Donor-advised funds, the fastest-growing method for charitable giving among Americans, have attracted criticism, including the allegations that these vehicles are used to avoid taxes, that financial services firms impose excessive management fees and that DAFs undermine American philanthropy by not distributing their assets for years, in some cases.
A report released this week by the Manhattan Institute’s Howard Husock finds that most complaints about DAFs are misplaced, and that on balance, they are a boon to the charitable world, although there is room for improvement with regard to how DAFs handle assets undisbursed at the time of a donor’s death.
DAFs and Taxes
According to the report, donors can realize charitable tax deductions relatively easily, especially with vehicles managed by the likes of Vanguard Charitable and Fidelity Charitable, which are tax exempt. Donors can seamlessly transfer assets from their personal accounts into their DAF accounts.
The report says some critics consider this “an enhanced tax deduction,” alarmed that donors can realize a tax deduction with such a transfer rather than contributing funds to an operating charity.
The Manhattan Institute paper counters that DAFs encourage more giving by reducing donors’ tax burden.
It points to a National Philanthropic Trust report that DAF assets grew from $57 billion to $71 billion during 2013–14 and grants held steady at 22% of assets. During the same period, private foundation grants totaled 5.8% of assets.
Schwab Charitable, Vanguard Charitable and Fidelity Charitable house the fastest-growing crop of DAFs, and all charge management fees, according to the report.
A major criticism holds that these sponsors’ business model is to earn a profit from the fees they secure.