Shariq Siddiqui: As donor-advised funds grow, there are concerns

Indiana University’s Lilly Family School of Philanthropy released its annual Giving USA report this summer. It showed that, for the first time since the Great Recession, giving in the United States declined. This is despite the presence of what normally are indicators of positive philanthropy, such as GDP growth and a strong stock market.

Despite this concerning data, it is important to note that certain kinds of giving did increase. For example, charities experienced an increase in giving by donor-advised funds.

DAFs are philanthropic “savings accounts” that allow donors to give an irrevocable gift to a sponsoring organization. Once donors make the donation, they receive a receipt. They cannot take the funds back, and the sponsoring organization is not required to give the money to the cause the donor selects (although, traditionally, sponsoring organizations try to implement the donor’s wishes if legally possible).

Common forms of sponsoring organizations include community foundations or commercial entities like Fidelity. While DAFs are a small part of philanthropy, they have grown to a point that, in 2018, Fidelity rose to the top of The Chronicle of Philanthropy’s Philanthropy 400 report.

A number of concerns have been raised about DAFs. First, just because a donor gives money to a DAF in a given year and receives the tax benefits in that year doesn’t mean those funds have to be given out to a charitable cause that year. It suggests that tax policy subsidizes charitable “savings” rather than giving. However, this reality might have been beneficial to charitable organizations last year. Funds that had been held in DAFs given to charitable organizations in previous years were donated at a time the sector was seeing a decline in giving.

Second, donors can be anonymous. Charitable causes only know that the funds are coming from the sponsoring organization. This makes stewardship difficult and makes it difficult to implement development strategies resulting in sustainable fundraising practices. Furthermore, it should be concerning that certain people can anonymously have greater influence over certain charitable causes. However, according to Nonprofit Quarterly and The Chronicle of Philanthropy, Fidelity reports that only 3% of its donors chose to be anonymous.

The advantage of hosting a DAF at a community foundation is that it can provide all the legal benefits of a commercial sponsoring organization but can also provide important advice on what local philanthropic investments might be critically needed. Central Indiana Community Foundation has played an important role in helping Indianapolis become the amazing city it is. The challenge is that DAFs are more expensive for foundations to manage because they don’t have the volume commercial organizations have and because of their focus on the community mission.

DAFs are often overlooked by not-for-profit leaders because of their relatively small slice of the giving pie. However, it is clear that these are important funds that can help ease the pain of economic decline or a decline in giving. Furthermore, DAFs are rapidly increasing. According to Nonprofit Quarterly, the number of donor-advised fund accounts has increased 200% over the past five years.

However, it is critical that policymakers find ways to resolve some of the concerns that have been raised about DAFs. These could include requiring that DAFs donate a certain proportion of their net worth annually and that they disclose donor identity to the charitable organization receiving funds, and finding ways to encourage sponsorship of DAFs at community foundations so philanthropic dollars are made available to localized community needs.•

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Siddiqui is an attorney, has a doctorate from the Lilly Family School of Philanthropy at IU and leads the Association for Research on Nonprofit Organizations and Voluntary Action. Send comments to ibjedit@ibj.com.

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