From the Desk of

Nancy E. Peterman ¦ Partner

Donor Advised Funds: $230 Billion & Growing

Thought of as a recent phenomenon, Donor Advised Funds, or DAFs, as they are commonly known, came about in the 1930s, which makes them close to a century in age; however, they were not widely accepted until the Pension Protection Act of 2006.  Their popularity arose in the 1990s, and many charities have well-defined strategies to cultivate donors who give through DAFs. The number of DAF-sponsoring organizations has grown beyond investment companies to include community foundations, large charitable organizations, and some universities. According to the National Philanthropic Trust, as of 2023, there were about 2 million donor-advised funds. Giving from DAFs was more than $52 billion, approximately ten percent of overall philanthropic giving. 

Donors tend to like DAFs as they afford them the opportunity for a tax break in the year that they give but do not require that they distribute funds to various organizations in that same year, effectively functioning as a private foundation without the excessive overhead costs and additional requirements for payout. This is especially acceptable for donors, whose salary may fluctuate significantly from year-to-year, or for those who may choose to give when market returns are favorable, thus enabling them to smooth out their giving to many organizations by use of a DAF. Donors may shield their personal identity if they choose by asking the DAF-sponsoring organization to withhold their names when making payouts. One notable limitation on contributing to a DAF is that a Qualified Charity Distribution from an IRA (as part of the Required Minimum Distribution) may not go to a Donor Advised Fund.

Charities who sponsor DAFs also like them as donors are likely to support the organization with at least some of the DAF deposited with them. It also increases the fund balance of the charity which can boost investment returns. Investment companies have grown their DAF programs significantly without regulation. By sponsoring DAFs, the investment company can truly serve as a financial advisor to the donor for investment management, tax strategies, and philanthropic giving. Both charities who sponsor DAFs, and investment companies benefit from fees charged for managing the individual DAFs.

The Internal Revenue Service proposed new DAF regulations for comments as 2023 ended. First and foremost, the proposed regulations would more carefully define what a DAF is and what it isn’t. Those serving in the advisory role, including donors and the financial advisers, could not benefit in any way from the donation. It would also tighten the restriction on lobbying support. Fee structure would also come under scrutiny especially for financial advisors. And the IRS is not the only one examining DAFs. Congress proposed a bill in 2021 sponsored by Senators Angus King and Chuck Grassley; however, it did not gain sufficient support. Although that bill is dead, others are still discussing the possibility of proposing future DAF legislation.

Interestingly and not surprisingly, according to The Chronicle of Philanthropy, contributions to DAFs grew 133% from 2018 to 2022. According to Chuck Collins at the Institute for Policy Studies, “Donors got tax breaks in 2022 for $85.5 billion in DAF donations. Now, the funds may sit indefinitely.”