Donor Advised Funds (DAFs) – Resolving weaknesses with self-regulation

All those often cited reasons why DAFs are here to stay do not mask that there are issues related to them. A number of the matters are resolvable and they can be addressed quickly by the DAF industry itself.

What are some of the major complaints? Here are three:

  1. Charities feel they have poor access to the billions of dollars in the 480,000 individual DAF accounts housed and administered by the more than 1,000 DAF sponsors. Charities and the DAF sponsors should sit down together and find ways to provide better access and transparency to the DAF accounts without undermining donor confidentiality. A simple action would be for the DAF sponsors to send an annual “report” to each charity detailing what grants were sent to their charity. With that information charities can then engage these donors in healthy discussions about annual, major and planned recommended grants from the individual donor-advised accounts.
  2. There is a perception that some large individual donor-advised accounts have issued minimal, even zero, grants out for the public benefit. There may be reasons why a donor chooses to hold back grant recommendations (for example to make a big splash grant recommendation to a charity at a pivotal point in time) but this still feels contrary to the spirit of DAFs. Maybe it’s time for a required annual payout for each account? Or jump up to a (5%?) on individual DAF accounts over a threshold amount (say, $10 million?). These feel like reasonable steps and would add millions to the public good.
  3. Private foundations are able to skirt their annual 5% payout requirement with distributions to DAFs. Again, that just does not feel right. Foundations work within the bounds of the law today but none of the 5% payout is guaranteed to reach the positive missions around us. Make the foundations distribute their minimum 5% or more to operating charities, or require the 5%+ payout to flow through the DAF within twelve months. Quite simply, this loophole allowing foundation distributions to be held into future years at DAFs should stop.

DAFs are here to stay. That’s a good thing for America. And DAFs will be better if these three issues are addressed with dialogue and action. And rather than waiting for these changes to be legislated into action, DAFs should take the lead and agree to implement these changes on their own, by a sort of DAF mutual declaration.