Major Philanthropy Sector Groups Are Dragging Their Feet or Outright Opposing DAF Reform. Why Is That?

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There’s no real way around it: Donor-advised funds represent a fundamental problem for philanthropy. That’s because, especially as they become an ever more prominent part of the philanthropic ecosystem, they render the bulk of the regulatory regime governing foundations essentially meaningless. 

We can and should debate whether DAFs are being used merely as a vehicle for wealth hoarding or as a more accessible path to organized giving by donors of more modest means (or both at once). What cannot be debated, however, is the fact that in a world where DAF giving is increasingly the norm, donors who wish to give in an organized way can simply skirt the foundation’s payout and disclosure requirements whenever they feel like it. Indeed, that’s already been happening, for quite a while and at scale.

Why is that a problem? Well, for one thing, it’s a matter of principle. The Tax Reform Act of 1969 formalized payout and disclosure requirements for private foundations and represented a social compact drawn around large-scale philanthropy. Wealthy individuals or corporations can receive immediate tax breaks when they set aside substantial assets for future charitable giving, but in return, these donors must agree to several conditions: First, that they promise to pay out a minimum portion of their assets each year; second, that they let the public know where that money’s going; and third, that they disclose basic information about how these funds are managed and invested.  

This compact, which governed large-scale philanthropy for decades, is now largely dead. The meteoric rise of the donor-advised fund is the reason why. In that sense, it doesn’t really matter if some DAF donors voluntarily pay out much more than 5% of their assets a year (the National Philanthropic Trust’s numbers to that effect are debatable, with murky aggregate numbers often masking sluggish or nonexistent giving). DAFs still represent a glaring contradiction between how large-scale American philanthropy is supposed to function and how, increasingly, it exists in the world. 

And that’s worthy of attention from anyone purporting to serve the interests of American philanthropy, not simply because the laws regulating foundations are made meaningless — bad enough! — but also due to possible long-term repercussions on how the sector is viewed and how it functions.

The fact remains, however, that major philanthropy sector groups seem essentially uninterested in reforming donor-advised funds. 

Not only have top philanthropy-supporting organizations — the Council on Foundations, the United Philanthropy Forum, Independent Sector, the Philanthropy Roundtable and others — refused to get behind the Accelerating Charitable Efforts (ACE) Act, the only federal bill proposed so far to address this problem. They’ve also soft-pedaled on the need for DAF reform in general. While they’re not necessarily opposed to all possible reforms, they’re also in no hurry to substantially acknowledge, let alone address, an ongoing seismic shift in the field they preside over.

This is a stance that we’ve found frustrating over the years, especially given the growing unease toward DAF rules, even among those working in the sector. IP reached out to several of these organizations to gain some clarity on their thinking, and their answers were not entirely satisfying — ranging from not regarding DAFs as a problem in the first place, to unwillingness to take action that might impede donors. That’s somewhat to be expected given trade groups’ tendencies to protect the status quo, but it’s also an increasingly precarious position.     

So far, philanthropy has managed to avoid the kind of sustained negative public attention that might prompt politicians to advance draconian regulatory proposals that would make the ACE Act look tame in comparison. But from the Sam Bankman-Fried scandal to ongoing anger toward donors like George Soros, Charles Koch, Mark Zuckerberg and a host of others, a drumbeat of disapproval threatens to displace the high regard in which this sector has long been held. 

The inscrutability of DAFs, combined with their bookkeeper-esque banality, has so far acted as a bulwark against public criticism. And according to a recent study by the Lilly Family School of Philanthropy, philanthropy in general is something of a terra incognita for the majority of Americans — particularly the specific rules foundations and other charitable entities need to follow. This knowledge gap acts as a convenient screen. But can the sector forever count on that? Polls of the American public show strong disapproval of the current rules around DAFs once respondents learned what those rules actually are. And even among IP’s audience, who are mostly nonprofit sector folks, our survey last year showed similar results

“Solutions in search of a problem”

Major sector organizations, meanwhile, seem unwilling or unable to confront what has become one of philanthropy’s biggest elephants in the room. The main reason for that, as far as I can tell, is the fact that DAFs have become so damn useful for so many people. Philanthropy is hooked on DAFs, never mind the side effects.

One manifestation of that: the ACE Act’s decided lack of traction among philanthropy trade groups. As Exhibit A, see this letter to Congress “expressing concerns” with the act mere days after its introduction in the Senate. Signing on were the Council on Foundations, United Philanthropy Forum, Independent Sector, the Philanthropy Roundtable and the Community Foundation Public Awareness Initiative.

From the letter: “While some argue new restrictions on DAFs and private foundations are needed to ensure charitable dollars are reaching nonprofits, there is no data to indicate whether these measures would propel more charitable giving.”

