Ep. 620: Reforming Donor Advised Funds

Donor-advised funds (DAFs) may be the greatest innovation in American philanthropy in the last generation. DAFs solve real problems. They allow donors to contribute appreciated assets without triggering capital gains taxes. They simplify recordkeeping. They help families think strategically about generosity. Those are real-world benefits. But there are also real-world problems that need to be fixed. Before we get to solutions, though, a little history is in order.

The good news is this problem is not all that difficult to solve, though it will take significant political will. Three reforms deserve serious consideration.

First, Congress should require that assets contributed to donor-advised funds be distributed within a reasonable period. I would suggest three to five years. But any limit — 10 or 15 years — would be better than no limit at all. Such a limit would preserve flexibility while ensuring that charitable dollars eventually accomplish charitable purposes. 

Second, DAF sponsors should publish far more detailed information about inactive accounts, median payout rates, and how long assets remain before grants are recommended. Better transparency would reward sponsors that encourage active generosity while strengthening public trust.

Third, Christian donors should treat donor-advised funds as conduits rather than warehouses. This recommendation is particularly aimed at Christian foundations. The National Christian Foundation has seen its assets under management double in the past five years, to $6 billion. Waterstone, another large Christian foundation, now has nearly $1 billion under management, also doubling in the past five years. The Signatry has grown tenfold during that time, from $81 million in assets to more than $800 million. MinistryWatch tracks 29 Christian foundations, and almost all of them have experienced dramatic growth.

Charitable dollars help no one while the money sits in investment accounts — except for the highly paid executives who manage those accounts.

Donor-advised funds remain a valuable tool. But tools exist to accomplish work. They are not ends in themselves. The measure of Christian stewardship has never been how much we reserve for charity. It has always been how faithfully we put those resources to work.

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