The popularization of donor-advised funds means that all the problems that have typically accompanied family foundations are now found much more widely than ever before.
More ways to give, all to the good, right? Not so fast, argues philanthropist Lewis Cullman, who, together with his late wife Dorothy Cullman, gave away hundreds of millions of dollars. Cullman complains about “Misuse of Philanthropy” as he examines a newly popular vehicle for charitable giving: donor-advised funds.
Donor-advised funds (or “DAFs”) can be established with as little as $5,000 and so allow those who aren’t wealthy enough to endow a family foundation to establish a fund for charitable giving. For many people, their DAFs are like charitable checkbooks: at their convenience, they advise the financial institution that holds their DAF to send donations to charities of their choice.
DAFs aren’t actually new—the New York Community Trust, established in 1931, was the first—but recently they have become extremely popular: contributions to DAFs held by the three main financial institutions that hold DAFs increased 44 percent in just 2012, and they seem to be becoming only more popular. The median balance in a DAF at one of these three institutions was a little under $15,000, which indicates that DAFs are being set up by lots of middle- and upper-middle class folks.
What could be wrong with a new, popular way to establish a charitable fund?
Lots, Cullman says.
First, Cullman raises concerns about ensuring that donor intent is honored. Once a donor turns over his money to a financial institution, he loses final authority over the funds—note that these are Donor-Advised Funds. Donors make recommendations as to how their funds are to be disbursed, and their recommendations are usually follows as a matter of course. But things can get tricky, especially if a donor doesn’t plan wisely, as Cullman explains:
Here’s a good example of what can happen. I’m a considerable supporter of a major cultural institution, and on its board of trustees. That institution had been receiving a sizable donation each year from a particular donor. When that donor had died, he had given his money to a DAF administered by a community trust. When the institution in question paid a call to the community trust, seeking confirmation about the continuation of the annual donation, it was told, “We’re not necessarily continuing to give that gift.” Note the use of the word “we”—nothing to do with the past practices of the late donor.
Perhaps worse, Cullman complains, charities aren’t necessarily being helped when donors put their money into a DAF. When you write a check to a charity, the charity gets the money right away. When you write a check to your DAF, you aren’t required to tell the financial institution that holds it to disburse the funds. In fact, the estimated overall annual disbursement rate from DAFs is only 17 percent. That means that 83 percent of the available money “donated to charity” through a DAF is not helping any charitable organization. As Cullman laments:
The funds can simply sit in the account awaiting instructions from the donor. If the donor never gets around to making distributions, they stay in the account earning substantial fees for investment managers.
And, as Cullman might have even more strongly emphasized, this isn’t just unfortunate, it is genuinely unfair to the wider community. Donors who put money into DAFs can take a charitable tax deduction for the full amount right away. The charitable deduction is justified by the argument that people who help the community through charitable gifts deserve a break on their taxes. Money sitting in a DAF isn’t helping the community even though it’s won a tax break for its owner—and that’s just not fair to other taxpayers.
It’s especially unfair when one remembers low-income taxpayers, who typically don’t itemize their deductions, don’t get any tax break when they give to charities. Meanwhile, DAFs allow more and more upper-middle-class taxpayers to claim tax breaks for “charitable” contributions to their DAFs that aren’t getting to charities.
The popularization of DAFs means that all the problems that have typically accompanied family foundations set up by the wealthy—honoring donor intent, the temptation to let money sit rather than be spent on a charitable purpose, the unfairness of claiming a charitable deduction for funds that aren’t actually flowing to charity—are now found much more widely than ever before. And that’s not to the good.