That, in a nutshell, appears to encapsulate many of these groups’ positions. Why do anything to rock the boat on DAFs when doing so might endanger the flow of tax-deductible money into 501(c)(3) vehicles?

Kathleen Enright, president and CEO of the Council on Foundations, has been a major proponent of that way of thinking. “In our view, the ACE Act adds cost and complexity without the promised upside of moving resources to operating nonprofits,” she told me. “While at the same time, DAFs make giving easier. [Something like] the ACE Act may slow giving, which is something we just can't afford.”

One of COF’s aims, Enright said, is to expand the available pool of philanthropic resources. “So whether those resources come out of a community foundation or corporate giving program, a private foundation, a donor-advised fund, or someone's checkbook is less of a concern,” she said. This all-of-the-above philosophy was on full display in an op-ed Enright penned last year for the Chronicle of Philanthropy in which she drew on many of the common defenses of the DAF model, especially the idea that DAFs “democratize” giving.

Enright doesn’t sign onto the idea that DAFs are doing anything to hold back charitable giving — much the contrary. But when I asked her about DAFs as a threat to the regulatory system governing foundations and to the sector’s reputation overall, she was less clear. “The Council and our partners and members are, every day, talking about the truth about philanthropy and philanthropic giving and pushing back against false narratives, including some that crop up about conflating money in politics with what philanthropy can and should fund,” she said.

Over at the United Philanthropy Forum, Senior Director of Public Policy Matthew Evans took a similar stance, pointing to a desire on UPF’s part to “promote a strong sector” and not to “be reactive to political rhetoric.” 

While UPF didn’t officially take a position on the ACE Act, Evans said that one of his organization’s issues with the bill was that its proponents didn’t consult with sector infrastructure groups and a wide enough slate of philanthropic stakeholders. Such “consensus” should be a part of any reform efforts going forward, he said. 

One sector group that did take a position on the ACE Act — sharply against — was the Philanthropy Roundtable. More so than its peers, the conservative organization has been a strong proponent of DAFs on the basis that they promote “philanthropic freedom,” which Vice President of Policy and Government Affairs Elizabeth McGuigan characterized as the Roundtable’s North Star. 

“In general, the charitable sector is heavily regulated,” she said. “The problem becomes when you have calls for new regulations and new restrictions on pathways to giving that aren’t based on any sound evidence of a problem. What we don’t want to do is support things that we believe are solutions in search of a problem.”

McGuigan called attention to many of the pro-DAF arguments advanced by others, including Enright at COF. “DAFs in particular have played a big part in bridging the gap between uber-wealthy donors and smaller donors,” McGuigan said. She also expressed concern with provisions like the ACE Act’s proposed payout minimum, saying that given DAFs’ (supposedly) high voluntary payout rates, such a minimum might act as a ceiling, not a floor.

Refuting populist attacks against philanthropy has been a concern for McGuigan and the Roundtable recently, so it seemed reasonable to ask whether she thought modest reform might be a way to defuse that threat. But she was adamant. “No. We don’t think it’s ever a good idea to add new restrictions to philanthropic freedom. It’s far more dangerous to have the government wielded as a weapon against voluntary organizations and civil society.”

I should note here that all-encompassing opposition to DAF reform isn’t a position shared by all philanthropy sector groups. COF, for instance, has no problem with the recommendations put forward by a working group it convened to “strengthen community foundations and donor-advised funds.” They include some pretty sensible entries, like a minimum annual payout requirement of 5% of the assets held in community foundation DAFs and a recommendation that gifts to DAFs from private foundations should go out the door within five years if the foundation included the gift as part of its own 5% minimum.

Likewise, Evans said UPF has no issue with reform as such, and that it doesn’t want to be seen as “just saying no,” as simply reticent regarding all possible reform. But he also said that there’s “no rush to this conversation,” and that UPF would prefer to get sector input and “come to consensus” — something the ACE Act, apparently, failed to live up to.

I also reached out to several other philanthropy sector groups for comment, including Independent Sector and the National Committee for Responsive Philanthropy. Both declined to be interviewed on the subject.

The generosity business

OK, so not all sector groups are against all DAF reform per se. But there’s a big difference between not opposing something in theory and actually supporting it in practice. These organizations all have the right to take issue with the one legislative proposal advanced to tackle these questions on the national level. Nevertheless, their laissez-faire, hands-off mentality around, say, advancing an alternative bill or actually organizing their members to reach some kind of action-oriented consensus reads as a big, glaring vote in favor of the status quo.

According to Chuck Collins, a longtime DAF reform advocate who directs the Charity Reform Initiative at the Institute for Policy Studies, that comes with the territory. “It’s true of any professional association. Their job is to defend the status quo,” he said. “Some of it’s just inherent in professional associations — we don’t want someone else telling us what to do.”

While that can be said to apply to any professional group, the philanthrosphere is a unique beast. “There’s a social virtue gloss painted over the whole thing,” Collins went on. “We’re in the generosity business, why would you dare question our motives?”

