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The Dark Side of Donor-Advised Funds (DAFs)

   Apr 23, 2024

Donor-advised funds (DAFs) offer a convenient way for donors to take a tax deduction for the charitable donations they make today while buying them time to decide which charities are worthy of those donations later. The funds donated are held in investment accounts operated by nonprofit community foundations like the National Philanthropic Trust (the Trust), or the charitable arms of large financial services firms such as Fidelity Charitable, Schwab Charitable, Vanguard Charitable, and many others.


Unfortunately, the convenience of donor-advised funds comes at a high cost. The Trust estimates that nearly $229 billion in charitable assets were held in DAFs as of the end of 2022. There is currently no time limit with respect to when donor-advised funds must be distributed to charities from these accounts. In theory, this money intended for charities can languish in DAFs indefinitely. DAFs therefore have the effect of lowering the tax base today while not guaranteeing that a commensurate amount of funds will be made available to charities to provide services and conduct other important work in the same year or even in the same decade. 


The National Philanthropic Trust published the information displayed in the chart below as part of its 2023 Annual Donor-Advised Fund Report, which examined “data from 1,151 charitable organizations that sponsored donor-advised funds (DAFs) in 2022.”


Charitable Assets$231.35$228.89-1.1%
Total Grants$47.83$52.169.0%
Total Contributions$78.44$85.539.0%
Payout Rate*28.7%22.5%-6.2 percentage points
Average DAF Account Size$122,162$117,466-3.8%
Number of DAF Accounts1,893,7621,948,5452.9%

Inequality.org, a project of the Institute for Policy Studies (IPC), reported that in 2021 alone, $2.5 billion in “grants” made from donor-advised funds did not go to “working” charities at all but rather consisted of “DAF-to-DAF transfers to and from community foundation sponsors…“ An “enormous amount of money [is] cycling between giving vehicles rather than being distributed outright to charity,” Inequality.org reported in a related article.


This raises an additional concern that the statistics published by various DAF sponsors citing the amount of grants being distributed from their funds each year may be misleading or overstated. In 2020 The National Bureau of Economic Research (NBER) published a working paper entitled “Calculating DAF Payout and What We Learn When We Do It Correctly.”  NBER’s research found that the payout rate method commonly used by the nonprofit industry may be overstating payouts by as much as 50%. For example, the revised 2017 payout rate based on NBER’s calculations would be reduced from 22.4% to only 14.7%, with DAF-to-DAF transfers cited as a contributing factor.   

Dark Money


The Baker Institute for Public Policy, a non-profit, nonpartisan policy research organization based at Rice University in Houston, Texas recently raised concerns that donor-advised funds could be abused to funnel money into lobbying efforts undetected. When a wealthy donor contributes significant funds to their private foundation, they are subject to public disclosure and annual minimum distribution requirements while also being prohibited from engaging in lobbying activities. Whereas, when the same donor contributes to their donor-advised funds, they avoid these restrictions and public disclosure. The wealthy donor can make large grants to publicly supported entities that are allowed to spend up to $1 million per year on lobbying without penalty and without disclosing their major donors.

Tips For Using Donor-Advised Funds Responsibly


While there is room for improvement with respect to how DAFs are regulated, donor-advised funds can be a win-win for donors and charities when used responsibly. CharityWatch offers the following tips for doing just that.


Tip 1: Do your research before giving


Just as it is not good to let funds languish in DAFs for years before distributing them to charities that can put them to good use, donating impulsively is also a bad strategy for maximizing the impact of your donations. View A+ to F charity ratings, including CharityWatch’s list of Top-Rated charities, to identify efficient and responsible charities to support before donating through your donor-advised fund.

Be cautious about relying on charity ratings housed in large, online databases that may lack rigor due to relying too heavily on automation of unaudited financial data, or on crowdsourcing flattering information directly from the charities being rated. 


Tip 2: Distribute funds in a timely manner


Once you know which charities you want to support, be mindful to not wait too long to think about the timing of how much you want to distribute and to which charities. Those dollars are not doing anything charitable until they leave your DAF and are granted to the charities of your choice.


Tip 3: Maximize your tax deduction while doing good

If you have profitable assets in a brokerage account, you may be able to bypass capital gains taxes you may otherwise owe from selling them by donating those to your donor-advised fund instead. You can generally deduct the full market value of the donated assets if you owned them for more than a year, limited to 30% of your adjusted gross income. The excess can generally be carried over for the next five tax years.

If your goal is to exceed the standard deduction by maximizing your itemized expenses in a particular tax year, consider making one large donation into your DAF in that tax year, then distribute those funds to worthy charities over the next several years. Doing so may offer a better bang for your buck from a tax savings perspective than would donating the same total amount into your DAF over multiple calendar years. 

The above is offered for informational purposes only. Contact your DAF sponsor and tax advisor directly for more information on how to maximize the benefits of your DAF and for tax advice specific to you. 

Donate to CharityWatch Through Your Donor-Advised Fund

This information was made possible by contributions from donors like you. As the only charity watchdog in the United States, CharityWatch relies on public support to fund our work with journalists, our research into wrongdoing in the nonprofit sector, and our charity ratings. Your donations are noticed, needed, and greatly appreciated. Use DAF Direct or your account with the financial services firm sponsoring your DAF to make a charitable donation to CharityWatch: Tax ID number 33-0491030, American Institute of Philanthropy, dba CharityWatch.