As readers opened the Sunday New York Times business section in early August, they couldn’t miss the newspaper’s prominently splashed report documenting the ways donors were getting overly large tax benefits for their gifts to donor-advised funds while the public seemed to be getting very little in return.
Nonprofit observers, legal scholars, philanthropic leaders, and others have for years been raising concerns that donor-advised funds are unregulated warehouses of wealth that hoard assets and allow donors to hide their resources. To date, much of the debate has focused on how to improve DAFs through proper regulation, as well as how best to get the benefits this charitable vehicle can provide. However, instead of focusing solely on legal and technical issues, the philanthropic world needs to seize this moment to dream bigger. As advocates look to influence policies on how DAFs are governed, we must also ask ourselves how to better use these funds to move money in solidarity with the very people the resources seek to serve — and how we make can make them accessible to causes most in need of support.
Like any other charitable-giving vehicle, donor-advised funds need to be held to high standards of transparency and accountability. Now the question is what regulations will best promote giving and ensure that the public benefits.
Looking back on U.S. philanthropic history, we can see that blind opposition to regulation rarely works for long. The Tax Reform Act of 1969 (which included the most substantial modern regulation of foundations) was driven both by a desire to prevent abuses and a populist pushback against philanthropy’s’ inability to clearly articulate foundations’ value. This led to major restrictions that shape how philanthropy operates to this day, including its reluctance to support advocacy organizations and a de facto adoption of the 5 percent annual payout standard for foundations as a ceiling for giving rather than a floor.
Today, trying to hold DAFs to a lesser standard of transparency than foundations is untenable given their dramatic growth, just as opposition to the Tax Reform Act was untenable. If philanthropy is going to thrive and grow, it must move beyond knee-jerk reactions against regulation toward a thoughtful conversation about appropriate strategies for regulation.
Models of Action
More broadly, and more important, this debate about the nature of DAFs gives us an opportunity to explore and reimagine the culture of philanthropy. The explosion of DAFs stems from both the great financial excess of this time and a desire by today’s donors for more flexible vehicles to move money.
Large-scale philanthropy exists due to the creation of wealth and a tax code that supports charitable giving. So let’s capitalize on concerns about donor-advised funds to change what charitable giving looks like in the United States — and how it needs to adapt to meet current and future needs.
Already there are examples of how philanthropy can take advantage of the best aspects of donor-advised funds. As the Chronicle noted this spring, Amalgamated Bank, the Tides Foundation, and other entities are focused on channeling money to advocacy nonprofits and supporting voluntary annual payout standards.
More broadly, Aaron Tanaka of the Center for Economic Democracy just published a compelling call for “solidarity philanthropy.” He details how philanthropy can play a role in creating a more democratic and inclusive economy by directing donors to support work that helps those left out by government, business, and others.
Additionally, he suggests that donors adopt participatory grant-making strategies that let grantees and communities have a say in shaping priorities and choosing aid recipients. He urges donors to invest in nonprofits that seek to build the political, economic, and cultural power of marginalized people so they can advocate to change policies and systems that stymie their progress.
Knowing how powerful it can be to move resources quickly, Eugenia Lee and David Roswell, both of Solidaire, a network of progressive donors, recently offered DAF holders and other donors another way to think about how to make deeper connections with their grantees while moving at the pace of change. They suggested that donors ask for minimal paperwork, engage with grantees to learn how the resources would be important to the work, and move in rapid response to the needs of social movements.
And Rodney Foxworth of Business Alliance for Local Living Economies, a group of grass-roots leaders and business owners working to build thriving local economies, is smartly pushing for community-led grant making and investment pools that include DAFs to spur local development that advances community needs. By investing resources in community land trusts, he has been pointing out how donors can use their DAFs to generate an equitable and democratic economy.
Focus on More Than Donor Intent
In this moment of intense debate about DAFs, let’s be sure to keep thinking big. The explosion of DAFs is a reflection of the current economy and philanthropic culture. Let’s do right by donors, DAF providers, nonprofit leaders, and society by holding honest and deep conversations about the legal and technical issues involved with donor-advised funds, such as required payouts or public reporting about assets and grant making.
But more critically, let’s seize this opportunity to address the core tenets of philanthropic culture underlying the controversy over donor-advised funds. Let’s move beyond the idea that a donor’s intent is the sole philanthropic purpose for donor-advised funds to also include the needs that social movements have identified. Let’s lift up the work of donor-advised funds that are already leading the way toward a new model.
Let’s dream really big and think how philanthropy can look radically different in the future. Change is calling us to get smarter. We can meet that challenge.
Jason Franklin teaches at the Dorothy A. Johnson Center for Philanthropy and is president of Ktisis Capital Advisors, a strategic advisory firm to donors, families, foundations, and philanthropic collaboratives. Tyler Nickerson, a philanthropic adviser, previously served as the founding director of investments and state strategy at the Solutions Project and program manager of the Dyer-Ives Foundation.