But you don’t have to look too hard to spot one of the primary interests driving the DAF boom, and it isn’t generosity. The wider wealth management industry — clearly on display in the form of Fidelity, Vanguard, Schwab and company — sees DAFs, and philanthropic giving in general, as a useful tool in the defense and preservation of wealth. 

Law professor Ray Madoff and philanthropist John Arnold, who helped advance the ACE Act via their Initiative to Accelerate Charitable Giving, have been among the DAF critics calling out the commercial wealth management industry’s role. 

“In 1991, a big change occurred when the financial services industry got involved in the world of charitable giving by creating their own eponymous charities,” they wrote in a November 2021 op-ed. “[The DAF] was originally developed by community foundations to connect donors with their communities, but in the commercial context, the purpose was simply to provide donors with maximum upfront tax benefits and maximum ongoing control of donated funds.”

That hints at what is likely the main internal reason philanthropy sector groups are so reticent about DAF reform — their membership often includes a bunch of community foundations, and as the original DAF sponsors, community funders are still sizable players in the DAF landscape. But as NPT’s latest reports attest, assets in the commercial DAFs have far eclipsed those held in community foundations, even as contributions to community foundation DAFs also jump up year after year.

In that context, Collins said, community foundation DAF defenders are “effectively carrying the water for the commercial DAFs,” particularly through organized efforts like the Community Foundation Public Awareness Initiative, which has worked to thwart the ACE Act. Looming large in that mix are several big institutions like the Silicon Valley Community Foundation, for whom “DAF management is becoming part of their revenue,” Collins said.

It should be noted that the ACE Act attempted to address this with a community foundation carve-out, exempting from most of its provisions DAFs of less than $1 million held at community foundations. That apparently didn’t cut it.

Creeping lawlessness

With the federal proposal seemingly dead in the water and the opposing sides unable to reach consensus on whether or not a problem even exists — let alone how to address it — can we realistically expect any further near-term energy around DAF reform? 

Collins remains hopeful. “Their calculus so far is we don’t have to do anything,” he said of the sector groups. “But in a divided Congress where not a lot is going to happen, there’s a lot of space for this charity reform conversation.” 

Much of the drumbeat for DAF reform so far has come from groups closer to the left, like the Initiative to Accelerate Charitable Giving or the Institute for Policy Studies, and has thus leaned into the inequality and wealth-hoarding angle. In my talk with Enright, she pointed out, perhaps justifiably, that the liberal tilt of IP’s own readership may have accounted for some of DAF reform’s popularity among respondents to our survey.

But despite surface appearances (and the Roundtable’s adamant opposition to reform), this isn’t just a matter of left versus right. On either side of the political divide, DAF money flows through places like DonorsTrust, Tides, the National Christian Foundation and Arabella Advisors’ fiscally sponsored entities — as well the bigger commercial sponsors — to highly ideological 501(c)(3) advocacy organizations and even 501(c)(4)s. Conservative commentators like William Schambra, currently a senior fellow at the Hudson Institute, have pointed out that given the rising tide of opaque DAF money, particularly on the left since 2016, adamant opposition to reform from the right doesn’t make much sense.

Schambra made that case in an op-ed he wrote with former Joyce Foundation President Craig Kennedy, arguing that despite the Tax Reform Act of 1969’s strong injunctions against partisan activity by private foundations, those rules are being “openly flouted by partisan activists” today — DAF giving being one channel for that. 

Whether or not you agree, it’s plain that even as they make life easier for philanthropic stakeholders, DAFs have severely muddied the waters the Tax Reform Act attempted to clear over a half-century ago. Regulatory incoherence, an abundance of loopholes and a growing lack of transparency have created an atmosphere of creeping lawlessness amid the DAF bonanza. And that threatens to erode the legitimacy of the entire nonprofit sector. 

Right now, the public isn’t paying much attention to a set of philanthropic practices that polls show they’d strongly oppose if they did pay attention. But that could change quickly in an era of strong populism on both the left and right, along with declining trust in institutions. As IP Editor David Callahan was already arguing back in 2015, it wouldn’t be the first time leaders from a particular industry failed to recognize just how fast things were shifting under their feet, and thus failed to avert crises that ended up seriously damaging reputations and bringing on heavy-handed government intervention. 

Perhaps the solution isn’t just patching up the existing legal framework, as the ACE Act proposed to do, but establishing new ground rules for philanthropy at large — a revisiting of the core prescriptions laid out back in 1969. Such a framework needn’t be stringent or punitive. It could even be largely permissive. But it should be coherent, in a way today’s strained marriage of convenience between foundations and DAFs is not. 

Regardless of whether we’ll see anything like that anytime soon, it seems safe to say we shouldn’t wait for the national sector groups to take the first steps — unless, of course, we like waiting forever.