May 5, 2020 | Read Time: 4 minutes
As #GivingTuesdayNow kicks off a day to encourage generosity around the world — and provide vital resources to nonprofits on the front lines as well as those carrying out important missions in every community — there’s an easy way to raise billions of dollars fast.
Donor-advised funds now house more than $120 billion, money committed to charitable purposes by thousands of donors, but currently sitting dormant in investment accounts. In the face of a once-in-a-century pandemic, it’s time to liberate the DAFs.
Today, these accounts are the kudzu of American philanthropy. Their massive growth over the past decade is choking off the flow of money to vital nonprofit organizations that depend on a steady stream of donations.
Critics have long complained about the lack of transparency and nonexistent payout requirements for DAFs. Unlike a private foundation that has to make public disclosures to the IRS and disburse at least 5 percent of its endowment annually, DAFs are not required to disclose anything and can indefinitely warehouse a donor’s wealth.
What’s worse, DAFs allow donors to enjoy a generous tax benefit while society gets no benefit at all until the money is distributed out of the fund. These tax concessions overwhelmingly benefit the wealthy while simultaneously costing all citizens in the form of forgone treasury revenue. A donor can circumvent capital gains by parking appreciated stock in a DAF and diminish taxable income by making cash contributions. The public subsidizes a donation today but may not see any social benefit of any kind for years or decades. For this reason, DAFs are increasingly popular for the burgeoning fortunes of tech executives and other wealthy Americans.
In the meantime, as the money sits in an account, the fund managers make out like bandits, too, because they earn investment fees on the money they manage. It’s no surprise that everyone is getting in the donor-advised fund game — the largest DAFs are managed by the likes of Fidelity, Charles Schwab, Vanguard, Goldman Sachs, and the Silicon Valley Community Foundation. Even wealthy universities like Stanford host DAFs for their largest donors.
The result is a system of perverse incentives. Individuals are incentivized to make donations to DAFs through tax breaks without any corresponding incentive to send the money out the door, and the fund managers are incentivized to keep as much money as possible under advisement, for this increases their own revenue in the form of fees. Citizens, nonprofits, and their beneficiaries are the losers in this grand scheme.
It appears that lawmakers are finally catching on. When the U.S. Congress passed the emergency-response CARES Act in March, it provided a $300 deduction for charitable gifts made in 2020 by every taxpayer. But giving to a DAF was pointedly excluded.
And now we confront the coronavirus pandemic. With employment in free fall, hunger and poverty rising across the land, and frontline workers suffering from lack of basic protective equipment, needs have never been larger or more urgent. What are donors and fund managers waiting for?
Some are responding. The Silicon Valley Community Foundation, the home of DAFs collectively worth $10 billion, is asking donors to immediately give up to 5 percent of their DAFs to local coronavirus-response efforts. That tiny percentage would amount to a $500 million infusion into the California effort to combat the virus. And yet even this humble request has proved controversial.
The largest warehouse of DAF wealth, Fidelity Charitable, manages more than $27 billion in assets and recently announced an effort to get donors to distribute $200 million to relief efforts. Fidelity is challenging its donors to give $100 million today — May 5 — as part of #GivingTuesdayNow. GivingTuesdayNow will spur millions to support critical causes from their own back pockets. Now is the moment for DAFs to release the money that is stockpiled.
A couple in San Francisco, David and Jennifer Risher, has issued a bolder challenge. They are offering $1 million in the form of $10,000 matching grants to nonprofit organizations, but that money will be matched only if a donor’s $10,000 gift is accompanied by a commitment to granting out half of her DAF by September 30. The #HalfMyDaf challenge starts on #GivingTuesdayNow.
Ultimately, we need new laws to undo the many problems with DAFs. But in the absence of regulatory changes that would impose fairer tax incentives and new transparency and payout requirements, we are left with appeals to the good will of donors and fund managers to let loose into the world these funds, which have been sheltering in place for far too long. We’ve been saying that DAFs are rainy-day funds for the nonprofits we count on to serve society. The storm of our lifetime is upon us. Let’s use this GivingTuesdayNow to unleash the many millions waiting to go to urgent causes.
