#152 What’s the Big Deal About Donor Advised Funds? With Helen Flannery, Director of Research for the Charity Reform Initiative and the Institute for Policy StudiesOct 30, 2023
Helen Flannery joins us to offer her perspective on donor-advised funds (DAFs) and her desire for the need for reforms to ensure the charitable sector's vitality and impact. For example, she discovered that of the top 20 charities in the United States, 11 of the top twenty are DAFs. She wants you to know that most people don’t realize that the top charities in the United States are DAFs. For example, Fidelity Charitable takes in 4 times the contributions as the largest working charity. Helen wants people to know just how big DAFs are becoming and what that means for our charitable institutions.
- The rise of Donor Advised Funds
- The ins and outs of Donor Advised Funds
- The top considerations when understanding the pros and cons of Donor Advised Funds
- Proposals to reform Donor Advised Fund structure and payouts
Helen Flannery Bio:
Helen Flannery directs research for the Charity Reform Initiative at the Institute for Policy Studies. Helen’s research focuses on the relationship between philanthropy and inequality, including the policies and practices surrounding charitable mega-giving, private foundations, and donor-advised funds.
Prior to her current employment, Helen provided nonprofits with reporting, analytics, and industry benchmarking services through her work at Target Analytics and ROI Solutions. At those organizations, she also wrote extensively on charitable sector fundraising topics such as direct marketing, sustainer giving, and the economic factors affecting donor behavior.
- The Charity Reform Initiative: Inequality.org
- Charity reform recommendations: https://inequality.org/action/charity-reform-initiative/
- IPS's full slate of charity reform proposals: https://inequality.org/wp-content/uploads/2023/08/IPS-Policy-Recommendations-for-Charitable-Reform.pdf
- Helen Flannery’s blog post about the top 20 charities: https://inequality.org/great-divide/top-public-charities/
- The California and Michigan studies on DAFs:
- California: https://oag.ca.gov/system/files/media/donor-advised-funds-overview.pdf
- Michigan: https://michiganfoundations.org/resources/payout-study
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Helen, this is so awesome. Thank you for coming to my podcast. What I think is the greatest ever is that I read your blog about donor-advised funds and found it fascinating. And I wanted you on my podcast because I have a whole month to discuss donor-advised funds, the benefits, the costs, and the things to think about. And I don't know you. I didn't know you before. I'm like, I wonder if Helen will be willing to get on my podcast.
And so, I emailed you guys, the whole team, and you got right back to me. So, hats off to you for being so willing and interested in discussing this important topic that so few people know a lot about. OK, Helen. So, before we get into the ins and outs of donor-advised funds, you also have some significant criticisms of DAFs. So, we're going to get into that. That's one of the main reasons I wanted to talk to you about this. Before we do that, tell my audience about who you are and what got you so interested in this work and all that kind of stuff.
First, thank you for having me on, and I'm always happy to talk about donor-advised funds. I am a researcher for the Institute for Policy Studies. We are a research center based in Washington, DC, focusing on inequity issues. My particular focus is on the relationship between inequality and philanthropy.
So, I researched the rules of our charitable system, specifically around things like mega-donor philanthropy and giving to intermediaries like foundations and donor-advised funds. So, this is hopefully right in my wheelhouse. I've been working for or with nonprofits for the past 30 years. For most of that time, I worked for a great company, Target Analytics. That helped nonprofits share their fundraising results so that they could all collaborate to fundraise better and they could understand how overall economic trends were affecting their giving. And that was where I started to see this trend happening. Which is that donor files are shrinking.
And at the same time, nonprofits rely more on major donors, so there's a tipping happening. And as that happened, our nonprofit clients—were taking in less money than before. And at the same time, they were relying on a riskier fundraising model. Because they're more dependent, their eggs are in one basket with major donors, and DAFs are the epitome of this. As I'm sure we'll get into this, this whole trend worried me, and I worried that it meant that a smaller number of people had more and more power over what charities were doing.
And instead of our charitable sector, being a broad, diverse, robust sector, walking on many legs. The reason I do the work that I do for IPS is that I want to say that. Story, and I want to lay out the trends, explain why they're happening, and then advocate for public policies that would reverse them.
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Helen, we'll have the link to your organization and the blog you wrote about this in the show notes. So, if anyone wants to learn more, please check out the show notes and the links. OK.
So, let's talk about Dafs, but you know what? You just mentioned something … tipping. You know, there's some law around that. Decision-makers were very concerned about this exact problem you address, and there are rules about nonprofits not being able to have too much donor influence.
Are you saying maybe let's go into this for a minute before we go into that? Are you saying that the tipping laws are not robust enough, or, you know, let's talk about that part? Is it there? It sounds to me like you're saying it, too. Fewer and Fewer donors, having more and more power over these amazing nonprofits' future is a challenge. Let's unpack that first.
