A strange thing happened last month during a webinar on donor-advised funds, sponsored by this publication: Not a single person talked about the proposed federal legislation to speed the flow of money from DAFs to charities.
This was especially surprising given that the Accelerating Charitable Efforts Act, known as the ACE Act, has received considerable attention from advocates, academics, and journalists, including the Chronicle of Philanthropy, which has frequently reported on charges that DAFs are more useful to donors than to the charities they are supposed to benefit.
But to the nearly 2,000 nonprofit professionals participating in the webinar, the pending legislation, introduced last June by Sens. Chuck Grassley, Republican of Iowa, and Angus King, a Maine independent who caucuses with the Democrats, was apparently a nonissue.
There are several possible explanations for this, including that the purpose of the webinar, as stated in promotional materials, was to help organizations “find and strengthen ties with supporters who give through DAFs.” As a result, both the presenters and audience questions focused on how to gain access to the estimated $160 billion held in these accounts.
But characterizing the program as a professional-development opportunity reveals something else: Despite the controversies swirling around DAFs on Capitol Hill, for most nonprofit professionals, these funds have increasingly become just another useful tool for obtaining resources.
That shouldn’t be surprising. DAFs, after all, are no more than restricted accounts set up to make gifts to charities. They can be managed by community foundations, investment companies, such as Fidelity and Vanguard, and other organizations, which set policies for allowing donors to designate recipients. Donors can claim tax deductions when they make contributions to establish these funds, but no laws govern when they must designate charities to receive the money, as the annual payout requirement does for private foundations.
That is why DAFs, which have been around for decades but have recently grown in popularity, have become controversial. Critics claim that donors benefit by lowering their taxes when they set up their accounts, but charities may get no benefits until much later when the donors choose recipients for their funds. In response, DAF defenders note that the money put into these funds must go to charities sooner or later and cannot go back to the donors. In any case, they argue, the actual distribution rates of the funds from the approximately 1 million DAFs in the United States compare favorably to those of private foundations.
What Legislation Would Do
The ACE Act would create a variety of incentives for DAFs to make gifts more rapidly. For example, under some circumstances, donors would not be able to receive tax deductions that exceeded the amount their funds gave to charities in the same year. Another provision offers a full, upfront tax deduction, but only if donors agreed to distribute everything in their accounts within 14 years. To further complicate matters, DAFs sponsored by community foundations and those managed by investment companies could be subject to different rules.
However, none of this came up during the Chronicle’s webinar. Instead, the expert speakers — one from a community foundation, the other from a nonprofit — discussed how their organizations use DAFs, work with DAF donors, deal with DAF challenges, including donor anonymity, and comply with existing Internal Revenue Service restrictions on DAFs, such as the prohibition against using the funds to purchase access to fundraising galas. Differences between DAFs sponsored by community foundations and investment companies were acknowledged, but downplayed.
The numerous questions from the audience addressed the same types of issues. There was no hint of the heated debate about DAFs underway in other philanthropic and legislative circles, including in the pages of the Chronicle.
Few Worries From Fundraisers
What transpired during this one webinar was not unique. Reports I’ve heard about other programs for nonprofit professionals, such as a workshop run by the Fund Raising School at the Lilly Family School of Philanthropy, tell a similar story: a lot of interest in how to obtain and manage gifts from DAFs and little worry that DAFs will prove more beneficial to donors than charities.
Additionally, several efforts are underway that aim to make DAFs more user friendly. In February, for example, a Silicon Valley-based nonprofit organization called Daffy announced it was setting up an online platform for DAFs that would make it easier for donors to set aside tax-deductible money for future charitable gifts and invest in their choice of traditional, crypto, or ESG — environmental, social, and governance — accounts. The group cites research claiming that givers were more likely to make larger contributions when they made pledges in advance, rather than giving when asked.
The history of fundraising innovations in the United States suggests that DAFs are following a familiar path. New ways of obtaining resources for charities have typically faced controversy when introduced, not least of all from existing organizations, which feared they might lose supporters to groups employing the new techniques. These include such fundraising efforts as the Easter seals donors affixed to envelopes to call attention to the needs of people with disabilities, federated appeals, direct mail, telemarketing, and affinity credit cards.
But eventually, nonprofit professionals learned how to use them effectively, and concerns diminished, even if they didn’t entirely die away. Telemarketing, for example, was once viewed as an inexpensive way to reach many donors but is now regarded as intrusive. That has not kept many nonprofits, such as colleges and universities, from continuing to use it.
Supporters of the ACE Act might argue that the bill aims to make DAFs more useful to charities than they are already. However, the consequences of new government regulations are often hard to foresee. The 1969 Tax Act, for example, which rewrote federal rules for foundations, initially resulted in a “lower propensity to form a foundation in one’s lifetime,” noted Elizabeth Boris, previously with the Council on Foundations — even if donors did eventually get used to the new requirements.
The Chronicle of Philanthropy’s webinar suggests that nonprofit professionals are well along in figuring out how to use DAFs. It would be a pity if a complicated new law set them back.