New research from Grand Valley State University is shining an unusual spotlight on the spending activity of donor advised funds, an emerging philanthropic tool that’s gaining speed with relatively little regulatory oversight.
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Commissioned by the Council of Michigan Foundations, the study from GVSU’s Dorothy A. Johnson Center for Philanthropy analyzed four years’ worth of distributions from these types of funds in Michigan. It comes amid a national policy debate about how donor advised funds (DAFs), which are established and largely controlled by donors through community foundations and other nonprofits, distribute funds to various causes.
While supporters say DAFs democratize philanthropy and can increase in value over time, critics contend that they are a vehicle for donors to gain tax benefits without being required to distribute money to causes.
The GVSU study analyzed 2,600 DAFs held at Michigan community foundations, finding that roughly two-thirds of the funds distributed money to charities in any given year. About 90 percent of DAFs at Michigan community foundations gave money at least once from 2017 through 2020, the study found. About 10 percent of the DAFs studied did not make contributions in the four-year period, while the median distribution from a Michigan DAF increased from $8,500 in 2019 to $9,750 in 2020.
“On its face, this fear that a lot of DAFs are sitting on the side can be mitigated because two-thirds of all DAFs made a distribution,” Jeff Williams, director of the Johnson Center’s Community Data and Research Lab, told MiBiz. “If you’re worried about huge DAFs sitting on the sidelines and parking money, our study at least of Michigan DAFs showed it’s not true.”
The GVSU research is also being heralded by industry experts as the first of its kind, even though it’s focused on Michigan, because nonprofits aren’t required to disclose data about fund amounts and when they distribute money to charities. The Council of Michigan Foundations provided anonymous account-level data to researchers covering about 90 percent of DAFs at Michigan community foundations.
The study also found “across the board” that larger DAFs distributed relatively less funds compared to smaller DAFs, Williams said. While larger funds in Michigan may distribute around 4 percent to 5 percent of their total, some smaller funds were paying out between 20 percent to 40 percent.
“Bigger DAFs start to act as if they are a foundation,” Williams said. “Just by behavior, it looks like larger DAFs are kind of acting like a perpetuity.”
Council of Michigan Foundations President and CEO Kyle Caldwell hopes the study’s findings provide data to a public debate in dire need of it.
“What we hope this does is inform our members but also others in other regions about how DAFs work, and that they’ll look at this to improve practices,” Caldwell said. “We’ve been waiting for a decade for (the U.S. Department of) Treasury to issue more guidance. Hopefully, this research would even inform them about how this could work.”
Funds on the rise, policy debate
Williams noted that DAFs have “really grown in the past decade” as a “popular tool in the philanthropy space.”
“DAFs have emerged as a significant and rapidly growing component of American philanthropy as an easily accessible method for individuals, families, and corporations to engage in philanthropic giving,” according to the study.
The study analyzed 2,600 funds in Michigan, while about 70,000 funds holding about $34 billion exist at community foundations nationwide. A suite of DAFs managed by Fidelity Charitable is now the single largest recipient of charitable donations in the U.S., Williams said.
Caldwell said the research shows DAFs are “highly useful tools and highly active.”
“The mix of having endowed and non-endowed DAFs makes for a very useful tool for people to think about their philanthropy both short term and long term,” Caldwell said.
DAF donors say their contributions, even if they sit idle in a fund, can grow in value over time. But this is where ideological differences begin to emerge.
Williams said the public debate surrounding DAFs stems from two issues: Donors get an immediate tax deduction based on their contribution to a fund, and current federal tax law doesn’t require a minimum distribution or a timeline to distribute funds.
“At the core of the debate is a discussion about timing, and it’s timing both of when the donor gets the tax benefit and when an operating charity receives the dollars from the DAF,” Williams said.
While supporters would note that two-thirds of DAFs actively distributed funds, critics would point out that one-third of them didn’t.
Texas-based philanthropist John Arnold told The Chronicle of Philanthropy this month: “If society is going to subsidize through the tax code the creation of donor-advised funds and private foundations, then there is a responsibility that those vehicles transmit resources into the community in a timely manner.”
Arnold is backing a federal bill sponsored by U.S. Sen. Chuck Grassley, R-Iowa, and Sen. Angus King, I-Maine, that would set minimum timelines to spend down money and set minimum distribution criteria. Arnold told the trade publication that the GVSU study “explicitly describes the problem” of DAF donors receiving a tax benefit without distributing their resources.
Caldwell called the criticism of DAFs holding on to money rather than distributing it a “flawed analysis.” The report also notes that three-quarters of Council of Michigan Foundations’s community foundation members have a written policy about inactive DAFs and require distributions every three years.
“It seems to be an argument looking for a problem,” Caldwell said. “All of that funding is earmarked for the charitable sector, it’s not going back to the donor. … If folks want to explore reforms, they should look at research and craft legislation accordingly.”
Williams said the federal bill is “not anti-DAFs, it just says DAFs got so big so fast that we need to put some guardrails on them,” noting that he does not take a formal position on the legislation.
But based on the study’s findings about distribution rates and amounts: “What that bill would do is basically change the behavior of one in every 20 DAFs,” said Williams, who called the funds an “absolutely critical grant-making tool. I’d argue they make philanthropy more democratic.”