The Darker Side of Donor Advised Funds

Donor advised funds (DAFs) can be useful tools for donors to gain tax benefits and to accrue larger pots of charitable money for making more substantial gifts. They may also prompt donors to be more strategic and do more planning, especially if they want to engage family members in their philanthropy. However, because of the flexible rules regulating DAFs, there is also a darker side to them, which is creating challenges to the philanthropic sector. Knowledge of this background can help DAF donors to use their funds skillfully.

DAFs allow for complete anonymity. Grants made from a DAF come from the sponsoring organization, which is not required to reveal the original donor’s name. This might be appealing to people who want to practice humility, be discreet, or avoid communications from nonprofits. However, this is not a good thing if people use DAFs to shield their identities and influence from public scrutiny, when more transparency would be in the public’s interest.

Source: Flickr user: Jenifer Corrêa

Source: Flickr user: Jenifer Corrêa

Anonymity also limits the ability of nonprofits to find and inform potential donors, like you. Let’s say your favorite nonprofit gets a gift from a DAF through a sponsoring organization. Unless the donor voluntarily reveals their identity, they have no idea who to thank, engage, or inform about the impacts of their mission work. Meanwhile as a donor, since your concern about the issue at hand is obvious, you might benefit from learning more about the problem and what is being done, if only to make more effective grants in the future.

Part of the reason for the growth of DAFs, particularly in the commercial sector, is that those sponsor organizations derive fee income from holding and managing these charitable funds, so they have a financial incentives. My earlier Fool articles, “Donor Advised Funds: The Basics and Benefits” and “Avoid Mistakes and Problems with Donor Advised Funds” talk about the different types of sponsor organizations, their fees, and their services. As a donor, consider these and other factors when choosing a DAF sponsor, so you find a good match for your values, resources, and service needs.

DAFs have become a significant segment of resources in the charitable sector. Their assets, particularly in commercial DAFs, are growing much faster than their allocations to nonprofits. This is partially due to the lack of any requirement by the IRS for DAFs to spend-down by making grants. As a donor, you will have already gained the potential tax deduction, and an incentive to give charitably, in the year of funding the DAF. If you do not take time to make grants from the fund, it can be unproductive for charitable purposes — potentially for years at a time.

Whatever the nature of your charitable concerns, they probably have some level of urgency. This holds true for the plight of the poor in a down economy, mortality from preventable diseases in the developing world, or environmental concerns in our resource-intensive age. Having significant charitable dollars available, yet not used, may well be tragic.

If you have a DAF or are considering one, you will need to allocate time and intelligence to identifying high-performing nonprofits, to giving grants, and to evaluating results. If lack of support is causing you to avoid this part of the process, consider talking to a philanthropy professional.

Donor advised funds can be a valuable tool in beneficent charitable giving. As a donor, you can use them most effectively if you choose the sponsor organization wisely, supporting the ones that shine brightly with policies about granting requirements. You can illuminate your identity by revealing your name to the nonprofits that you fund. That way, they can engage you in their efforts to make social or environmental change. And you can brighten the causes you care about by making skillful and significant gifts in a timely manner from your donor advised fund, while still gaining the tax benefits you may be seeking.

(Thanks to Alan Cantor, who is becoming famous for his incisive criticism of DAFs, for lending intelligence to this piece.)

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