Sure, that is a great question, I would say… Not to get too far into the donor-advised fund angle on this, but when it comes to private foundations, we do have relatively good laws and procedures to make sure that we know where the money is going and who's giving it; we can sort of trace that back when it comes to private foundations.
When it comes to DAFs, There's very little transparency about them. The public can't know. Who is giving to a donor, and where is that money coming out? Where it's going on an individual account level? We know about the overall sponsor level, but we don't know about the individual account level.
So, unlike private foundations, donor-assisted funds are pretty opaque. But some concerns sometimes arise. And use donor-advised funds to get around the public support test, which is what you're talking about where you have to prove.
Tipping and public support Test. Right. Exactly.
Exactly. So. So that's because they're not transparent. A single major donor can give to a charity and be pretty much the only donor giving to that charity. But there's no way of figuring that out.
Very helpful. Thank you. OK, so. Helen, let's talk briefly about your writings, your research around donor-advised funds, and your thoughts and concerns. And as you say in your writing, I mean that DAFs have exploded in there, and it is a tool for donors, so talk to me a little more about your thoughts here and elaborate on them for my listeners.
I wrote the blog post in the first place because I thought most people probably don't realize how big DAFs have become and how fast they're growing. Most people don't even know what DAFs are, much less how to use them or how much money they take.
So, I did what seemed like a simple exercise: mashed up the lists of the top public charities that were not donor-advised, sons, or working charities. According to publicly available news sources and the data we have in our own database about how much money donor-advised fund sponsors are taking in, those are also public charities. Donor-advised funds are also public charities. I put them together and ranked them to see who the top 20 charities were in the United States.
To know how much money they're taking in, I was Kind of dumbfounded to discover that eleven of the top 20 are donor-advised funds, including the top four and seven of the top ten. I thought most people probably don't realize that the top four charities in the United States for fundraising are donor-assisted funds and that a donor-assisted fund-fidelity charitable is at the top. Public charity in the United States takes in four times as many charitable contributions as the next as the largest working charity does.
And so the reason that I wrote this blog post was because I wanted people to know this. I wanted people to realize how big it was becoming that DAFs are the fastest-growing sector in our charitable universe. Over the past 10 years, they've gone from 4% of individual giving to 22% of individual giving, meaning that donor-advised funds take in 1/5 of all charitable contributions from individuals every year. So, they're taking the pie, which hasn't necessarily gotten much larger. Donor-advised funds are taking a much bigger slice of it.
Thank you for that. And the graph is fascinating in your blog, so I recommend that folks look at it. I have a couple of questions for you, Helen, about this.
So, and I know you've thought about this, so you have this list, and its sort of eye-opening, right? But I always think that maybe Daffs are the top fundraisers, but they're also giving money out, so they're not just holding on to it.
Some data shows that people often give way more than the 5% requirement in a private foundation when they have DAFs. And so, can you talk more about that piece of the puzzle? Because I think that's another part of the story.
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Yeah, the rate of donors is a tricky and contentious question. I said earlier that we have very little transparency into what is going on with donor-advised funds on an individual account level, and that's true of payout rates.
So, the thing is that most sponsors will report payout rates. In aggregate, they'll report their aggregate payout rates, and for national sponsors, it's usually somewhere in the 15–20% range. The thing is, there are some accounts. There are certainly many daft donors who genuinely want the money to go to charity. They're treating them like the revolving doors they're supposed to be. They pay out at extremely high rates.
Our concern is that those accounts that are paying out at very high rates provide statistical cover for the accounts that are paying out very little, or none at all. There have been two studies recently. That has come out, one in California and one in Michigan, where the researchers were able to get access to individual account level data for donor-advised funds in those states, mostly Community Foundation sponsors, and they were able to look at payouts for the typical donor advised fund so that they looked at medians.
And what they found was that the median payout rate was somewhere in the low single digits, like 3%. On a typical fund value, they also found that many donor-advised funds don’t pay anything out a given year.
And in some cases, I believe in the Michigan study, they found out there was roughly a third of their accounts. They didn't give out anything over the four periods they analyzed, so our concern would be that these aggregate rates reported by the national sponsors look good on the surface. But they are hiding some accounts that absolutely a good portion of them pay out very little or nothing. And I would also say that sometimes there are questionable ways of calculating payout rates that people may not realize.
For example, some of the very largest sponsors calculate their payout rate by saying they take the amount that donor-advised funds have paid out during the year and divide it by a five-year rolling average of the assets in those accounts, which inflates payout rates because it means most accounts are going to have much less five years ago. In their asset base than they do now. So, it has the effect of inflating the payout rates unrealistically.
