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Donors would do well to consider the risks of large-scale DAFs and the benefits of boutique funds.

In recent years, donor-advised funds (DAFs) have enjoyed a meteoric ascent in the world of charitable giving. As of 2016, DAFs comprised six out of the top 10 charities ranked by donations, with Fidelity Charitable outpacing the United Way for the top spot.

Reasons for this ascent are not hard to find. DAFs hold obvious advantages for financial institutions (who earn fees on the funds they manage) and for donors: giving can be timed to maximize tax benefits; they expedite the process of giving property and complex assets; and they are exempt from mandatory disclosure or disbursement requirements. 

For these same reasons, nonprofits have not welcomed the rise of DAFs with unqualified delight.

Critics note that these funds obstruct charities’ access both to cash and to information about the donors who gave it, while structurally encouraging donors to think of their contributions not as gifts but as assets (in which they have a continued stake). As such, many fear that DAFs might severely impede the flow of philanthropic giving—their charitable assets, like the souls in Limbo in Dante’s Inferno, destined to remain eternally uncommitted.

But perhaps it’s also time to consider the risks DAFs might pose for donors.

In a Giving Institute webinar last month, “The Data on Donor-Advised Funds: New Insights You Need to Know,” Fidelity Charitable Trust president Pam Norley commented that FCT monitors recipients not just for legal compliance but also for bad publicity. If a recipient appears on the Southern Poverty Law Center’s Hate Groups List, Fidelity will notify donors, but will still make the donation if the donor requests it.

The bottom line, however, is that Fidelity is under no legal obligation to do so. Once a donation has been made into a DAF, the donor can only “advise” how they are disbursed (hence the name). He or she has no legal rights beyond the “right” to make recommendations.[1]

Now, in common practice this isn’t a meaningful distinction, since institutions honor clients’ requests in order to keep clients happy. But it doesn’t require a paranoid soul to perceive the donor’s fundamental vulnerability in this arrangement: Charitable giving is ultimately at the discretion of the financial institution and whatever questionable metrics it chooses regarding recipients’ eligibility.

Fidelity Charitable’s reliance on the SPLC Hate Groups list compounds the cause for alarm, given the latter’s highly partisan and controversial nature—including its penchant for lumping religious and prolife organizations with neo-Nazi or skinhead ones.

How, then, ought the circumspect philanthropist approach the prospect of donor-advised funds?

At the very least, the donor must recognize the hidden costs of DAFs’ advantages—the extent to which those practical advantages are bought with a loss of legal control over the giving process.

But not all donor-advised funds are created equal.

Some of the risks abovementioned can be mitigated by avoiding large-scale financial services DAFs (like Fidelity Charitable), and instead opting to donate to “boutique” DAFs or special purpose funds with which the donor shares an underlying philanthropic intent.

Such “boutique” funds are multiplying, organized around a single issue or philanthropic focus (higher education, regulatory reform, animal shelters, etc.) These offer donors the same tax benefits as large-scale DAFs, while assuring them that their donor intent will be honored.

Boutique funds also present additional attractions to donors, such as:

  • A network of likeminded donors;
  • Institutional connections and expertise in vetting recipients within the specified charitable field, with which to help donors select the best avenues for giving;
  • Charitable vehicles particular to the fund that allow donors to pool their gifts for one particular cause.

For now, the verdict is very much out on whether donor-advised funds serve the common good, and on how they ought to be regulated. What’s certain, however, is that donors would be well-advised to carefully consider who they will be advising with regards to their charitable contributions, lest their advice fall on deaf ears.

 


[1] From the NYRB Cullman-Madoff article: "In one case, a DAF sponsor went bankrupt and the donated funds were seized to pay its creditors. In another case, the DAF sponsor used donated funds to pay its employees large salaries, hold a celebrity golf tournament, and reimburse the cost of litigation when a dissatisfied donor sued. In both cases, courts ruled against the donors and upheld the rights of the fund sponsor to exert full legal control over DAF funds."


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