June 3, 2022
Donor-Advised Funds (DAFs): Proposed Legislation
Donor-advised funds (DAFs) are funds or accounts
foundations are complicated and costly to set up and run.
established within a sponsoring organization. Taxpayers are
DAFs can also facilitate year-end tax planning, by allowing
allowed to make deductible charitable contributions to
a large contribution in a year when tax rates are higher,
DAFs. Sponsoring organizations are organized as charities
which can be distributed in the following years without
that can receive tax-deductible donations and they in turn
determining the charities to receive deductions. Individuals
make distributions (grants) to active charities. The gift to
may also choose to make large contributions in a single
the sponsor is irrevocable, as in the case of a gift to a
year when deductions can be itemized, rather than making
foundation or any other charity. The donor does not legally
smaller, potentially nondeductible charitable contributions
oversee the payment of grants to charities from the fund,
annually.
which the sponsoring organization determines. Donors
make recommendations for grants (hence donor-advised),
Evidence suggests DAFs are replacing, rather than
and there is general agreement that these recommendations
increasing, charitable giving. A 2021 report by Boston
determine, with few exceptions, the distributions. DAFs,
College Law School Forum on Philanthropy and the Public
like private foundations, can accumulate assets and earn a
Good found that contributions to DAFs rose from 4% of
return tax free, but they are not subject to many of the
total contributions in 2007 to 13% in 2019, whereas total
restrictions on foundations, including the minimum payout
charitable contributions remained unchanged as a share of
rate.
income. The data also suggest that DAF contributions did
not substitute for contributions to private foundations but
Magnitude and Growth of DAFs
rather displaced contributions to active charities. The share
DAFs have been growing rapidly, in part through funds set
of giving to DAFs and private foundations combined grew
up by major financial institutions. Since 2016, contributions
from 18% in 2007 to 28% in 2019. It is possible that DAF
have increased by 90%, and in FY2020, accounted for
giving is offsetting a general decline in giving, such as
10.1% of total charitable giving. According to the National
giving to religious organizations, although most of that
Philanthropic Trust 2021 report, in FY2020, there were
decline preceded DAFs’ growth.
more than 1.005 million individual DAFs, with
contributions of $47.85 billion, assets of $159.83 billion,
A common concern about DAFs and their growth is that
and distributions of $34.67 billion. The DAFs were
charitable contributions do not fully flow to active charities
managed by 55 national charities, 603 community
but may remain in DAF accounts. Assets can also remain in
foundations, and 318 single-issue charities.
private foundations, although there is a 5% minimum
distribution requirement. Contributions as a share of income
Whereas DAFs were originally largely found among
are more restrictive for gifts to private foundations: 30% for
community foundations, grants, assets, and contributions
private foundations compared to 50% for other charitable
are now concentrated in national charities. In FY2020, 61%
contributions. (The 50% limit is temporarily increased to
of grants, 70% of contributions, 63% of assets, and 86% of
60% through 2025.) Gifts of appreciated property are
accounts were in national charities. In FY2020, Fidelity
limited to 20% for gifts to private foundations, but are 30%
Charity donors made 26% of grants; in FY2021, more than
for charities. DAFs are also not subject to the private
286,000 donors had accounts at Fidelity Charity, with
foundation excise tax of 1.39% of investment income or the
grants of over $10.3 billion. The five largest national
private foundation rules on self-dealing. Thus, DAFs allow
charities—Fidelity Charitable, National Philanthropic Trust,
the accumulation of assets without some of the restrictions
Schwab Charitable Fund, Vanguard Charitable Endowment,
imposed on private foundations.
and the Silicon Valley Community Foundation—were
responsible for half the FY2020 contributions.
DAF payout rates (as a percentage of end of previous year
assets) averaged 23.8%. Payouts were 23.9% from national
Average account sizes are smaller among national charities,
charities, 19.8% from community foundations, and 35%
$115,901, compared to $543,553 in community foundations
from single-issue charities. Proponents of DAFs point to
and $244,238 in single-issue charities. The overall average
these measures as indications that DAFs are distributing
account size is $159,019, an amount that has been falling as
more than private foundations, who, according to
the relative size of assets in national charities has been
FoundationMark, typically distribute in the aggregate about
growing.
8% of assets.
Benefits and Concerns About DAFs
A 2020 National Bureau of Economic Research study by
DAFs are a simpler way to provide sustained giving than
James Andreoni and Ray Madoff (Working Paper 27888)
through a private foundation, and they are practical for
contended that the payout rate is overstated for determining
those with smaller amounts of charitable giving. Private
how much money is going to charities. The payout rate,
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Donor-Advised Funds (DAFs): Proposed Legislation
while comparable to that used by foundations, is measured
deductions would not be allowed until the cash is
as grants divided by beginning of year assets. They indicate
distributed. Distributions would be on a first-in, first-out
that a proper measure is grants divided by the sum of end of
basis so that distributions would first come from preexisting
year assets plus grants. (The denominator is also equal to
amounts in the fund. The distribution would not be able to
beginning of year assets plus contributions plus earnings.)
be made to another DAF to permit deductibility.