This is such an interesting conversation for me. OK, so let me do some other pushback questions I'm considering. And you did address this a little bit, which is a timescale.
So, what I think about with Daff, sometimes a positive benefit in my mind, is that somebody could come into quite a bit of wealth or want to start thinking about giving and have it as part of their regular cycle. They have, you know, it in their budget. Right. But they may not have—a deliberate idea of how to be effective in their giving strategy.
So, it’s time to think it through because sometimes, as a donor, you can make it harder on nonprofits if you just start putting tons of money into a community. There is a way to do this well, and there's also a way for you. You can do it where you exacerbate inequalities, even by giving money.
So sometimes people want to be thoughtful, and they do want to hold on to the funds over time. And then. Ultimately, they are giving much more effectively, and while the money is in a community foundation, it might be invested in mission-based investments. These people might not want to create their own family foundation because there's so much more legal, time, and cost. And if there weren't the DAF option, maybe they wouldn't even give it all because they feel overwhelmed. They want to give it more thought, however. They want to put it in.
And so, I'm just wondering. I'm sure you've thought about this. As an angle to the benefit of a DAFF that creates a little more complexity, I'd love to hear your thoughts on this.
Yeah, it's an excellent question. And I think there is an argument for people having more time to figure out what they want to do with a windfall. I would say that it's interesting because the Institute for Policy Studies did a poll in collaboration with Ipsos last year. They asked people about donor-advised funds and private foundations and the issues surrounding them, and most people didn't know what donor-advised sons were, but once you find out what they are and how they work.
When asked about donor payout requirements, Overwhelmingly, the poll respondent said. Yeah, you can give them some time. Give them 2-3, maybe 5 years at the very most, to give out these funds. It cannot be a perpetual place to store your money, which is what it is right now.
So, in our reform proposals, we propose some sort of payout requirement along with a 2/3 year Requirement for funds going in to come out. It is important to remember that on the timeline front. Charity is taxpayer-subsidized through the charitable deduction. In return for that deduction, the money is supposed to go to public charities working for our public benefit in a timely way.
So, the public is vested in ensuring that taxpayers' deductions and subsidized tax-deductible donations do what they're supposed to and do it relatively quickly.
So, if donors don't take tax deductions, they can do anything with them. They want to take all of the time. But when a donor takes a tax deduction for their donations, it becomes taxpayer business. So that puts a little more fire under the donor to move it out more quickly.
I also wanted to mention mission-based investments because I think there's an argument to be made for that. Mission-based investing is a good thing, and arguably, we might want all investing to be done with an eye toward its societal benefit and impact. It gets tricky when the donor advises that fund money is invested in potentially fewer liquid investments—long-term investments—meaning that those funds aren't as readily able to be turned into grants as quickly and for things that don't necessarily have to as proven and effective as giving the money to charity. So that's what I would say.
Thanks for that, Helen, and I have to ask another question about this. So, let's get into the nitty-gritty of your proposal, too, because I think that will be helpful. But I want to ask one more question.
So, we're talking about donor advice funds; the challenge is that people are holding onto their wealth and not bringing it out into the community, which was the intention of having this tax benefit from Congress. And you know, that's the whole thing. Is there supposed to be a public good?
And I hear that.
The one thing I'm wondering about is that private family foundations must give out 5%. They have millions and millions and millions of dollars in endowments as well. They're holding on to money, too, and it's intergenerational and everything. And it's not. It's not all going out the door right away. It's a very deliberate piece, too.
So, it almost seems like in the proposal you're offering under the DAFs, you're saying people need to give the money out. More quickly, it's feeling like it's stricter. It's it. Your proposal is even stricter than the private family foundations on that side of things or are on the private family foundation side. Are you advocating spending money when they don't have it? They can't hold on to the funds either.
So, let's just talk about That's a little more.
Sure. Those are excellent questions. First, you're right that family and private foundations are sitting on vast pools of wealth for which they have already received tax deductions. In our reform proposals, we focus on foundations, too. For example, one of the planks in our proposal would be to increase foundation payout requirements to 10% instead of five just to move the money out faster. So yes, that's an excellent point.
And we also know that there are certain organizations of sound. Actions like the crisis charitable commitment, which urges foundations to pay up at 10% voluntarily, and we would encourage that kind of effort where foundations voluntarily choose to spend out more or to spend themselves down. I think that it's very valid to say that foundations have similarities.
