The Year of Donor-Advised Funds?

Many charities dislike donor-advised funds – they want direct donations now, not gifts, possibly larger, in the future. Many individuals and families love them.

According to data in the WSJ,  contributions to donor-advised funds have grown by double digit rates for seven years in a row. At the end of 2015, donor-advised funds held more than $78 billion. And that was after paying out over $14 billion to charities during the year.

Could President-elect Trump's proposed income tax changes, including a large standard deduction and a cap on itemized deductions, slow the growth of donor-advised funds in years to come?

Will donors try to beat the tax changes with a surge in donations this year?

Down With Donor-Advised Funds?

They're like charitable foundations for the millionaires next door. Fidelity launched the first donor-advised fund in 1991. The idea proved remarkably popular, prompting other companies to offer DAFs. Today the funds of Fidelity, Schwab and Vanguard rank among the top-ten recipients of tax-deductible dollars.

And there's the rub. With more philanthropic dollars flowing into DAFs, fundraiser Alan Cantor charges, actual charities are losing out:

"Giving USA" reports that charitable giving from individuals in recent decades has consistently hovered at around 2 percent of disposable personal income. While overall giving to charity as a percentage of income has remained flat, dollars flowing to DAFs doubled from 2009 to 2012 (reaching $13.7- billion), according to the National Philanthropic Trust’s 2013 Donor-Advised Fund Report, and the percentage of charitable giving going to donor-advised funds also doubled (to 5.7 percent of the $240.6- billion of all giving from individuals, as reported by "Giving USA"). It’s largely a zero-sum game: Money going into DAFs is essentially subtracted from other charitable giving.

Jesse Eisinger at DealBook echoes that criticism, noting proposals that would require donor-advised funds to distribute their assets quickly, within five or seven years.

Such a rule would doom DAFs to oblivion. Clearly, many donors like the idea of building mini charitable foundations, funds that can serve as philanthropic training wheels for the next generation. Vanguard pitches the possibilities here.

Whether DAFs, like dynasty trusts in a number of states, should be allowed to last forever is another matter. If family trusts become limited to a term of ninety years, shouldn't DAFs be limited, too?

Charitable foundations have to distribute a portion of their assets each year. DAFs at present do not. Is that difference likely to last?