Making Donor-Advised Funds More Effective Instruments for Giving

No doubt, donor-advised funds can be extraordinary vehicles for millions of Americans to get involved in philanthropy. But this cannot overshadow the glaring need for increased transparency, disclosure and mandatory payout rates to ensure that nonprofits and the public get the charitable benefit they deserve from foundations and donor-advised funds.

What is Transparency and Accountability Worth?

A common argument by those against mandating disclosure for donor-advised funds is that such a requirement would be administratively burdensome and costly. This is the same argument foundations used prior to the advent of public accessibility of the 990PF.

The public has a right to know who or what is exactly is getting supported by charitable donor-advised funds. The public has a right to know who is benefiting from the foregone tax revenues it has entrusted to donor-advised funds to distribute.

For well-intentioned fund managers, the kind of review, analysis, and reporting that would be required with increased transparency will help them weed out donors hiding behind the anonymity of donor-advised funds to do things that might not be all that charitable. In an era where the Council on Foundations is asking for a public discussion of the substance of philanthropy, such substantive accountability should apply to the billions of dollars held by donor-advised funds as well as foundations.

Exceptions to the Rule Don’t Make Regulation Unnecessary.

A number of people have cited exceptions to the rule to justify the continued minimal regulation of donor-advised funds—or even to roll back much of the Pension Protection Act. They claim that entities like the Domini Global Fund or some of the small donor-advised funds set up by community residents for community improvement projects that might be adversely affected by a 6 percent mandatory payout or by disclosure requirements.

To protect those worthwhile examples of donor-advised funds by allowing the thousands of others to go along their ways is upside-down policy-making. There are vehicles for charitable giving that exist or can be created, not to mention the opportunity to make sure there are built-in safeguards in future regulatory policies, to allow these worthwhile entities to function and continue without giving carte blanche to the ones that do not quite exhibit the same community or redistributive benefit.

Legal Doesn’t Mean Right.

A spokesperson for the Council on Foundations noted that most donor-advised funds have lawyered up to stay this side of legal. Of course everyone has lawyered up. How else can the continued operations of the National Heritage Foundation, profiled in the summer 2005 issue of Responsive Philanthropy, be explained after several IRS legal assaults? As the Boston Globe’s Fall 2003 Spotlight Team series on foundations [1] amply demonstrated, some egregious foundation behavior failed to attract what the then head of the Council referred to as “perp walks” because the foundations were well lawyered to operate through the lacunae of laws and regulations. The notion that DAFs have also sought legal advice to operate “legally” doesn’t make some of their grantmaking and operations necessarily right, especially in an environment of weak regulations and even weaker IRS oversight.

Be Wary of the Average.

As the Chronicle of Philanthropy’s recent study on donor-advised funds noted, many officials from donor-advised funds claim that there’s no need to minimum distribution requirements because the distribution rate for these funds averages above the current 5 percent mandatory payout rate for private foundations.

However, the high payout rates reported by some donor-advised funds managers are not the equivalent of private foundation payouts; they are the averaged payouts of dozens, sometimes hundreds of funds. Therefore, the reported payout rates of 10, 15, or close to 20 percent really reflect the existence of some very high payout funds in the portfolio covering up funds that are paying out sometimes well less than 5 percent.

Also, there is a lesson to be learned in foundations’ own payout history: their annual payout increased when the government increased their minimum distribution requirement. The payout rate should be increased to 6 percent for both private foundations and donor-advised funds to make more funding accessible to the nonprofit sector that continues to be in dire need of financial support.

Donor-advised funds can be effective instruments for charitable giving. But the nation need not rely in all cases on blind faith to assume that what these funds do is automatically always charitable. Wearing the toga of charity does not obviate the need for strong standards and government oversight to ensure that nonprofits and the public get the charitable benefit they deserve from foundations and donor-advised funds.

[1] The Boston Globe, “Some Officers of Charities Steer Assets to Selves,” Oct. 19, 2003; “Charity Money Funding Perks,” Nov. 9, 2003; “Foundations Veer Into Business,” Dec. 3, 2003; “Foundation Lawyers Enjoy Privileged Position,” Dec. 17, 2003; “Philanthropist’s Millions Enrich Family Retainers,” Dec. 21, 2003; “Foundations’ Tax Returns Left Unchecked,” Dec. 29, 2003.