Donors added more than $73 billion to donor-advised fund accounts in 2021, marking a 47 percent increase in the sums they contributed to the funds over 2020. The growth was prompted by a desire to give to causes affected by the pandemic, the racial-justice reckoning, and more — and the fact that many donors who have such accounts probably reaped big gains when the stock market was roaring.
The sums donors channeled out of their funds — which are sort of like a charity checking account — grew at a slower clip, according to a study released Tuesday by the National Philanthropic Trust, which manages donor-advised fund accounts. Donors awarded $46 billion to nonprofits in 2021, an increase of 28 percent over 2020 and an amount that approaches10 times the $5.4 billion in grants made by the Bill & Melinda Gates Foundation in 2021.
By using a donor-advised fund, donors can get an immediate tax break on assets they set aside for charity without a facing a deadline on actually directing money to a nonprofit. Because so much money went into the funds last year, there might be a surge in donations next year even if declines in the stock market cause a slump in the new money available for donors to put into their accounts.
The combination of the $73 billion donors contributed on top of the investment gains realized by the funds enabled the assets to increase by 40 percent to top $234 billion, according to the study, which calculated the results from the tax returns of 995 donor-advised fund organizations.
The high rate of growth of donors putting more money into their funds is unsustainable, said Eileen Heisman, the trust’s CEO.
“These numbers are not a new normal,” Heisman said. “I don’t think the numbers are going to stay this robust.”
She says 2021’s growth was the result of people feeling “self-reflective about what’s important to them, and at the same time the market was up, so they were able to act on that,” she said.
The flow of dollars from accounts to actual charities lagged so far behind growth in contributions and assets, Heisman said, because gains in contributions and stock-market increases came late in the year. Often donors give more in the few years following a bull market, she said. Despite uncertainty in today’s economy, Heisman said last year’s increase in donor-advised fund assets bodes well for charitable giving in the near future.
“We’re probably going to have a very robust grant year or two,” she predicted. “The charitable sector is going to be seeing lots of lots of money coming out in grants.”
Dormant Accounts
Critics have pointed out that studies like the annual National Philanthropic Trust report look at aggregate distributions to charity, rather than going account by account to see how much is distributed. In doing so, the study overlooks accounts that remain dormant for years, according to Ray Madoff, a professor at Boston College Law School. Some accounts might be giving a big share of their funds rapidly so this kind of aggregate view distorts how much the funds are doing to help working charities, she said.
Madoff and others who see donor-advised funds as a place where people warehouse charitable dollars are pushing Congress to take action on legislation introduced in 2021 that would provide incentives to donors who move money from their accounts to charities.
The National Philanthropic Trust study doesn’t give an accurate picture of how much goes to working charities, she says, not only because of the dormant accounts but because it also tracks some money that simply flows from one account to another.
The study has also historically included hundreds of thousands of workplace-giving accounts administered by the American Online Giving Foundation, which is a technology nonprofit that creates giving accounts for corporations.
Last year, donors had an average of $180,000 in their accounts, according to the study. That figure should be much higher, but the inclusion of the workplace accounts skews the average account size lower, Madoff said. Still, she argued that the average account size calculated by the trust suggests that donor-advised funds are almost exclusively used by the wealthy, counter to the claim made by some donor-advised fund proponents that they are democratizing philanthropy.
Madoff is confident policy makers won’t be swayed by the heady numbers in the trust report and that efforts to pass legislation regulating donor-advised funds will continue. The trust report, she suggested, should not be viewed as an unbiased, independent data source.
“When one of the biggest players in an industry writes a report about the social value of their work, people are smart enough to take it with a grain of salt,” she said.
Further Research
The study is able to chart activity at community foundations, single-issue charities, and national funds affiliated with commercial financial services firms.
And now, a $750,000 grant from the Bill & Melinda Gates Foundation will enable more research on donor-advised funds and their activity.
Leading the effort will be researchers who have completed previous studies on funds at the national level and in the state of Michigan, Dan Heist of Brigham Young University, Danielle Vance-McMullen of DePaul University, Jeff Williams of the Dorothy A. Johnson Center for Philanthropy at Grand Valley State University, and consultant Brittany Kienker.
The study of Michigan funds found that on average, more than one-third of funds held at community foundations in the state don’t make any charitable contributions each year.
The researchers on the upcoming study consulted with a team of advisers that included Heisman and a number of people who represent organizations that sponsor donor-advised funds or have members that are sponsoring organizations, including the Arizona Community Foundation, the Council on Foundations, the Jewish Federation of North America, League of California Community Foundations, and United Philanthropy Forum.
The goal is to analyze data from 80 to 100 donor-advised fund providers that manage up to 100,000 accounts in total, Kienker said. The study, which will be released late next year or in early 2024, will look at activity from 2014 through 2022. The researchers plan to start by examining the impact of Covid and then following up with studies on federal tax changes and, possibly, the impact of disasters on giving.
“This research is designed to look at the transaction and account-level data and get beyond the 990-level data to see what’s actually going on inside these organizations, Kienker said, referring to the Form 990 that nonprofits file with the Internal Revenue Service.
Madoff is skeptical that the study will provide a balanced view of activity in the funds. She pointed out that the previous national study conducted by the participating researchers did not include responses from many of the largest donor-advised fund organizations.
“They can’t cherry pick the information,” she said. “They have to provide all their information. Otherwise, what’s the value of the study?”
In response, Vance-McMullen said information from about 20 of the biggest accounts, each totaling more than $100 million, were excluded from the previous national study because large accounts are difficult to keep anonymous and publishing results about them would jeopardize the privacy of account holders. She said their exclusion did not affect the outcome of the study in a material way.
The upcoming study is an attempt to provide authoritative data on a wide range of donor-advised fund activity and will provide nonprofits and researchers with a range of calculations, including several ways to calculate annual payout from the accounts.
Different Methodology
One of the biggest points of contention between DAF critics and advocates of the funds is over how to calculate the rate at which assets are distributed to working charities. The National Philanthropic Trust uses a formula that divides grants made during the current year by assets held by a fund at the end of the previous year. Using that calculation, the trust found that the payout rate in 2021 was more than 27 percent, much higher than the 7 percent that private foundations paid out during the same period, according to the report.
The payout figure is even more impressive compared with foundations, Heisman said, because foundations are able to include expenses they incur to make grants in their distribution total.
But the trust’s calculation, critics say, exaggerates how much goes to charity because grants are compared with the previous year’s asset figure, which doesn’t include new contributions or appreciated assets.
The research collaborative plans to use several methods, including measuring a fund’s “flow-rate,” which calculates how much money goes into and out of funds each year. No single method is perfect, they say. The idea is to present as much data and analysis as possible and let nonprofit leaders and researchers come to their own conclusions.
Said Kienker: “We’re here to be a neutral party.”
