Donor-Advised Funds Don’t Pass the Democracy Smell Test

To the Editor:

I challenge the premise of Kathleen Enright’s arguments in her opinion essay Donor-Advised Funds Are Essential to Democratizing Philanthropy (January 18.)

As an experienced development professional with a long career raising tens of millions of dollars from both private and public foundations and individual donors, I have grown increasingly concerned that some donors and foundations are exploiting donor-advised funds for their own benefit — deepening the perennial gap and power imbalance between donors and recipient nonprofits. This kind of inequity is hardly the stuff of democracy.

Yes, DAFs may allow people of modest means to become philanthropists, but that’s only one side of the donor equation. What about the nonprofits, especially the small community-based organizations that are often overlooked as grantees for such funding? How is the rapidly increasing amount of money in philanthropic institutions the standard for democratizing a field that exists in large part to support underserved and underrepresented people and their communities?

But there are other reasons this argument doesn’t pass the democratic smell test:

• Donations to DAFs are immediately tax deductible to the donors who establish the funds. This is a benefit that is largely limited to wealthy people, furthering inequality and the luxury of amassing wealth. To be more democratic, tax deductions should be provided to donors only when funds in their DAFs are paid out to qualifying tax-exempt organizations.
• Gifts paid out of DAFs are largely not transparent, and nonprofits can’t access the funds through an application process. Donors derive these benefits because many want the anonymity DAFs offer without providing even modest transparency about how the funds are used. If democratic practice is the goal, donor-advised funds should publicly list the recipients of their donations just as the law requires of private foundations. And they should allow potential eligible recipients to apply for the funds.
• Private foundations are legally permitted to set up DAFs in entities such as financial intermediaries or community foundations. This encourages the obfuscation of funds that would otherwise need to be listed on a private foundation’s annual 990 tax form. Private foundations only need to report “gifts” to their DAFs on the 990-PF, which doesn’t require them to reveal the ultimate recipient of such funds. Without the legal requirement of accountability, donor-advised funds make philanthropy less democratic, not more.

The bottom line: DAFs will continue to be part of the problem, not the solution, to democratizing philanthropy until a significant amount of the $140 billion stockpiled in these funds starts flowing to nonprofits working to address the nation’s many economic, educational, health, and environmental needs.

Tricia Rubacky
Former Director of Development
Open Society Institute-Baltimore