New Report: The Promise and Problem of Donor-Advised Funds

NEW YORK, NY — As individuals, foundations, and charitable organizations across the country celebrate Giving Tuesday, a new report by the Manhattan Institute’s Howard Husock sheds light on the role of donor-advised funds (DAFs), examining their recent growth and attendant criticisms.

Husock finds that the majority of complaints about DAFs are misplaced, and, on balance, these funds are a boon to the charitable world. There is, of course, room for improvement, specifically in how DAFs handle “orphan assets” left by deceased donors. Currently, major national charities often donate these funds to causes never chosen by their original donors. To ensure that these funds stay true to their name, Husock recommends implementing policies that would require funds to be distributed in line with donors’ previous giving patterns.

DAFs are currently the fastest-growing method for charitable giving among Americans. This sharp growth has attracted criticism, including the allegations that DAFs are used to avoid taxes, that financial-services firms impose excessive management fees, and that these funds are “undermining” American charity by not distributing their assets for years, in some cases.

Husock examines each of these critiques in turn, finding:

• DAFs are a legitimate vehicle for charitable giving, not a ruse to avoid taxes. By reducing donors’ tax burdens, DAFs encourage more charitable giving than would otherwise exist.
• The use of national financial-services firms to manage DAFs is not diverting money away from charitable giving. The management fees charged by such firms are comparable with those charged by local community foundations, the other major “sponsor” of DAFs.
• The overwhelming majority of DAF assets are disbursed to charities during their donors’ lifetimes. However, national financial-services firms do hold small amounts of DAF assets that have not been disbursed or earmarked at the time of their donors’ death. Ideally, these “orphan assets” should be automatically distributed to donors’ previous recipients, in proportion to previous giving patterns.

The growth of DAFs in the United States should cause the philanthropic world to take heart. These funds encourage charitable giving, boost the value of assets donated to charity, and disburse funds only at the direction of their “donor-advisors.” By tackling the problem of orphan assets, firms can ensure that these funds continue to grow, while not losing sight of their donors’ intentions.

Click here to read the full report.