President Biden has proposed prohibiting foundations from using donor-advised fund accounts to avoid making distributions to working charities. Supporters say the change would keep money intended for working charities from sitting idle for years in DAF accounts, but opponents say it would curtail the flexibility that foundations need in their grant making.
At issue is a law that requires private foundations to distribute, on average, 5 percent of their assets to charity every year. The idea behind that law is that foundations get special tax treatment because they spend their money doing good works for the public, so a percentage of that money should go to nonprofits annually.
However, some foundations meet that payout requirement, in whole or in part, by transferring money into donor-advised fund accounts, which is allowable under current law. DAFs operate like charitable savings accounts and are used primarily by individual donors, who can deposit cash, stocks, and other assets into DAF accounts and take an immediate tax deduction. The donors can then decide which working charities will get the money and when, sometimes many years later.
President Biden’s fiscal 2023 budget proposes prohibiting private foundations from counting deposits into DAF accounts toward their annual payout requirement unless those funds are distributed to operating charities within a year.
How Foundations Can Avoid Disclosing Grant Recipients
Foundations typically are required to disclose the grants they give to charities. However, if they route the money through a donor-advised fund, the ultimate recipient of the money need not ever be disclosed by the foundations.
Allowing foundations to treat deposits into DAF accounts the same as any other charitable giving is “an obvious design flaw” in how private foundations are regulated, says Chuck Collins, director of the Charity Reform Project at the Institute for Policy Studies, a research and advocacy organization.
Collins praised Biden’s proposal as one small step of many that are needed to boost the flow of cash to operating charities. “Some of these escape hatches should be closed in terms of what counts towards payout,” he said. “The public interest is best served if the money flows.”
A similar provision is included in legislation that would impose a broad array of new regulations on both private foundations and DAFs that are intended to speed up the flow of money to operating charities.
Collins and others also say that foundations can use DAFs to hide grants to controversial nonprofits designated as hate groups by the Southern Poverty Law Center and other watchdogs. Grants from private foundations must be disclosed, but the donor behind grants disbursed from DAFs can remain secret.
In other words, although the public can find out when a private foundation sends money to a DAF, the public has no way of knowing where that money eventually ends up unless the foundation chooses to disclose it.
Stephen Austin, a spokesman for Fidelity Charitable, the largest DAF sponsor, said in an email that Fidelity doesn’t “encourage or see” private foundations using DAF deposits to fulfill their 5 percent payout requirement.
However, a Chronicle analysis found steady growth in foundation-to-DAF transfers, including $740 million in 2018 alone. That figure likely understates the flow of money, perhaps substantially, because the database included only foundations that file digital tax returns.
An analysis by the Institute for Policy Studies identified $934 million in foundation-to-DAF transfers in 2018. That study also found that grants to DAFs made up 100 percent of all grants made by 157 foundations from 2016 through 2018, and for another 152 foundations, disbursements to DAFs made up 90 to 99 percent of their charitable grant making over those three years.
Kathleen Enright, CEO of the Council on Foundations, said her organization agrees that foundation deposits into DAF accounts should be distributed to working charities “in a timely way.” However, she noted that a list of recommended regulatory changes released by the Council in February called for a five-year window to distribute DAF account deposits to working charities to ensure “flexibility for private foundations to best advance their missions.”
The Debate Over Anonymous Giving
The Philanthropy Roundtable, an association of grant makers, is among those opposing the provision in Biden’s budget, as well as the broader legislation to boost payout.
Elizabeth McGuigan, director of policy there, said foundations use DAFs for legitimate reasons. They can simplify transactions to charities overseas, and they can facilitate the bundling of money toward a common goal when multiple foundations collaborate.
Also, foundations sometimes have legitimate reasons for remaining anonymous in some of their grant making, she said. Sometimes people don’t want to be solicited for additional gifts, or they may want to give to liberal or conservative causes without drawing public backlash, she said.
She added, “There is no evidence of private foundations using DAFs to systemically fund bad actors.”
The provision in President Biden’s budget, which would allow foundations to count DAF deposits toward their payout requirement as long as the funds are distributed within a year, would theoretically still allow foundations to anonymize their grant making by channeling money through DAF accounts. However, McGuigan noted that one year isn’t enough time for some of the complex challenges facing philanthropy. “A lot of the crises we face today aren’t fixable or solvable within a year,” she said.
