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Manhattan Institute

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The Promise — And a Problem — of Donor-Advised Funds for Charity

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The Promise — And a Problem — of Donor-Advised Funds for Charity

November 29, 2016
OtherPhilanthropy

Abstract

Donor-advised funds (DAFs), individual charitable accounts that can be used to make grants over a donor’s lifetime, are the fastest-growing way in which Americans set aside money for charity. The sharp growth of DAFs has also attracted criticism, including the allegation that the charitable arms of national financial-services firms—such as Vanguard Charitable, Fidelity Charitable, and Schwab Charitable—impose excessive fees to manage DAFs; and that, because assets placed in DAFs may not be distributed for years, DAFs are “undermining” American charity. This report examines such critiques.

Key Findings

  • DAFs are a legitimate vehicle for charitable giving, not a ruse to avoid taxes. By reducing donors’ tax burdens, DAFs encourage more charitable giving than would otherwise exist. According to the National Philanthropic Trust, as DAF assets grew from $57 billion to $70.7 billion during 2013–14, DAF disbursements (i.e., grants) held steady at 21.9% of assets—well above the 5% disbursement rate required of private foundations. (During the same period, grants from private foundations totaled 5.8% of assets.)
  • The use of national financial-services firms to manage DAFs is not diverting money from charitable giving. The management fees charged by such firms are comparable with those charged by local community foundations, the other major “sponsor” (i.e., manager) of DAFs.
  • The overwhelming majority of DAF assets are disbursed to charities during their donors’ lifetimes. However, national financial-services firms do hold small amounts of DAF assets that have not been disbursed at the time of their donors’ death and have not been earmarked for disbursal to particular charities. Ideally, these “orphan assets” should be automatically distributed to donors’ previous recipients, in proportion to their previous giving patterns.

READ FULL REPORT

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Howard Husock is the Vice President of Research and Publications at the Manhattan Institute. From 1987 through 2006, he was director of case studies in public policy and management at Harvard University’s Kennedy School of Government

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