Because you need one more post on DAFs

Bruce DeBoskey is a terrific peer mentor and I respect his thinking and passion in his philanthropic advising work. We’ve been talking about writing together and our first crack is my response to his recent nationally-published column, “Donor-Advised Funds – Powerful giving tool needs sharpening.” I encourage you to read it first.

OK, Bruce. We disagreed on this less than we originally discussed. I’ll follow your points in order knowing that you were constrained for space in your column.

1. The Forced Payout Idea

I agree with you and other critics that it would be appalling for a Donor-Advised Fund (DAF) to never make grants. There currently isn’t any data about the frequency of this problem over time, so it may be more of a perceived than real threat to philanthropy. An increasing number of DAF sponsors are putting “inactive fund” policies and practices in place to prevent the problem. The DAF sponsors proactively contact fund advisors within some years of inactivity to encourage action. If there is none, they can then enforce grants, typically to a fund at the DAF sponsor. Donors can also document a valid reason for not spending from the fund in a given timeframe (see delayed readiness below).

I think DAF sponsors would be open to a law that requires such an “inactive fund” policy to be in place and to be enforced. But, the new law doesn’t have to lead to….

2. The Forced Timeframe Idea

You and other critics want to impose a time limit on DAFs (e.g. money in has to be 100% granted in X years). A federal imposition of a time limit would damage the goals of both DAF sponsors and donors and it wouldn’t necessarily result in more meaningful, effective philanthropy. Is it more important that the money is out the door anywhere or that the money is put to effective use? Here are three examples of unintended consequences.

Obstructing donor intent – Donors establish DAFs with the full range of timeframes available to private foundations. Some want perpetuity and a multi-generational family legacy. Some want a limited timeframe. Some want a fairly liquid account – money in and money out throughout each year. Many, honestly, don’t know for sure at the beginning – they’re feeling their way through having the tool. (You’ve seen this with clients, I’m sure).

I don’t understand why critics would deny this choice for DAFs but leave it open for private foundations or some charitable trusts. If the concern is getting money to charities on the front lines more quickly, why not limit the time frames of other charitable tools or force all endowments to pay out faster? The reality is there’s no guarantee an endowment in the hands of an operating nonprofit or a private foundation is doing more current social good than an endowed DAF in the hands of a DAF sponsor.

Outsized donor capacity – I worked with an older donor who ended up with more than $200 million he chose to place in DAFs after the sale of his business. He wants to give the entire amount away in his lifetime. However, the rural area he wishes to benefit has a limited number of charities, most under $500k in annual revenues. Even the community foundation is small. Under the proposed limited timeframe rule, should he be forced to:

a. Give a bunch of money in 2 or 5 years to those nonprofits knowing full well they don’t have the governance or fiduciary controls to manage budgets of 10X or 100X the norm?

b. Give the money to universities and national charities in which he has no emotional connection just because they can handle large grants?

c. Hand the money over to an intermediary that will charge an overhead fee and take some years to deploy the resources in the rural area anyway?

He’s an outlier, but not a singular case in this massive intergenerational transfer of wealth.

Delayed readiness – Many donors have a liquidity or tax event (business sale, IPO, etc.) long before they’re ready to focus a time and thought on philanthropy and/or to have kids old enough to be involved in granting from a DAF. (The Giving Code report has good examples from Silicon Valley). Or maybe they want to use the DAF as a way to be generous as a family, but the kids and grandkids don’t currently have the time or inclination to be involved. Or, maybe the DAF is a savings account to continue their current level of generosity after retirement – e.g. the homeless shelter continues getting $2,500/year even though the couple only has modest income from their retirement accounts. In all of these cases, donors and fund advisors want grants from their DAFs to be both meaningful and effective, but the timing is off.

A different solution to a forced timeframe

I was recently in a meeting with some community foundation staff, and I think they had a creative solution that is worth replicating

  • The fund agreement for the DAF, like all DAF agreements I believe, names successor grantees. At the founders’ death (or death of their heirs) the DAF sponsor automatically grants the remaining amount to one or more charities. Community foundations and DAF sponsors such as hospitals and universities use this clause to funnel money to their discretionary funds.
  • The newer idea came from the agreement also having contingent grantees named – what one foundation called the “auto-pilot mode”. The founding donors name a set of annual grants to be made by the DAF sponsor if they or their kids aren’t active with the fund within a certain timeframe. The donors can change the autopilot list over time, and I suppose could also give discretion to the sponsor’s staff to make grants to certain issues or geographies. The trigger for the autopilot is connected to the sponsor’s “inactive fund” policy.

This solution doesn’t meet all donors’ goals for their DAFs or hopes for flexible timeframes. But, it could be a more palatable public policy choice for most DAF sponsors.

3. Private Foundation Granting to DAFs

I agree with you that this option should remain legal and still count toward a private foundation’s required annual distributions. Most critics want this option eliminated, and I think they’re dead wrong. I’ve seen too many productive partnerships between private foundations and community foundations in which DAFs solve pain points for either or both parties. Those range from geographic dispersion to misaligned interests in the family, and from new risk capital for a key initiative to the donors’ grandchildren receiving in-depth training on being savvy givers and grantmakers. The National Center for Family Philanthropy has documented some great stories here and here for starters.

Final thought (for now)

Here’s one place where Bruce and I might disagree. I think there’s too much that can go wrong if Congress attempts additional regulation of DAFs. We’re in a decade of declining trust in nonprofits, increasing attempts by government at all levels to meddle in the tax exemption and privacy of nonprofits, and increasing willingness to shift the funding of public services to private philanthropy.

Why would Congress stop at increasing the payout of only DAFs? Why would they not also go after nonprofit endowments (they’ve already tried at universities) or increase the payout of private foundations? And, do you really trust Congress or the Department of Treasury to develop and enforce smart regulations that limit corollary damage and close all loopholes? (See for instance, oh, just about any tax law…). I just can’t get there.

 

OK, Bruce (and anyone else). What are your thoughts? What stories or solutions did you not have space to discuss in your column?

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