Donor-advised funds: Families love them, critics want more IRS rules
Former Microsoft CEO Steve Ballmer distributes about $400 million a year through a donor-advised fund managed by the Goldman Sachs Philanthropy Fund. “It’s just easier. ...They do everything—all the accounting, the infrastructure."
Wealthy families and founders have long created what have become major “brands” in the philanthropic world—names such as the Rockefeller Foundation, Ford Foundation and, more recently, the Bill & Melinda Gates Foundation. At least 40,000 such family foundations are operating in the U.S., all of them required by Internal Revenue Service rules to contribute 5% of their endowments to charitable organizations each year.
But over the past 20 years, billions of dollars have shifted to another type of philanthropic tool: Donor-advised funds, or DAFs. Under this arrangement, donors get an immediate tax benefit when they transfer dollars or appreciated stock to a DAF—which is usually managed by a public charity, a fund created by a major financial firm or a community foundation.
Because the dollars can be redistributed to charities without any required payout deadline, critics want Congress to step in.
The result: Bills dubbed the Accelerating Charitable Efforts Act are pending in both the U.S. House and Senate. The measures would change the rules to create two types of DAF:
- One would carry the same tax benefits as now but require the assets to be contributed to charity within 15 years of the contribution.
- The other would allow a 50-year option, with income-tax deductions deferred until after the dollars are distributed.
“They [DAFs] will be regulated in the next year or two, I guarantee you,” said Susan Winer, co-founder and COO of Chicago-based Strategic Philanthropy Ltd., which counsels individuals and families on how to accomplish their philanthropic goals.
Winer is skeptical of some donors’ motivations in contributing to DAFs, calling them the “offshore banking of philanthropy. … They are a place for people to dump money to avoid taxes. It’s a tax-saving vehicle vs. a charitable vehicle.” Billions of dollars are sitting in the funds, whose creators received tax benefits without any requirements on giving the dollars away, she said.
‘IT’S JUST EASIER’
Not that there aren’t some remarkable exceptions.
Steve Ballmer—who stepped down as CEO of Microsoft Corp. in 2014 and created The Ballmer Group with his wife, Connie, a year later—distributes about $400 million a year through a DAF managed by the Goldman Sachs Philanthropy Fund. “It’s just easier,” Ballmer told Crain Currency in early June. The flexibility of making donations to the fund offers advantages in tax planning, Ballmer said.
“They [Goldman Sachs] do everything—all the accounting, the infrastructure,” he said.
On its 2022 World’s Billionaires list, Forbes estimated Ballmer’s wealth at $91 billion. Bloomberg pegged it higher—at about $95 billion—as Microsoft stock surged. His wealth also includes ownership of the Los Angeles Clippers of the National Basketball Association.
A DAF would allow Ballmer to donate appreciated Microsoft stock to the fund and use the proceeds for charitable grants approved by Goldman Sachs. And unlike many DAF creators, he and his wife have listed grantees on The Ballmer Group website.
New data compiled by the Donor-Advised Fund Research Collaborative, led by academics at DePaul University and Brigham Young University, suggests that lumping all DAF donors together is a mistake. In their review of 13,000 DAF accounts between 2017 and 2020, more than half had four-year average payout rates ranging from 5% to 49%.
And the vast majority, 71%, made a grant annually—countering the notion that donors “sat” on the funds.
The survey was drawn from 21 community foundations and DAF sponsor organizations with religious affiliations, with funding from the Gates Foundation.
DAFS HAVE A PAST
DAFs have been around since the 1930s; many community foundations are sponsors of the funds on behalf of donors. The Fidelity Charitable Gift Fund led the way by winning a landmark ruling from the IRS in 1991 that recognized its fund as a public charity.
Today, Goldman Sachs, Fidelity and the Schwab Charitable Fund are in the top 10 in terms of assets managed.
Many donors are attracted by the flexibility, the ability to take an immediate tax benefit when the stock or assets are transferred to the DAF, and the ease of redistributing the money unbound by a specific timeline. Also attractive is the privacy: Foundations file reports with the IRS that include the size of the endowment, major gifts and salaries paid to top staff.
“Many people with DAFs just use them more like a pass-through charitable checking account,” said Michael Moody, the Frey Foundation Chair for Family Philanthropy at Grand Valley State University’s Johnson Center for Philanthropy in Grand Rapids, Michigan. “They put the money in and then have the sponsor, for a fee, write their charitable checks every year. So their payout rates are very high, sometimes 100%.
“These accounts balance out those relatively few accounts that pay nothing in a given year—but those dormant accounts get most of the attention and rightly fuel the calls for reform.”
One example of notoriety: In June 2020, The Washington Post reported how Google co-founder Larry Page made huge year-end gifts from his foundation to two donor-advised funds totaling $100 million and $80 million. But nothing indicates whether the money was redistributed to charities. And the donations likely were made to meet the requirement that 5% of the endowment value be granted to eligible nonprofits.
DAFs are popular with donors in Houston. The Greater Houston Community Foundation has no discretionary endowment, but it manages $1.3 billion in assets, with the majority of those assets in donor-advised funds. The balance is held primarily in supported organizations the foundation manages, such as the Barbara Bush Literacy Foundation, and in vehicles such as designated and scholarship funds. The foundation makes no annual grants of its own outside of disaster relief grants made with the local United Way.
The 27-year-old foundation has built a DAF and philanthropic services platform that has created robust grantmaking by donors—with an average payout of 20% payout rate, compared with the 5% minimum payout required of a family foundation.
“Some advisers might recommend a private foundation as a default giving vehicle to families who want to establish a formal giving structure, “ said Jennifer Touchet, the Houston Foundation’s vice president of personal and family philanthropy. “But we are seeing a lot of growth in the use of other vehicles such as donor-advised funds.”
Strategic Philanthropy’s Winer called Houston’s formula “highly unusual. Beyond highly unusual”—especially the 20% payout.
Perhaps fueled by the pandemic and the racial reckoning following George Floyd’s murder, overall payouts from DAFs may have increased in 2020. The National Philanthropic Trust, itself a public charity that sponsors DAFs, created an annual report that surveys data from nearly 1,000 organizations that manage DAFs. One of the highlights from its 2021 Donor-Advised Fund Report: Grants from DAFs to charities jumped 27% in 2020 compared with 2019, with nearly $35 billion donated. That represents a payout rate of more than 23%.
Another high-profile donor is using DAFs: MacKenzie Scott, who has given away $12 billion since her divorce from tech giant and Amazon founder Jeff Bezos, has created DAFs at three institutions, according to a report published in January by the website Puck. The sponsors are the Chicago Community Trust, Fidelity Charitable and the National Philanthropic Trust.
DAFs also may be more agile than the more cumbersome grantmaking process within a foundation.
Grand Valley’s Moody believes the calls for regulation of DAFs are reminiscent of the period that led to foundation regulation in 1969—rules including the 5% payout. The legislation was in response to some “clear abuses” of foundation loopholes, Moody said.
Charles Stewart Mott, at the time in his 90s and namesake of a Flint, Michigan-based foundation, testified that Congress should “not burn down the barn just to kill a few rats.”
Seems like what many proponents of DAFs are saying now.