Nonprofit Spotlight: Criticism against donor advised funds is ridiculous
The Community Foundation of Western Nevada sponsors this content
August 27, 2018
Have you heard or read about the criticisms of Donor Advised Funds, or DAFs, in the news recently? In the philanthropic world, it appears it is a topic everyone is talking about.
A donor advised fund is a charitable giving vehicle administered by a public charity. It is created to manage charitable donations on behalf of organizations, families, or individuals. Critics claim that rich people use a donor advised fund to avoid paying taxes, to give covertly and that they don't provide enough of a benefit to the needy.
I say these claims against donor advised funds are ridiculous.
A donor advised fund can be a person's entry into philanthropy. Most of us write checks to charities, but when a person establishes a DAF and makes their first gift there, it is usually with an appreciated asset like stock or land, and it is typically several times larger than their prior giving level. Scaled up giving means more charitable benefit for our community.
As to the criticism that DAFs are used to avoid taxes — who doesn't try to reduce their tax liabilities? Strategies for minimizing our taxes influence our choice of what we buy, where we live, how much we direct to our IRA and how we plan for retirement. Of course, the tax benefit will be considered when planning for and making decisions about a substantial charitable gift.
It is a misconception that the money in a Community Foundation donor advised fund just sits in the bank and is held rather than being granted to charitable organizations. A DAF balance is typically part of the donor's charitable planning which includes deciding how much to distribute each year.
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We work with donors who are building up an endowed DAF, who make annual grants, who make multi-year grants, and who time additional contributions to their DAF's based on infrequent financial liquidity events and other life milestones such as retirement. Intentional planning for charitable goals means more money for charity.
Anyone who considers makes a charitable gift solely to avoid paying tax is disappointed when they look at the numbers. For example, if you sell $10,000 worth of stock and have a gain of 80%, your tax at 20% would cost you $1,600, and you'd end up with $8,400. If you gift that stock to avoid that tax you have zero dollars, although through your DAF charities will receive the full $10,000.
You may get a tax deduction that would save you perhaps $2,500, but clearly you come out ahead financially if you keep the stock and pay the tax rather than donating. How can anyone say that a DAF isn't anything but a wonderful charitable gift when the donor is giving up the asset and the income in favor of giving the asset away to help others?
DAFs are also criticized because they can be used to make anonymous grants. I don't find it unusual that people seek privacy. And everybody certainly has that right. We have worked with donors who have a have a fundamental belief that quiet giving without any recognition is the best way to give.
It is subjective to complain that charitable giving through a donor advised fund provides less benefit to the "needy.” Who decides what need is real? We each get to decide what touches our heart, what we love to support and who and what we want to help. Generous people give to a variety of causes which improves our community life for everyone, such as supporting the museums, natural resource organizations and the environment, educational institutions, and the arts.
Finally, DAFs been criticized for having no required annual minimum grant payout, unlike private foundations that are required to grant 5% annually. National studies show that DAF's grant out more than 10% annually. Unlike many private foundations, the clear majority of DAFs are typically temporary, they will be entirely granted out during most donors' lifetimes.
Community Foundations should not have to defend the donor advised funds they administer. When I see disparaging articles, one of which said that DAF's represent the worst of philanthropy today, I think, who are these people and what do they have to benefit by criticizing people's generosity?
Donor Advised Funds encourage giving to charity. Gifts to DAFs aren't a hack or just the appearance of giving. They are irrevocable gifts by genuinely generous people. And in our experience, giving through DAF's embraces giving as a family culture and value. They often lead to more charitable giving through donors' financial and estate plans. The number and amounts of legacy gifts that are in place right now through the Community Foundation are astounding, and the local support and good that will result when those estate gifts are received is immense.
Let's celebrate those people who choose to make charitable gifts. Our local charities depend upon their generosity. If you'd like to learn more, please give us a call, send us a note, or stop by the office
The Community Foundation of Western Nevada is your community foundation.
This article was written by Chris Askin, President and CEO of the Community Foundation of Western Nevada, which sponsored this content.