The Status Quo Is Not Acceptable When It Comes to Donor-Advised Funds

To the Editor:

Kathleen Enright’s opinion piece about donor-advised funds (January 18) misses the mark. She concludes that while DAFs are not perfect, improvements should come from within the philanthropy field, mainly through adoption and enforcement by fund sponsors of policies regarding inactive funds. Otherwise, Enright generally supports the status quo, suggesting that DAF critics disregard a key point in the funds’ favor: that the money must eventually be donated to charitable causes and cannot by law be taken back or used to benefit the donor.

As I expressed in a recent paper, I have a very different view. Enright leaves out important facts, including the enormous growth of donor-advised funds. In 2007, DAFs controlled $32 billion. By 2014, that number had more than doubled to $70 billion, and by 2020, it stood at $160 billion. DAFs now account for one in every eight dollars donated in the United States. In 2020, the funds received contributions of roughly the same amount as the nation’s 85 biggest charities.

Yet it bears repeating that until the money comes out of the DAF, no charity benefits from funds going into them. Donors benefit with a tax deduction. DAF sponsors benefit through fees. But charities receive no benefit at all — merely the promise of benefits in the indefinite future. Charitable tax deductions were designed to encourage gifts to charities. But a gift to a DAF does not accomplish this goal.

Asserting that DAF money must eventually be used for a charitable purpose misses the central problem with the intermediary role played by the funds. While donor-advised fund assets are committed to charity, unlike a typical donation, they are not available for use by charities. The assets are in limbo — awaiting instructions, but with no requirements to ever be deployed. DAFs represent $160 billion in taxpayer-subsidized funds that remain out of reach for charities and under the thumb of donors.

DAF boosters sometimes compare the funds to a university endowment. But that’s an unfair comparison. A university endowment is an asset of a working charity and is available for use by that charity. It is providing a current benefit even if it accumulates wealth.

Defenders of the status quo also like to say that it does not matter whether the money is spent now or later. But this, too, misses a central problem with DAFs since no charity has the opportunity to decide whether to spend today or save for tomorrow. Donor-advised funds leave that decision with the donor, but after the donor has already technically made the gift — to the DAF — and taken a deduction.

The Senate’s Accelerating Charitable Efforts Act recognizes that current DAF laws are inadequate and offers a path forward that would correct the imbalance of power between these funds and charities. Yet Enright criticizes the “forcing mechanisms” of the legislation without mentioning what it would actually do.

The ACE Act’s primary reform is to impose a time limit of 15 years for donors to provide advice on where their contributions should be distributed in order to get an upfront tax deduction — or 50 years if DAF donors choose to delay the deduction. Fifteen years! That is plenty of time for donors to decide where they want their gifts to go and would not undermine the attractiveness of DAFs as giving vehicles. But it would stimulate activity from the accounts that need it and generate a reliable flow of much-needed funds to charities over time.

Enright presents a false choice, suggesting that DAF reform is a distraction and that the charitable community should instead focus its efforts on a permanent charitable deduction for taxpayers who do not itemize deductions. Congress, however, is capable of doing two things at once. This is not an either/or moment but, rather, a time to improve the charitable-giving incentives overall, both through an expansion of the charitable deduction and with reform of how it operates.

Roger Colinvaux
Professor of Law
Catholic University’s Columbus School of Law