It’s one of main gripes of donor-advised funds’ critics: Foundations, some of them channeling the fortunes of the nation’s richest, appear to be using DAF gifts to do an end run around the 5% annual payout mandate, rendering optional what was supposed to be a requirement.
On a foundation’s Form 990, it’ll typically look like this: a bunch of small gifts, or maybe just a few, to local charities, perhaps a few paid employees, and then a big, whopping contribution to a DAF housed at, say, Fidelity Charitable or the Silicon Valley Community Foundation. The DAF contribution might be 10 or even 100 times larger than the amounts contributed to specific charities that year, and without it, the foundation in question would come nowhere close to that 5% threshold.
Nationwide, this foundation-to-DAF pipeline is growing by leaps and bounds, according to recent findings gleaned by by the Institute for Policy Studies (IPS) from recently released tax records for 2021. In 2019, IPS estimates that total grants from private foundations to national DAFs came out to $967 million. In 2020, that jumped up to $1.9 billion. And in 2021, the most recent year for which sufficient records are available, the figure was $2.6 billion.
The near-exponential growth of this practice mirrors the meteoric rise of donor-advised funds overall. The National Philanthropic Trust’s latest numbers put DAF contributions at $72.67 billion in 2021. That was also the year DAFs shot past private foundations as American donors’ charitable vehicle of choice, with contributions to DAFs rising to about 22% of individual giving — while the figure for foundation contributions has long hovered near 15%.
The latest numbers and the overall debate around the foundation-to-DAF pipeline gives us a good window into the key sticking point between DAF critics and DAF defenders, one that has the two camps talking at cross-purposes, with no real hope of resolution in sight. Namely, the critics call for DAF reform as a matter of principle, while the defenders oppose reform on the basis of convenience.
Just look at the exchange between IPS and the Philanthropy Roundtable following the publication of IPS’s numbers on foundation-to-DAF giving. In a post titled “Much Ado About Private Foundations Using DAFs,” the Roundtable’s Jack Salmon made the observation that next to total foundation giving in the U.S., the amount moving to DAFs is relatively minuscule: Even that $2.6 billion in 2021 counted for just 3% of foundation giving. Additionally, Salmon argued that the usefulness of DAFs for foundations — to pool resources, to engage donors, to outsource administrative costs — justifies preserving the status quo.
That’s the convenience argument, and it’s one we’ve heard not just from the Philanthropy Roundtable, but from numerous sector groups with more moderate ideological positioning. This is where the philanthropy establishment, if there is such a thing, is at.
In a riposte to the Roundtable’s critique, though, IPS laid out what I’ve come to think of as the principle argument. Basically, sure, the vast majority of foundation giving doesn’t involve using DAFs to circumvent the payout requirement, but some of it definitely does. And at the end of the day, as IPS’s Helen Flannery wrote, “individual foundations should not be able to meet their payout requirement through DAF grants.”
Donors who appear to be using DAF gifts to satisfy their foundations’ annual payout requirement include some of the wealthiest people in the nation — and the world. Google cofounders Larry Page and Sergey Brin are well-known for shunting large sums from their foundations into DAFs, and most of the giving from Elon Musk’s foundation over the past several years has gone into a DAF. And it’s definitely not just the biggest billionaires — time and again, we’ve encountered versions of the above scenario (a big DAF gift and much-smaller non-DAF gifts) in the 990s of even modestly sized foundations, particularly those helmed by living donors.
Flannery’s overall point, though, is that whether or not they’re doing it en masse — and I wouldn’t call $2.6 billion nothing — it’s a problem that foundations can use DAFs to circumvent the payout requirement at all. The fact that this loophole exists, regardless of the extent to which it’s being exploited, means the foundation payout requirement isn’t actually a requirement — it’s optional. So why have these rules at all?
By calling this the “principle” argument, I don’t mean to suggest that these concerns are theoretical or abstract. Regulatory gaps like this allow the wealthiest among us to withhold real money that should be moving toward the public good, and that taxpayers have already subsidized. The position thus becomes: This is simply not the way philanthropy ought to work in a democratic society. However, many DAF supporters don’t really seem to care all that much about said principle, so long as donors’ lives and their presumed giving are made easier.
We tend to find the principle argument pretty convincing here at Inside Philanthropy, but that’s not to say the convenience camp has no case. To begin with, it’s hard to say whether a given foundation is definitely using a DAF to skirt payout, and that’s precisely because we can’t track where that DAF money is headed.
Take Stephen and Susan Mandel’s Zoom Foundation, for instance, which IPS put at the top of its foundation-to-DAF giving list with $263 million in DAF grants from 2017 through 2021 (comprising 99.9% of total grants). While this means the Zoom Foundation is largely a black box from a 990 perspective, there is clearly money moving out the door to a wide variety of causes. It’s just impossible to get the full picture.
Another entrant on IPS’s list, the Kataly Foundation, also caught my eye. According to the report, $138 million went to DAFs from Kataly between 2017 and 2021, comprising a full 100% of the foundation’s giving. Now, from what I know about Kataly, Regan Pritzker’s staunchly progressive, economic-justice-oriented giving vehicle, it isn’t the sort of outfit to do a DAF-powered end run around the payout requirement. And that doesn’t seem to be what’s happening here.
In fact, most of Kataly’s yearly giving runs through DAFs like one at ImpactAssets, an impact investing platform that lets its DAF donors recommend impact investments as well as grants. “We chose to use DAFs to redistribute wealth because it provided the foundation with the flexibility to get started on grantmaking quickly and move resources rapidly to groups on the ground,” said Kataly Foundation CEO Nwamaka Agbo in an emailed statement. As a spend-out foundation with a plan to sunset within 10 to 15 years from its start in 2018, Kataly “chose not to expend resources building out our own internal grantmaking systems and infrastructure.” Agbo also said, “We see DAFs as a tool, and like many tools that serve the industry of philanthropy, they can be used in harmful or inequitable ways, or in ways that support social movements.”
Note also that Kataly voluntarily lists out its grantees in a database on its website, though it doesn’t have to.
So, sure, circumventing payout certainly isn’t the whole story when it comes to the foundation-to-DAF pipeline. But sticking entirely with the convenience argument still discounts the cognitive dissonance of a regulatory regime that mandates one thing for private foundations and then undermines that mandate with a big, fat loophole. I find it hard to believe that modest reform — say, to ensure some level of DAF payout and transparency — would do much to hinder or endanger what foundations like Kataly are achieving through DAFs.
But to date, the convenience side seems to be winning out, both among philanthropic sector groups and in the halls of power. (Remember the ACE Act?) The question, though, is how massive the foundation-to-DAF pipeline needs to become before it becomes much ado about something. Because looking at where DAF trends are headed, $2.6 billion a year seems like just the beginning.
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