Thanks. Yeah. Yeah. Thank you for that reminder and for what I wanted to be sure that you brought That out, and then the other thing. I'm worrying about it a little bit. Is it very, very important? I mean, the United States has such, in my opinion, it's very important that the United States, especially, be a leader in philanthropic giving, and I'm thinking a lot about your wonderful research and information and thinking about how far we push on this side of things, where it becomes a disincentive for people to give them to feel like they're being penalized for wanting to do good in the world. I'm not saying that's what you're doing, but I'm just wondering where that line gets crossed. I don't think we're there. Yet at all. It's. It's what I'm wondering about.
And how do we navigate that? I'm interested in this. Everything I do in my life involves incentivizing good people who have the means to support nonprofits and think about it positively. So how do I? I'm sure, like I said, you're sure you're thinking about this.
So, tell me more about your deliberations therein. Your own mind revolves around this.
It's funny because sometimes we get accused of saying it's bad for wealthy people to give to charity. And there's no good donor, and we're not saying that. It is a good thing when people give back to society. We can hold up certain people as role models for other donors because they have gone the extra mile. While trying to give responsibility, give generously, give boldly, and I think that what I would say you think about people like Mackenzie Scott and Chuck Sweeney, who founded Atlantic Philanthropies and spent down his entire foundation. As of 2012, I think it no longer exists. Also, other people have given boldly.
I think I would answer your question: When giving to charity, think about why you're giving the money in the first place because often in our society, money equates with power. But that can't come into play when it comes to charity. Charity is supposed to be about giving; we're giving because we care about these organizations. We care about the causes; we have so many societal problems that we must fix… The environment, jobs, homelessness, the ongoing pandemic, and philanthropy can help, but not if it's bottled up or if the donors think more about their control over the money than what they want to fund.
And so, I would say if you're a donor. Are you concerned about giving your money out in a way that will do good? Think about planning well on giving directly and boldly without restriction. To the organizations you care about and Trust instead of diverting it away into intermediaries—an infinite amount of time.
Helen, thanks for that. And can you talk to us more about the specific proposal you and your team have outlined as positive reform?
Sure. We have about a million different planks in our proposal, and they're all up on our website at inequality.org. So, you can go there to see the whole thing. But the main gist of what our proposals are all centered around is increasing money flow to charity—and discouraging the warehousing of funds that have already received a tax deduction but are not moving out to charity.
So, for example, Item #1 Sets a payout requirement for donor-advised funds. Some people would like that to be a percentage; the way foundations have foundations right now has the 5% minimum requirement. Some have proposed a 5% requirement. We would say that the money coming into donor-advised funds has to go out two or three years after it has come. Including the interest earned on that fund,
#2 raises the foundation payout requirement from 5% to 10% so that they're paying out faster, too. And then there are many other ways you can prevent the warehousing of funds, including saying that grants to donor-advised funds can't count towards payouts, either for donor-advised funds or for private foundations, because right now, we did this, and another analysis shows that right now, $2.5 billion is going from some donor-advised funds to other donor-advised funds each year.
A funny example is that Fidelity and Fidelity Charitable, the nonprofit wing of Fidelity Investments, received $600 million in grants from other donor-advised funds. They gave out about $600 million in grants to other donor-advised funds. So that's a huge amount of money between investment portfolios and foundations. Private foundations also give about $2.6 billion yearly to donor-advised funds, which is counted towards their payout requirement.
It is not a common thing, necessarily. It's only a couple of thousand foundations that do it. But for the ones that do it, it's often a very large percentage of their pay. So those are some of the specific planks we would have. We also would like to see a lot more transparency and standardized reporting. DAF granting at an account level so that we can find out more about where the money is going for individual accounts, which you can find out for private foundations, but you can't find that out for individual DAF accounts.
What a great conversation, Helen and I hope my listeners have a lot of food for thought here. I just wanted to ensure you could offer your thoughts and opinions beyond the writing because conversation is much more fruitful. Well, not more fruitful. I love everything. I think what you've written has been so great and thought-provoking.
And I mean, it's interesting, Helen. While we talk, I tend to because I'm so much in the philanthropic world. Some of what you're saying, I'm like, oh, no. I think I understand the overall deal, but I'm really worried that it's going to end essentially; some of the proposals stymie the giving of interest because people will feel judged, and then I'm realizing, well, maybe I need to open my mind a bit and think about productive solutions here and not just lock it up and lock up my mind.
So, you're challenging me to think about these things, and I hope my listeners are getting challenged, too, because my natural inclination is to feel like donor-assisted funds are good. After all, it's good to offer folks options to incentivize and think, just be able to think more creatively about giving, and you're bringing up some of these really important questions. How do we do this in a way that gives back genuinely to the community?
And I just really, really love conversation. I love tough conversations, and I appreciate you bringing this into the mix with the daft conversation. So, thanks.
Thank you so much for having me. I loved this opportunity.
All right, Helen, let's keep talking after this. All right. Thanks. Have a great day. Rest of your day.