When it comes to revamping donor-advised funds, America is not a polarized nation. A survey released in March by Inequality.org and the Giving Review — news and opinion sites on the left and right, respectively — found that 74 percent of conservatives and 88 percent of liberals agree that money should be moved out of DAFs to charities within five years.
As the founder of the Foundation for Appalachian Kentucky, which serves one of the most persistently poor regions of the nation, I agree that a DAF overhaul is long overdue and that more community foundations like mine need to get behind those efforts. But the focus of such changes should shift from DAFs themselves to the sponsors entrusted to steward them.
There is little difference in how DAFs are structured and how they operate as a philanthropic tool. However, a huge chasm exists between community foundations that use DAFs to shore up civic infrastructure, improve education, and provide economic stability in a particular region, and national or commercial gift fund sponsors that use them as a mechanism to build wealth through the fees they collect to sponsor the accounts.
These differences should be a starting point for any new DAF policy and should inspire more community foundation leaders to fight massive lobbying efforts to halt donor-advised fund legislation.
Through discussions with experts and advocates pushing for DAF changes, I’ve formulated what I believe is a strong workable alternative to previous legislative efforts, most notably the 2021 Accelerating Charitable Efforts Act. While that legislation would have exempted community foundations with less than $1 million in DAF assets from payout requirements, it came under fire for potentially creating complicated accounting requirements that some community foundation leaders felt would be especially onerous for smaller organizations.
The solution, I believe, is to develop entirely separate policy for community foundations and the DAFs they manage, similar to laws governing community organizations focused on housing and economic development — community housing development organizations and community development financial institutions.
To better understand why this makes sense, consider the evolution of DAFs. The first DAF was created in 1931 at the New York Community Trust. The idea was to pool local donor funds and develop a stable funding source to address local problems. Fees for sponsoring these DAFs could then be used to pay salaries for foundation staff and keep the organizations afloat so they could continue to serve their communities. This same structure remains in place today for most of the nation’s more than 900 community foundations.
But the DAF-sponsor landscape has changed strikingly in the past three decades. In 1991, Fidelity Investments became the first commercial sponsor of donor-advised funds. This opened the door for wealth-management firms to create charities whose only purpose is to sponsor DAFs. These firms rack up millions of dollars in fees for holding these assets year after year, while sending little money to charitable causes.
That’s a big problem — not with DAFs, but the institutions where they sit.
Contributions to DAFs grew to almost $230 billion in 2022, three-quarters of which went to 73 national DAF-sponsoring organizations. Of those, three of the top four were created by Fidelity, Vanguard, and Charles Schwab. These firms have zero incentive to encourage, much less accelerate, grant making, given the enormous fees they earn and lack of connection to charitable activities in local communities.
An Alternative Approach
So, instead of decimating a tool that has been a mainstay of community foundations for nearly 100 years, let’s examine why Wall Street has been given so much power over the charitable landscape — and create policy that addresses that imbalance. Community housing development organizations, or CHDOS, and community development financial institutions, known as CDFIs, provide a useful framework for an alternative legislative approach.
Both are supported by tax incentives and philanthropy to bolster their investment in local people and places and are certified and monitored to serve a public purpose. They make loans just like banks but are governed and regulated very differently to ensure they are responsive to needs in their local communities. Community foundations could be similarly structured and regulated, along with the DAFs they oversee.
CHDOs and CDFIs, which are certified and monitored by the Department of Housing and Urban Development and the Treasury Department, respectively, serve specific geographic areas where they provide services otherwise unavailable to their communities — much like community foundations. They receive special consideration for state and federal grants and tax credits that encourage investments in low-income housing or small businesses.
A similar structure could be created for community foundations, requiring certification by a designated federal entity or national organizations such as CFLeads and the Community Foundations National Standards Board. To become certified, the foundation would need to be locally governed and dedicated to improving conditions within a defined geographic area. It would also have to demonstrate that it performs meaningful work beyond DAF sponsorship, including nurturing new nonprofits, bringing people together to address community issues, investing in development in the region, and running programs focused on local needs.
Community foundations should be allowed to continue expanding their DAF assets but also required to distribute a minimum of 5 percent every year to charity, as recommended by the National Council on Foundations. This would ensure money is in place as an ongoing funding source for communities and nonprofits, making them less vulnerable to economic shifts or crises. Fees for holding and administering these funds would continue to go directly back into the community foundation, supporting its grant making and local development work.
Certified community foundations, however, should be exempt from any time limits for distributing funds put in place for commercial and national DAF sponsors. As anchors for community development, community foundations require the flexibility to work with donors and local leaders on long-term strategies and projects that require the security provided by permanent assets.
Donor Incentives
As with CHDOs and CDFIs, the added scrutiny of certification by a legislatively approved entity would open opportunities for greater government and philanthropic support of community foundations. New DAF policy, for example, could provide tax credits to donors who invest in DAFs held at community foundations, recognizing that they are a vital resource for high-need areas.
Currently, $158 billion is sitting in DAFs managed by national organizations. Those funds are doing nothing for nonprofits or those they serve. Compare that with the $54 billion sponsored by community foundations led by local people using every dollar, including the fees earned by administering DAFs, to support local grant making, invest in local development, and build stronger communities. Commercial gift funds and other national organizations that sponsor DAFs have a different structure, different governance, and ultimately serve very different purposes than community foundations, and therefore can and should be regulated differently.
The fight to stop DAF legislation and maintain the status quo is being fought on the national stage by lobbyists representing fewer than 20 percent of U.S. community foundations. That’s because most community foundation leaders don’t have the time or money to ensure their voices are heard. But we can and should get behind changes that put strict time limits on distribution and tax benefits of commercial and national DAFs and offer more incentives for investment in community foundations.
Instead of pretending that the current system is working, community foundation leaders need to use our collective voice to tell a story about what’s really needed. The Internal Revenue Service made a mistake in 1991 when it granted public charity status to investment firms, allowing donor-advised funds to become just another transactional part of wealth management. We can fix that, but we shouldn’t destroy the essential infrastructure of community building and charitable giving in the process.
