Investment Earnings in DAFs Total at Least $5 Billion, Study Finds

A new study by the American Enterprise Institute and the Philanthropy Roundtable argues that charities benefit — eventually — when money sits idle in donor-advised-fund accounts.

To make the point, the study calculated that funds held by the four largest sponsors of donor-advised fund accounts — Fidelity Charitable, Vanguard Charitable, Schwab Charitable, and the National Philanthropic Trust — generated $2.7 billion in investment returns from 2015 through 2019. During that time, contributions to donor-advised-fund accounts managed by those four giants totaled $65 billion.

“The potential of appreciated assets demonstrates a value in ‘giving and holding’ — waiting to disburse contributions while one’s assets gain value,” the study states.

Those four organizations sponsor about 46 percent of all donor-advised-fund accounts, a report on the study states, so it’s likely that all donor-advised-fund accounts combined generated more than $5 billion in investment returns during that period.

The study was conducted by Howard Husock, a prominent scholar who has examined donor-advised funds for years and is a critic of efforts to impose tighter regulations on them.

Calls to Change the Rules

Donor-advised funds allow people to take an immediate charitable tax deduction when they deposit money in such accounts.

However, there are no requirements regarding when the money must be disbursed to working charities. Critics of donor-advised funds, including a coalition led by the billionaire philanthropist John Arnold and Boston College law professor Ray Madoff, see that as a key flaw: The money can sit idle in those accounts for years or even decades, accomplishing nothing for nonprofits while generating fees for the institutional account sponsors that hold the money and manage it. Arnold and Madoff have urged lawmakers to consider a proposal intended to boost distributions from both foundations and donor-advised funds. Among other provisions, the proposal would allow an immediate tax break for a contribution to a donor-advised-fund account only if the money is distributed within 15 years.

“Nothing in our proposal requires immediate spending, but you must have charities in the equation,” Madoff said when asked for comment on the study. “We feel that 15 years is plenty of time for funds to grow and benefit charities.

But Husock’s report argues there is no need to impose payout rules on donor-advised-fund accounts, noting that once money is deposited in a donor-advised fund account, the only allowable use of those funds is to distribute them to charity, and the donor ceases to enjoy any ongoing tax benefits.

“There is little reason to see DAFs as a ‘tax loophole,’” the report states.