Three Questions We Have About a Philanthropic Future Dominated by DAFs
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It’s official. Donor-advised funds have surpassed private foundations as American donors’ charitable vehicle of choice. According to the National Philanthropic Trust’s latest report, DAF contributions came to a whopping $72.67 billion in 2021, shooting past foundation contributions in stunning fashion. As Helen Flannery of the Institute for Policy Studies (IPS) showed in a handy graph, around 22% of charitable giving from U.S. individuals went into DAFs last year. The percentage for foundations, meanwhile, has long hovered near 15% — which is also where DAF contributions were in 2020.
This is a portentous development for the future of U.S. philanthropy. Although foundation endowments still contain the vast majority of private charitable funds in the U.S., DAF contributions have been in a state of rapid growth for over a decade now. As NPT (a major DAF sponsor) repeatedly points out, so has grantmaking out of DAFs, which the report places at a “new high” of $45.74 billion in 2021.
That question, of money in versus money out, lies at the core of the controversy over DAFs and has led to calls for reform — current tax law does not stipulate any minimum annual payout from DAFs, while private foundations must maintain an annual minimum of 5% of their assets.
It’s highly uncertain whether any such legislative reform will make it through Congress anytime soon, despite polling that shows a strong majority of Americans support changes like mandated DAF payout. (Our own survey of IP readers earlier this year, many of whom work in the sector, arrived at a similar result.) Nevertheless, here and elsewhere, the drumbeat for substantial changes to current charitable tax law will continue. But just as a quick thought experiment, let’s consider how the philanthrosphere might change if the current trend toward DAF dominance continues uninterrupted by any legislation with teeth.
Is this really democratization?
One of the major reasons we’ve seen this explosion of DAFs is how easy and inexpensive they are to set up compared to private foundations. Between 2020 and 2021, donors opened nearly 300,000 DAF accounts nationwide, with much of that growth representing donors who wouldn’t have considered starting their own foundations.
While getting even a simple foundation off the ground can require sizable investment of time and resources, DAFs have the benefit of a much lower barrier to entry. Minimum initial account balances required at many DAF sponsors have long been in the $5,000 to $10,000 range, and the largest DAF sponsor of all, Fidelity Charitable, recently dropped its minimum altogether.
DAFs have thus been on the rise among smaller donors with extra cash to spare (and often looking for a quick tax relief), prompting characterizations that they “democratize” philanthropy. And yes, DAFs do allow more philanthropy-minded people to give in a more organized way. But let’s not get ahead of ourselves. NPT’s report puts the average DAF account size at around $180,000 last year, a slight increase from 2020. Even having a tenth of that amount to put away for future giving is a luxury few Americans can afford. And NPT’s figure may significantly understate the size of the typical DAF account, for reasons IPS’ Dan Petegorsky discussed in a guest piece last year. In terms of democratization, the rise of DAFs is kind of like extending the franchise from noble-born men to all landowning men: hardly ideal.
Also troubling from a democracy standpoint is the fact that DAFs are subject to virtually no transparency requirements. When a DAF donation shows up on a nonprofit’s 990 form, all we see is the name of the sponsor organization, like Fidelity or Vanguard, leaving the actual donor undisclosed.
Thankfully for philanthropy watchers, the vast majority of charitable assets in the U.S. still lie in foundation endowments. But in a future when DAF contributions far outpace foundation ones, that will eventually change. A veil will continue to descend over philanthropy, limiting the ability of journalists, researchers, fundraisers, other donors — anyone, really — to know who’s giving to what. Convenient for privacy-minded funders, perhaps, but far from a win for democracy.
Will we see the demise of the staffed foundation?
Barring any landmark changes to the laws governing U.S. philanthropy, the next half-century or so will play host to a rapid decline in the relevance of large, staffed foundations in favor of DAFs, LLCs and hybrid giving vehicles presided over by the very rich. This trend has already been playing out over the past decade and seems set to continue. Crucially, mega-donors of all stripes are partaking, from MacKenzie Scott to Elon Musk.
