Growing Giving - American Philanthropy and the Potential of Donor-Advised Funds

Executive Summary

At 2.2 percent of GDP in 2006, the most recent comparable year, U.S. charitable giving is approximately twice as high as that of the U.K. and roughly fourfold that of Ireland, the next most charitable E.U. country. (At the individual level, France and Germany barely give at all.)[1] Yet even as overall wealth has continued to increase in the U.S. (notably, among higher-income households, which are disproportionately likely to make significant charitable donations), overall philanthropic giving has, over the past generation, remained roughly constant as a percentage of economic activity.[2]

Giving has remained flat even as a variety of rationales have emerged for the need for more such giving: declining discretionary government spending because of increased fixed costs; concern, in some quarters, over the efficacy of publicly funded social programs; and new social needs in the wake of stagnant wage growth and decreased workforce participation. At the same time, a new generation of not-for-profits, led by young social entrepreneurs, is injecting both greater dynamism and stiffer competition for funds into the charity marketplace.

Given such conditions, the question of whether total U.S. philanthropic giving remains flat, or increases, becomes increasingly pertinent. One specific, tax-advantaged vehicle for charitable giving, Donor-Advised Funds (DAFs, see box, page 2 in PDF), shows signs—thanks to a 2006 clarification of the federal tax law governing them, as well as their increased marketing by National DAF Sponsoring Organizations (NDAFs)—of becoming a means through which net U.S. charitable giving, along with the funds supporting it, might significantly increase.

This paper examines the potential for further growth in donor-advised funds: recent DAF growth (especially in funds established and marketed by NDAFs) could signal the start of a surge in the volume of total charitable giving, or merely its redirection through a new, more convenient vehicle (rather than, say, cumbersome individual check-writing). This paper concludes that, on balance, DAFs of all kinds—particularly, though not exclusively, accounts held with NDAFs—provide the preconditions for significant growth in overall U.S. charitable giving. If realized, such growth would likely be driven by:

1. Increased giving from increased DAF participation, driven by NDAFs. Since 2007, the year after federal tax law significantly clarified the legal status and reporting requirements of DAFs, the number of such individual accounts held by NDAFs—including NDAFs like Fidelity Charitable, Vanguard Charitable, and Schwab Charitable— increased from 72,590 to 112,170, with the value of assets in such accounts growing from $11.11 billion to $24.82 billion.3 Growth factors facilitated by NDAFs include ease of donation (especially for donations of appreciated assets, such as equities) and control over the timing of donations.
2. Nonredundant charitable giving. NDAF-giving likely complements community foundation–based DAF-giving. DAF account holders in community foundations (which, prior to the growth of NDAFs, had been the most important umbrella organizations for DAF accounts) typically support different charitable causes from those that DAF-account holders in NDAFs do.
3. Increased charitable capital. Such an increase would result from tax-free appreciation of DAF assets (a consequence of the fact that the full amount of funds deposited in DAFs are not typically distributed in the same year that they are donated). Such funds, when held in NDAFs, grow through investment in a mix of mutual funds chosen by their boards. Since 2009, undisbursed funds held in NDAFs have appreciated by $6.56 billion.4 In contrast to private foundations, which must make annual grants equivalent to 5 percent of assets, there is no legal DAF payout requirement—suggesting that such accounts will evolve into thousands of small, individually controlled charitable endowments. Typically, however, NDAFs commit to a 5 percent minimum institution-wide payout requirement that would eventually become binding if institution-wide assets fail to pay out in a timely fashion.

Still, DAF growth is not inevitable. Changes in tax law, such as that proposed in the Tax Reform Act of 2014, could discourage the deposit of funds and assets into NDAF-based and community foundation–based DAF accounts, curtailing overall U.S. charitable giving in the process.

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