California Would Be First State Law to Reach Donor Advised Funds
Editor’s Note: A donor advised fund (DAF) is a charitable giving vehicle that allows donors to make a tax-deductible contribution to the fund, and to recommend grant distributions at a later date to qualified charitable organizations. DAFs have become popular tools for high-capacity givers in recent years, but California is now attempting to impose regulations on this mechanism. This article, by the general counsel of The Non-Profit Alliance, clarifies key issues related to donor advised funds and explains why the Non-Profit Alliance is opposed to the currently proposed California legislation.
The explosive growth of donor advised funds (DAFs) has been widely reported in both popular and trade media. The National Philanthropic Trust reports, using 2018 data, $37 billion in gifts to sponsoring organizations and $23 billion in grants from sponsors to public 501(c)(3) charities, amounting to 13 percent of all individual giving.
Mid-level and major gift officers who once struggled with the operational aspects of properly attributing DAF contributions have come to recognize and even embrace DAFs as a desirable gift vehicle for donors in their stewardship portfolios. But, the DAF boom has also brought forth a critics’ boom, some of it raising arguably important issues.
Generally lacking in much of the criticism has been data reinforcing the critics’ premises. “Policy concerns” are generally instances that “could” happen, regardless of whether they are actually happening. The following fact-checker parses popular hype from reality:
Concern: There can be a long gap between a DAF donation and the attending tax deduction and subsequent grantmaking to a charity.
Fact-Checker: Yes, there can be, but is there? A study by the largest DAF sponsoring organization shows that 75 percent of donated dollars are granted within five years (Fidelity Charitable, 2017). A study by independent researchers (Heist and Vance-McMullen, 2019) reports a median “flow rate” of 87 percent; that is, in a given year total grants are equal to 87 percent of incoming contributions.
Concern: DAF contributions may never result in grants.
Fact-Checker: It’s difficult to parse how that might happen. The original donor has made an irrevocable gift. If the account remains dormant long enough or a donor dies leaving no successor, then the sponsoring organization directs the grant according to policies that vary from sponsor to sponsor.
Concern: Grants are reported only in the aggregate.
Fact-Checker: They are reported in the aggregate, but not “only.” Individual grants of $5,000 and more are reported on the sponsor’s federal Form 990, Schedule I. In graphic illustration, Fidelity Charitable’s 2017 Form 990 devoted 17,233 pages (not a typo) to approximately 140,000 grants.
Concern: The potentially anonymous quality of DAF grants makes them attractive vehicles for funneling dark money to overtly political campaigns.
Fact-Checker: It is hard to figure how this might come about, short of out-and-out fraud for which no additional regulation is required. A DAF grant may go to an entity other than a 501(c)(3) charity in only very narrow circumstances. A 501(c)(4) organization “may” receive a DAF grant given for exclusively charitable activity of the (c)(4). However, the monitoring obligations of such a grant are extensive, as are the penalties upon DAF donor and DAF sponsor. The result is that many sponsors (e.g., very large commercially-connected ones such as Fidelity, Vanguard and Bank of America) will categorically only grant to a 501(c)(3).
Concern: Administrative fees might not be reasonable and could be eroding the amounts intended for charity.
Fact-Checker: People might not agree on what are “reasonable” fees, but they are definitely not in hiding. The administrative fees of six of the largest sponsors can be discerned in two (five of them) or three clicks (one) on the respective websites. Four of these are attached to commercial entities and two are independent. Their fees differ, but not by much. Additional regulation would naturally increase overhead costs and administrative fees, and therefore reduce the amount of funds ultimately granted out.
First Proposed Regulation
California is the first state to introduce legislation that attempts to regulate DAFs. The original iteration of Assembly Bill 1712 in early 2019 contained three novel additions to the reporting and compliance requirements already imposed on sponsoring organizations due to their status as 501(c)(3) organizations soliciting contributions in California. First, and foremost, sponsors would have to “disclose information about individual funds or accounts” on top of the existing Form 990 requirement of reporting on grants of $5,000 and more.
Noted by most opponents was the considerable cost imposed on sponsoring organizations to produce a far deeper reporting dive than currently required. Consider the amount of data already reported by Fidelity Charitable, for example. Its Form 990 is more than 17,000 pages. Fidelity permits grants as low as $50. The data scale would be massive. Whether Fidelity or a small community foundation, such costs — sooner or later — might well be borne by individual account holders, diminishing the amount available for charity.
Seemingly innocuous, but provocative in fact, is the authority given to the state’s attorney general. The legislation specified the reporting of sponsors’ existing policies toward inactive funds, but mandated no policy, and “disclosure” if fund assets were invested with a commercial counterpart. The attorney general was given the authority to make rules about any information prosecutors might want concerning individual accounts.
This brought on a storm of protest and concern from California grantmakers and community foundations, The Nonprofit Alliance, and others. A common complaint of all was the threat to anonymity that could arise from reporting details of each account and from the attorney general’s unlimited grant to require what he wished. Indeed, nothing in the bill would have prohibited requiring donors to be explicitly identified. The concern was not contrived. The attorney general has demonstrated an acute interest in identifying donors, having successfully litigated for five years to compel all solicitation law registrants to include Schedule B of Form 990 in its filings (Schedule B identifies major donors.).
1712’s Next Chapter
The legislation did not advance during California’s 2019 session. State Assembly member Buffy Wicks (D-District 15) brought an amended version back this year, introduced on Jan. 7. One amendment sought to forestall the opposition of California community foundations by carving out sponsors that held less than $300 million in assets. While this would, in fact, relieve many of a reporting obligation, at this writing the organized opposition remains.
Another amendment prohibited the attorney general from requiring a donor’s name, address, telephone number, or email address. While this sought to obviate the anonymity concerns, opponents have, thus far, not been swayed. Fears remain that enough account detail (e.g., where stocks or other financial instruments have been donated) could lead to donor identification.
On Jan. 14, A.B. 1712 went for hearing before the Assembly Judiciary Committee, from which it was approved by an 8-2 vote. Noteworthy were comments made by Assembly Member Lorena Gonzalez (D-District 80), a member of the committee and chair of the Appropriations Committee where 1712 was scheduled to head next. Paraphrasing and condensing her on-record comments, Gonzalez wanted to know what problems were being addressed and how 1712 would solve them.
On Jan. 22, recognizing that the bill would not successfully pass out of the Appropriations Committee, A.B. 1712’s author and sponsors pulled the bill and announced that a new bill to replace 1712 will be introduced this month. That will once again start the process in the Assembly Judiciary Committee, with a May 15 deadline to pass out of Appropriations for it to proceed. The DAF bill’s future and its potential impact on reporting costs and donor anonymity is in question.
The Nonprofit Alliance strongly asserts that a significant source of charitable funds should not be hampered in any fashion that is not supported by hard information and clear public policy delineation.
Robert Tigner is general counsel of The Nonprofit Alliance in Washington, D.C.