This method has significant effects when assets are growing
Distributions would have to be made within 50 years or a
rapidly, and the revised measure changed the payout rate
50% excise tax would apply.
from 22.4% to 14.7% in 2017. This measure was used in
the past by the National Philanthropic trust and using this
The bill would create two categories of qualified DAFs not
method for FY2020 resulted in a payout rate of 17.8%.
subject to these restrictions. A qualified DAF in general
would terminate advisory privileges on a contribution and
Although payout rates from assets are higher than the
its earnings after the last day of the 14th taxable year
required minimum rate for private foundations, they reflect
beginning after the contribution year. The donor would
a mix of DAF objectives. Some accounts pay out most of
have to specify a preferred organization to receive the
their contributions as they are used for simplifying tax
distribution after 14 years. A 50% excise tax would be
planning, whereas others maintain funds in accounts. The
imposed on the sponsoring organization for amounts not
Andreoni and Madoff study found that even among DAF
distributed after 14 years. A qualified community
sponsors, 24% had payout rates of less than 5%. Some
foundation DAF is not subject to these restrictions but the
sponsors also provide for endowment DAFs that pay grants
bill would limit advisory privileges to $1 million and
out of earnings.
require a 5% payout from each account. No deduction for a
nontradeable asset would be allowed to either type of
No aggregate data exist on the payout rates for individual
qualified DAF until the asset is sold.
accounts in sponsoring organizations, but within sponsoring
organizations, high payout rates for some accounts could
The public support test requires that a third of contributions
conceal low or no payout rates for accounts. A Williams
for charities come from the public; otherwise, the charity
and Kienker study of 2,600 DAF accounts in Michigan
may be classified as a private foundations. The bill provides
community foundations found that, for 2020, 57% had
that contributions from DAFs would not be counted unless
distribution rates of less than 5%, including 35% of
the donor is identified.
accounts that had no distributions. A Vance-McMullen and
Heist study of 13,000 accounts in community foundations
The proposal also includes some provisions for private
and religious-affiliated sponsors found 35% of accounts
foundations unrelated to DAFs. One provision would
made distributions of less than 5% over the four years of
disallow administrative expenses from qualifying for the
the study, including 14% that made no distributions.
5% minimum distribution if made to disqualifying persons
Neither of these studies, however, included accounts with
(such as substantial contributors). The bill also includes two
national sponsors that hold the most assets.
provisions favorable to private foundations by eliminating
the excise tax on investment income for foundations that
Some are concerned that DAF contributions to other DAFs
distribute at least 7% of assets or foundations limited to 25
are reported as charitable distributions and that private
years.
foundations’ contributions to DAFs are counted as part of
their minimum distributions.
Prior Proposed IRS Regulations
The public support test in the ACE Act was also included in
Legislative Proposals
a notice to consider regulations (IRS Notice 2017-73). The
The Administration’s FY2023 budget proposal contains a
proposed regulations would also have asked for public
narrow provision that would affect DAFs, and more
comment on the inclusion of contributions to DAFs by
extensive legislation, the Accelerating Charitable Efforts
private foundations in satisfying the 5% minimum payout
(ACE) Act, has been introduced in Congress.
rule. These proposed regulations have not been developed
further.
Administration Proposal
The FY2023 budget proposal would clarify that a
Issues
distribution by a private foundation to a DAF does not
As discussed earlier, one of the concerns addressed by the
count in satisfying the 5% minimum distribution
ACE Act is to speed the distribution of funds to active
requirement unless the DAF funds are distributed as grants
charities. Opponents argue that these rules would reduce
by the end of the next year.
charitable giving, although, as noted above, data on giving
trends suggest that contributions to DAFs have displaced
ACE Act
other giving rather than increasing overall giving.
The ACE Act, S. 1981 (King and Grassley) and H.R. 6595
(Pingree, Reed, Khana, and Porter), includes the budget
One particular concern is the requirement that DAFs
proposal regarding donations by private foundations but
identify donors for purposes of the public charities support
would make a broader set of changes to DAFs.
test. It is argued that this provision may make it more
difficult for charities with sensitive or controversial issues
For existing DAFs, contributions of property (noncash
to raise funds.
contributions) would not be deductible unless the
sponsoring organization sells the property for cash and
Jane G. Gravelle, Senior Specialist in Economic Policy
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Donor-Advised Funds (DAFs): Proposed Legislation

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