What might this mean for the philanthrosphere? Well, aside from the transparency problem (evident with Scott, Musk and scores of others), an exodus of billionaires from the staffed foundation model will make it more difficult for nonprofits to establish and sustain relationships with their largest funders. Sure, the grantmaker-grantee relationship hasn’t always been the healthiest, but is no relationship the better option? Is it best that DAF gifts descend out of the blue, MacKenzie Scott-style, into the laps of nonprofits that receive them with as much bewilderment as gratitude, and few options for following up?
The counterpoint to that is the prevalence of general support among DAF gifts, which is a good thing in one sense, but also simply reflects smaller donors’ lack of capacity to make project grants, and larger DAF donors’ lack of willingness to staff up and engage in a dedicated philanthropic project. One telling sign of that latter issue is just how many living donors with foundations use gifts to DAFs to fulfill their yearly minimums, putting off giving to actual working charities and essentially rendering the 5% threshold pointless.
In a future where DAFs predominate, we might expect more traditional large-scale giving — to universities, hospitals and name-brand charities — from donors who might have otherwise relied on the effort and advice of foundation staff to spread their money around more broadly.
Some will surely celebrate the decline of foundation program teams, which, in the most extreme examples, can form a wall of highly paid, highly educated professionals between funders and those on the ground. On the other hand, we’d also see continued boom times for already well-heeled philanthropic consultants, wealth managers and DAF sponsors called upon to perform roles previously fulfilled by foundation staffers.
How will DAF sponsors throw their weight around?
That brings me to a third observation, which is that in a DAF-centric philanthrosphere, it would be a mistake to underestimate the quiet power of the DAF sponsors themselves. Despite marketing themselves as unobtrusive middlemen, many of the organizations hosting DAFs are large enough to vie with and surpass the nation’s biggest foundations in terms of assets and money out the door. Fidelity Charitable, the nation’s largest DAF sponsor, oversaw $10.3 billion in giving in 2021. Compare that to the Gates Foundation’s $6.7 billion.
With such size comes influence, both over the evolution of philanthropy as a whole and over how donors choose to recommend individual grants. The biggest sponsors, like Fidelity Charitable, Schwab Charitable, the Silicon Valley Community Foundation and NPT itself, mostly maintain a policy of ideological neutrality, allowing DAF donors to recommend gifts — beneath a veil of anonymity — to problematic or controversial charities if they wish. Allowing this is a choice on the sponsors’ part, since it’s technically their money.
Parallel to these “values-neutral” behemoths is an expanding array of smaller, values-oriented intermediaries that offer DAF accounts to donors who share their worldviews. The largest is the National Christian Foundation, but plenty of others exist and are growing on either side of the political divide — say, Tides on the left or DonorsTrust on the right. Unlike the Fidelities and Schwabs, these sponsors are more likely to engage in donor organizing, cultivating communities of DAF holders to align their giving around a certain set of values and policy priorities. This can include mega-donors who move their money through these groups and fund controversial causes with no transparency to speak of.
There’s also the issue of where the money’s invested. Just as the money in DAF accounts technically belongs to the sponsor organization once the donor takes their tax deduction, so does final say over how investments are allocated while they’re parked in DAFs, which could be forever.
The biggest sponsors’ default position is to invest with the traditional aim of maximizing returns. Some offer donors the option to recommend impact-oriented investment approaches, but as with foundation endowments, the majority of this money remains bound up in the traditional economy, with all the problems that entails. For reference, NPT places the total value of DAF assets at $234.06 billion in 2021.
All of these groups — including DAF sponsors and the wealth management industry with which they’re inextricably bound — are a powerful constituency with a vested interest in maintaining a status quo where DAF assets and contributions keep growing, to the point, one assumes, that they surpass foundations in terms of actual money on the books. If it does come to pass, that’s a future when the current rules mandating payout and ensuring transparency make even less sense than they do now.
Editor’s note: This article was updated to include additional context regarding NPT’s figures for average DAF account size.