One of the first studies ever to look at donor-advised funds on a micro level has found that every year, 37 percent on average don’t distribute any money and over half give less than 5 percent of their assets. The findings are fueling demands for passage of a Senate bill that would spur donors to do more to channel their money out of the funds faster.
The study of donor-advised funds at Michigan community foundations found that in 2020, 35 percent of those funds distributed no money, 22 percent distributed less than 5 percent of their assets, and 43 percent distributed more than 5 percent. Across the entire four-year period covered in the study — 2017 through 2020 — 86 percent of the advised-fund accounts gave money to working charities.
The findings come amid a growing debate over legislation proposed by Sen. Angus King, a Maine independent, and Sen. Charles Grassley, Republican of Iowa, that would add new incentives to encourage donors to give fast. For instance, donors would get an immediate tax break if they distributed their funds within 15 years, while delaying tax benefits for funds distributed beyond that span and requiring all funds to be spent within 50 years.
Proponents of the legislation have seized on the results as evidence that the measure is needed. At issue is the lack of a requirement for donor-advised funds to give money to charities similar to laws requiring private foundations to distribute at least 5 percent of their assets to charity every year.
“If society is going to subsidize through the tax code the creation of donor-advised funds and private foundations, then there is a responsibility that those vehicles transmit resources into the community in a timely manner,” John Arnold, a prominent philanthropist pushing for Congress to change regulations for donor-advised funds, told the Chronicle. Arnold is a founder of the Initiative to Accelerate Charitable Giving, a group of donors, scholars, and foundation leaders who drafted many of the ideas included in the King-Grassley measure.
“Opponents have said the bill is a solution in search of a problem, and this report explicitly describes the problem,” said Arnold. “There are too many DAF accounts that have received a tax benefit and are not distributing resources into the community.”
Not everybody agrees with that analysis.
“One shouldn’t assume that because a DAF didn’t make a gift in a particular year that the donors were basically taking advantage of the tax code,” said Leslie Lenkowsky, a professor emeritus at the Indiana University Lilly School of Philanthropy and self-described “skeptic” of the Initiative to Accelerate Charitable Giving. He noted that the 15 years that the King-Grassley bill allows for an immediate tax break is a sign that nobody thinks all spending needs to happen right away.
Detailed Study
The study, commissioned by the Council of Michigan Foundations and conducted by the Dorothy A. Johnson Center for Philanthropy at Grand Valley State University, is notable for its methodology, which used account-level data from 2,600 funds held by the council’s member foundations to get a detailed understanding of how — and how frequently — the funds were being disbursed by account holders. It’s believed to be the first account-level study of donor-advised funds.
Because that data is so rare, the debate over donor-advised funds has mainly relied on aggregated data from multiple accounts and fund sponsors. While researchers have been able to glean organization-level insights from data contained in Forms 990 or in summaries of national donor-advised fund activities, the activities of bigger donor-advised-fund grant makers can obscure how the funds are being used on an individual basis.
The account-level data in the study covered 85 percent of all community-foundation-sponsored donor-advised funds in Michigan.
The study found small donor-advised funds led the way in terms of share of assets distributed annually. Funds with balances of less than roughly $15,600 distributed 46.3 percent of their assets in 2020. The largest funds, those with assets exceeding about $500,000, distributed the least, or 4.6 percent of their assets that year.
On average, 25 percent per year received no contributions and made no distributions, while an average 12 percent per year received contributions but distributed nothing.
Kyle Caldwell, CEO of the Council of Michigan Foundations, said both proponents and opponents of calls to overhaul donor-advised funds will find things in the report to support their arguments. But he also said the report “does not provide a compelling case” that affirms the need for the changes proposed by King and Grassley.
For example, he noted the study found that the 14 percent of donor-advised funds that didn’t distribute any money during the study period account for only 5 percent of all assets studied, which he said cuts against arguments that donor-advised funds are just a place to park wealth.
Lenkowsky, the Indiana University scholar, said the study should be praised for its account-level detail but cautioned against generalizing the findings of this study outside of Michigan, saying larger account-level studies were needed to understand the issue on a national scale.
He said the report shows donor-advised funds are, by and large, being used as legitimate vehicles for charitable giving. But he noted one statistic in the report doesn’t paint donor-advised funds in the best light. In particular, he said, it will be alarming to some that a combined 37 percent of many donor-advised funds made no distributions in a typical year.
"That will strike people as pretty high percentage,” said Lenkowsky. “On the other hand, the study reported over the four years of the survey, 90 percent made some sort of payment. ... Some might say that’s pretty good.”
Arnold dismissed that analysis.
“If you look at the year 2020, in which the need for charitable giving was arguably the greatest ever, that there’s 35 percent of DAF accounts in Michigan that made no distribution, I think is a real problem,” said Arnold. “And this statistic that 90 percent made a distribution of at least $1 in aggregate is an incredibly low bar, and one I don’t think defines success.”
