Four Things We Actually Like About DAFs

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The DAF debate has been raging for a while, and suffice it to say, opinions still differ. Around the middle of the last decade, it became clear that these flexible giving vehicles, long overshadowed by foundations, were skyrocketing in popularity. It made sense. For the average, well-heeled donor, a DAF delivers most of the foundation’s advantages — particularly in the tax department — with pretty much none of the foundation’s hassles.

In 2021, DAFs shot past private foundations as American donors’ charitable vehicle of choice for new contributions. That prompted the question: What would a philanthropic future dominated by DAFs look like? Such prognostications, when they do occur, can be quite grim. Transparency, the critics warn, will be a thing of the past. Payout? Measly. The power of the wealthy to do as they please and get a tax break for it? Enhanced even further. We’ve published such valid critiques many times in these pages.

There’s one root problem underlying all of this. In their current form, DAFs represent a glaring exception to the regulatory regime embodied by the foundation: payout and transparency in exchange for a tax deduction. That social compact is now arguably in tatters thanks to DAFs, which let donors take their tax deduction up front but leave them free to “warehouse” the money and make no gifts at all, or to make gifts without letting American taxpayers — who subsidized their giving — know where the money went. For conservative proponents, in particular, this reduced oversight is a feature rather than a flaw. But for many of us in the philanthrosphere, it’s a serious cause for concern.

It’s difficult to get past that. But DAF giving itself isn’t wholly bad. Far from it. There are some real advantages to the form, and while they don’t make up for that fundamental problem (as DAF defenders often seem to imply), those upsides are worth noting as philanthropy evolves into a new era in which the private staffed foundation just won’t be as dominant as it used to be. So setting aside regulatory flaws for a moment, here are four things we like about DAFs.

They make it easier for smaller (if not small) donors to give

When I hear from people about their own experiences with DAF giving, simplicity and ease of use almost always come up. The fact is that, compared to the time and expense it takes to set up a foundation, moving money through a donor-advised fund is a piece of cake.

At one point, the big DAF sponsors (Fidelity, Schwab, Vanguard, etc.) required minimum initial contributions, but they were still small enough to be more accessible than the leanest foundation. These days, though, you can set up a DAF at Fidelity Charitable with no minimum initial contribution at all, and no requirement to maintain a balance over a certain level. Most DAF sponsors also make it really straightforward to move gifts out the door. Meanwhile, community foundations and “values-oriented” DAF sponsors like the National Christian Foundation and Tides offer onramps for donors with particular geographic or ideological commitments.

DAF defenders often point to this accessibility and ease of use as a sign that donor-advised funds are “democratizing” philanthropy. That’s going too far. Not only is the median DAF account (or any DAF account) beyond the means and impulses of most cash-strapped Americans, the idea that “democratizing” philanthropy means more accessible giving for the upper middle class bastardizes the term. Real democratization, I’d argue, should involve giving decision-making power to people who can’t afford to give away any of their own money at all.

That said, with philanthropy growing more top-heavy by the day and smaller donors on the decline, anything counteracting that trend has some merit, and DAFs fit the bill. Just don’t call them democratic.

The money can’t be clawed back, unlike at a philanthropy-focused LLC

This is another one DAF boosters like to reach for. Having taken a tax deduction on their DAF contribution, donors can never again access that money. It now belongs to the sponsor organization, although the original donor retains de facto control over whether and when it moves to nonprofit recipients. 

DAF defenders often use this fact to argue that DAFs help grow the overall philanthropic pie. That may be true in a quantitative sense, but it’s cold comfort to those who’d like to see philanthropic money actually moving out the door faster. If philanthropy is about giving money away, it’s reasonable to ask why the pie should grow at all.

What the DAF defenders don’t talk about as much — possibly because of the clientele to whom they cater — is how the permanence of a DAF gift contrasts with the easy revocability of giving promised through a philanthropy-focused LLC. Like the donor-advised fund, the LLC has jumped in popularity as a giving vehicle over the past decade and more, with mega-donors like Mark Zuckerberg and Priscilla Chan, Laura and John Arnold, and Laurene Powell Jobs leading the way. Even MacKenzie Scott channels her money through an LLC.

The thing about an LLC, though, is that there’s no legal stipulation its funds remain designated for charity. We just have the donor’s word on that. LLCs can also be used to channel political giving, which can be an upside or a downside, depending on who you ask. So if we’re talking about a brave new philanthrosphere filled with DAFs and LLCs, DAFs are preferable if the goal is actually to guarantee that a vast reserve of 501(c)(3) money remains in play. Or big donors could, I don’t know, just start foundations.

General support is the norm

Anyone who’s been following philanthropy lately knows that general operating support is in vogue, and that project grants are so last decade. Although most foundation grantmaking is still decidedly out of fashion in that sense, there’s one corner of the philanthrosphere where general support is always on trend — DAFs.

That’s mostly due to the lean, often smaller-scale nature of DAF giving rather than any specific intent on donors’ part. But the end result is the same: more unrestricted funding for nonprofits at a time when more people in the philanthrosphere are recognizing the value of stepping back and trusting grantees to do the work.

While DAF giving doesn’t have to be for general support — donors can often specify a use or purpose for their grant — I can’t see a future in which greater restrictions become the norm, especially given the fact that the major national sponsors will continue to administer most DAFs and they lack the capacity to handle traditional project grantmaking functions en masse.

Perpetuity can have its advantages

General support may be popular right now, but perpetuity increasingly isn’t. From the Gates Foundation all the way down, grantmakers are rejecting what was once an unquestioned norm and making pledges to spend out. DAFs, of course, have come under scrutiny for that very reason. Critics see them as stockpiles of warehoused wealth in an era of clear and present need, and call their complete lack of any payout requirements a fatal flaw.

As one counterpoint to that, in what era hasn’t there been vast need? Without going too deeply into the moral philosophy of it all, what perpetual giving vehicles have is the advantage of compounding returns. By drawing steadily on investment income, a foundation that sticks around can move far more money out the door than one that spends down early. The argument is that as long as a DAF does give some of its money away regularly, it can fulfill a similar function.

There’s even a long-termist case that having some philanthropic money socked away for future crises is a smart move, and that it’s morally questionable to prioritize present need over future need. That “rainy day” argument isn’t a popular one at the moment, but it’s also valid to ask whether massive money dumps right now will add up to long-term structural change.

Another aspect of this worth noting is the potential that DAF assets represent in the realm of impact/ESG investing. We’ve run multiple guest op-eds (including recently) about how some DAF donors are ensuring that those assets are invested with social responsibility in mind. That isn’t the norm — most major DAF sponsors offer donors an option to invest the funds in an ESG-friendly way, but it isn’t a requirement. Still, DAF assets totaled upward of $230 billion in 2021. If the major sponsors were more assertive in pushing the impact investment option, that could mean a windfall for ESG enterprises, and perhaps some upside to all that stockpiled money.