnecessary.
Behind the smoke and mirrors, what the data actually shows is that at least 84% of the assets available for distribution remain in DAFs and are not distributed to charities – despite the fact that donors receive the same upfront tax benefits as if they directly gave to a charity. Moreover, the DAF retention rate is likely significantly higher than that figure because DAF sponsors include transfers to other DAFs as charitable distributions.
What does this all mean? This means that potentially billions of dollars that could be distributed to charities continues to sit on the sidelines, while the taxpayer is left footing the bill without receiving any of the public benefits that come from working charities.
Additionally, the average payout figures presented in this report are particularly misleading and say nothing about what is happening on the account level. We know that one of the most common – and most promoted – uses of DAFs is for people who want to fund their annual giving with appreciated property. The assets in these DAF accounts are likely to be distributed in the year of contribution, which would in turn create a 100% distribution rate. The average payout rate would then lead you to believe that the system is working, but if only 16% of the accounts are used in this way, then the other 84% may not be making any distributions at all.
The existence of these “flow through accounts” or “fast DAFs” should not be used to justify a tax system where wealthy individuals and foundations garner charitable tax benefits with zero obligation to distribute the funds to charity. In other words, because some DAF accounts distribute their funds in a timely manner does not mean that others should be absolved from doing so.
Finally, the report’s comparisons to private foundations are completely irrelevant. Tax benefits for private foundations are significantly less beneficial than those available for DAFs. The problem with the status quo is that DAFs are capturing benefits that were only intended for outright gifts to working charities. Without assurances that these funds will go to working charities, the charitable tax rules no longer fulfill their purpose: to provide a tax benefit to ensure more resources are going toward the public good and our nation’s working charities.