Donor-advised funds (DAFs) are an increasingly popular vehicle for charitable giving. There are now more than 500,000 individual DAFs across the United States, with assets upward of $100 billion. All DAFs are managed by “sponsors”—tax-exempt public charities that can administer any number of individual DAF accounts. Sponsors include community foundations, the charitable arms of investment managers such as Fidelity and Charles Schwab, religious organizations, and universities.
Donors (sometimes termed DAF “advisors” or “holders”) receive a tax deduction when they contribute money or appreciated assets to a DAF. Donors can then request that the DAF sponsor distribute funds to the operating charities of their choosing. Although donors can only “advise,” rather than require, a sponsor to make a gift, their advice is almost always heeded.
DAFs potentially affect both the timing of grants and the size of gifts: They often lead to delays in grants compared with gifts made directly to operating charities, but they probably lead to a larger total amount granted. It is especially the delay in grantmaking that has led to criticisms by nonprofits, which would prefer to have the gifts in hand as soon as possible.
Unlike foundations, which must distribute at least 5 percent of their endowments annually, DAFs have no payout requirements at all. However, the average payout for DAFs is about 20 percent—compared with foundations’ average payout of slightly above 5 percent.
The CEOs of nonprofit organizations that deliver services to disadvantaged communities understandably want funds as soon as possible—on their watch. Yet the lives of their future beneficiaries are no less valuable than present ones. To be sure, a dollar spent now is—all else being equal—preferable to a dollar spent later, if only because the cumulative effect of inflation means that a dollar now will carry more purchasing power. But dollars in DAFs are invested in stocks, bonds, and other assets that tend to grow faster than the inflation rate. So the tradeoff posed by delay is not a dollar now versus a dollar later; in most times, it’s a dollar now versus something more than a dollar later.
Moreover, donors may have good reasons to postpone grants, and society may have strong justifications for supporting donors’ choices.
Read the full article about donor-advised funds from the Stanford Law School Policy Lab on Donor Advised Funds at Stanford Social Innovation Review.