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New Report Says Charities Lost $300 Billion in 5 Years in Part Because Donors Stashed Money in Advised Funds

By  Michael Theis
May 4, 2021

New research from two scholars who are advocating for new rules on foundations and donor-advised funds suggests “working charities” lost $300 billion in recent years due in large part to the proliferation of donor-advised funds.

According to a new data analysis from Boston College law professor Ray Madoff and James Andreoni, an economist at the University of California at San Diego, charities lost out on that sum from 2014 through 2018 as charitable donations went instead into donor-advised-fund accounts

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New research from two scholars who are advocating for new rules on foundations and donor-advised funds suggests “working charities” lost $300 billion in recent years due in large part to the proliferation of donor-advised funds.

According to a new data analysis from Boston College law professor Ray Madoff and James Andreoni, an economist at the University of California at San Diego, charities lost out on that sum from 2014 through 2018 as charitable donations went instead into donor-advised-fund accounts and private foundations and didn’t come out. The amount lost is substantial: For context, “Giving USA” estimated individuals donated $295 billion to all charities, including DAFs, in 2018 alone.

The findings from the Madoff-Andreoni research directly counter the narrative put forth by major donor-advised-fund sponsors, who argue the increasingly popular giving vehicles boost giving by providing a useful silo for charitable funds that can be opened when need is greatest.

“There’s basically no evidence that the rise of DAFs has increased the total amount of giving,” said Madoff, noting that individual charitable giving has hovered around 2 percent of income for at least four decades, according to “Giving USA,” the annual study of American philanthropy.

Madoff, along with the philanthropist John Arnold, has been building a coalition of donors, scholars, charities, and foundation executives to press Congress to add new incentives to insure that more money flows to charities that put the money to work right away. Among their proposals are new incentives to encourage donor-advised-fund holders to distribute their money within 15 years and the creation of a new class of donor-advised funds that withhold tax deductions on contributions until the money is given to a working charity. They are also seeking to limit the ability of private foundations to meet their requirements to distribute at least 5 percent of assets every year by contributing to donor-advised funds.

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Analyzing Tax Records

The scholars’ research estimated what difference it has made that donor-advised funds are not required to distribute any money to charity, along with the fact that foundations are required to distribute at least 5 percent of their assets each year. Some foundations, they noted, meet the payout requirement by giving to donor-advised funds — meaning less money flows to working charities.

The report analyzed data from two five-year time periods, 1987 through 1991 and 2014 through 2018. For the period from 1987 through 1991, “working charities” — defined as nonprofits other than private foundations and donor-advised funds — received gifts worth an estimated 94 percent of the total value of individual giving as reported by “Giving USA’s” annual report on U.S. charitable donations. The other 6 percent of that value went into private foundations and community foundations. However, from 2014 to 2018, working charities only received gifts equal to 73 percent of the value of individual giving at that time, the research says.

The rise of the commercial donor-advised funds came after a 1987 court ruling that opened up donor-advised-fund management to other types of organizations, Fidelity launched its donor-advised fund in 1991. Since then, the funds have grown in popularity, particularly in the past 15 years. Since 2007, contributions to donor-advised funds grew from 4 percent to 13 percent of the value of individual giving as of 2018. That rivals contributions to private foundations, which accounted for 15 percent of the value of individual giving as of 2018.

As a result of the growing diversion of charitable contributions to donor-advised funds and private foundations, Madoff and Andreoni estimate that from 2014 to 2018, working charities received gifts equivalent to around 73 percent of the value of individual giving in that time.

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That ratio includes all money that charities received, including distributions from donor-advised funds and private foundations, as a percentage of the value of total individual giving.

A Look Back at History

Their conclusion rests on the assumption that without the opportunities for accumulation of charitable assets afforded by donor-advised funds, the ratio of money received by working charities to the value of “Giving USA’s” individual giving figures would be similar to the ratio seen from 1987 to 1991.

Madoff said their findings answer a question that has remained murky for some time, namely how the growth of private foundations and donor-advised funds has affected working charities.

Said Madoff: “This report is a novel approach in that it looks to actual receipts by charities instead of reported distributions by donor-advised fund sponsors.”

Correction (May 5, 2021, 12:17 p.m.): A previous version of this article said the report analyzed data from 1988 through 1991. It should have said 1987 to 1991.
We welcome your thoughts and questions about this article. Please email the editors or submit a letter for publication.
Fundraising from IndividualsDonor-Advised FundsData & Research
Michael Theis
Michael Theis writes about data and accountability for the Chronicle, conducting surveys and reporting on fundraising, giving, salaries, taxes, and more.
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