Next week is Giving Tuesday, the recently inaugurated holiday that marks the beginning of what is traditionally Americans’ most charitable time of year. In 2020, though, the giving season began many months ago. Much of that giving occurred through donor-advised funds.
Donor-advised funds, or DAFs, essentially work like charitable savings accounts. Individuals give to a DAF and then take the charitable tax deduction right away, even if the money does not flow immediately to a charity. The money accrues interest tax-free in the fund until the donor selects a charity to receive a distribution.
People use the funds for various reasons. In many cases, smaller donors use them as an alternative to setting up expensive, staffed organizations to distribute their funds. Sometimes donors aren’t sure how they want to allocate charitable funds and prefer to set them aside until they can make this determination.
Donor-advised funds have played an important role amid the Covid-19 pandemic. Last month, Vanguard Charitable, an umbrella group for DAFs, launched the Nonprofit Aid Visualizer, which is designed to connect donors to nonprofits providing Covid relief. Fidelity Charitable, a similar group, reported that in the first four months of 2020 its “donors nationwide recommended 544,000 grants totaling $2.4 billion—an increase of 16 percent from the same time period in 2019, despite a stock market that plunged in March and widespread fears of an economic recession.” Grants through Fidelity’s fund to free-food programs alone went from less than $10 million in 2019 to $75 million during the same period in 2020.
So why are elites in the world of philanthropy claiming that donor-advised funds aren’t giving fast enough? Critics have launched the Initiative to Accelerate Charitable Giving, to press Congress to “enact reforms that ensure that payouts occur . . . within a reasonable period of time”—at most, 15 years after the gift to the DAF. The campaign is based on proposals circulated by billionaire philanthropist John Arnold and Boston College law professor Ray Madoff, who evidently think the right time to give is always right now. Critics of donor-advised funds argue that the need is “especially dire now,” given Covid and racial-justice issues. But some have been plugging such proposals for years, even decades. What would have happened if everyone emptied their DAFs last year, before Covid hit? There would be many more underfunded food banks today.
Academics and left-wing philanthropists don’t like donor-advised funds for other reasons. For one thing, DAFs provide donors with privacy. While Fidelity or Vanguard must report in their tax documents which charities receive their funds, they don’t have to identify the individuals who requested gifts to those charities. Earlier this year, legislators in California introduced a bill to require DAFs to report to the state government the individual activity of each account in their portfolios.
Such a mandate would curb the ability of donors to give to controversial causes; it would also allow the nonprofits to find out who has been giving to them so they can solicit those donors again. And public airing of these accounts would allow opponents of a philanthropic cause to harass donors. No one has a right to donors’ information, just as no one has a right to donors’ money—even if they think the time is “ripe” for giving.
Individuals get a tax deduction when they contribute to the fund because at that point the money is no longer theirs—it has been forever set aside for charitable purposes. They can’t use it to buy a boat or to pay for their kids’ college tuition. Even their donations must be approved by the organization, and many funds have missions that exclude certain kind of nonprofits as recipients. For instance, Donors Trust, a Virginia-based group that manages donor-advised funds, tries to direct funds toward nonprofits promoting private solutions to problems rather than taking in a lot of government money.
Philanthropists are certainly free to encourage donors to give their money away faster—and there’s a case to be made that DAFs should allocate funds while donors are alive and understand where the money is going. David and Jennifer Risher, who were early employees at Microsoft before he became a vice president at Amazon, have launched a campaign called #HalfMyDaf to get the holders of donor-advised funds to give away their money more quickly. They even offered matching funds to many of those who did so between May and September. Persuasion, not coercion, is the better path.
Philanthropy continues to be a robust activity in the United States in large part because it is private, pluralistic, and an expression of independent choice. Subjecting it to regulations like those proposed by the Initiative to Accelerate Charitable Giving would undermine a tradition that has served America well.