Larger donor-advised funds are slower to distribute their assets, study finds

According to a new study of a limited number of account sponsors, nearly 80% of donor-oriented fund accounts distribute money to charities quickly enough to deplete initial contributions to those accounts within 15 years.

However, the study found that funds with the largest assets distribute money at slower rates – so the overall payout picture isn’t as robust as that 80% figure suggests. .

The Donor Advised Fund Research Collaborative study was funded by the Bill & Melinda Gates Foundation. The collaboration is building a database to provide information on how donor-advised funds are being used.

DAFs allow donors to contribute cash, stock and other assets to accounts and receive an immediate tax deduction. Donors can then decide which charities will receive the money and when, sometimes several years later.

Because the funds hold so many assets, they have become an important source of fundraising – and the subject of much discussion on Capitol Hill and in other political circles because they are not subject to distribution rules. , unlike the foundations.

Even so, in 2020, the latest year for which information is available, grants to charities from the top 10 DAFs totaled $22.41 billion. This is roughly double the amount that the 10 largest foundations gave in the same year.

The researchers said the new study can help policymakers understand the landscape and rules that might be needed for donor-advised funds and can help fundraisers make better decisions about how to apply for grants. close to them.

The study found that 52% of accounts have four-year average annual payment rates of 5% to 49%; 35% distribute less than 5% and 13% of accounts distribute 50% or more.

The study is likely to provide ammunition to both sides of the debate over whether tighter regulation of donor-advised funds is needed, including rules that would require minimum annual installments.

A key congressional bill would allow donors to get an upfront tax deduction for donor-advised fund deposits only if they distribute the money to active charities within 15 years.

For community foundations and certain other organizations, such as Jewish Federations, the bill would exempt donor-advised fund accounts of $1 million or less from any payment requirements; large accounts should distribute at least 5% per year.

Proponents of the legislation say too much money sits idle in donor-oriented fund accounts for too long, generating fees for those who manage them but doing nothing for charity. Opponents say legislation is unnecessary because donor-advised disbursement rates are robust, and they say stricter rules would discourage donations through DAFs.

The study has important limitations. It did not review donor-advised fund accounts held at organizations with commercial subsidiaries, such as Fidelity Charitable and Vanguard Charitable, which are among the largest sponsors of such accounts. Instead, the researchers looked at the activity of 13,000 accounts at 16 community foundations and five affiliated religious organizations.

Additionally, accounts with over $100 million in assets have been excluded to protect donor privacy (there are relatively few accounts above this level), and research suggests that the largest accounts tend to have the lowest payout rates.

Daniel Heist, assistant professor at the George W. Romney Institute for Public Service and Ethics at Brigham Young University, and Danielle of Vance-McMullen, assistant professor at the School of Public Service at DePaul University, have conducted the study. Both have experience in fundraising.

Heist said they plan to do further research involving accounts of donor-advised funds held at organizations with commercial subsidiaries. He noted that “the customer relationship is different” in these organizations, which makes it more difficult to obtain data even if it is anonymized.

Another shortcoming: the study does not exclude transfers from one donor-advised fund to another; these are counted as “payment”, just like a grant to an operating charity. Vance-McMullen says future research will rule out such transfers. She said these transfers likely had little impact on results such as the median amount distributed, although she acknowledged that they could affect some statistics, such as the total grants awarded by large organizations.

Despite the limitations, Heist and Vance-McMullen said the data from the new study contains important information for fundraisers. Heist said the research underscores the importance for fundraisers to know which of their clients with donor-referred fund accounts donate money to charity each year and which rarely give large grants because different donors require different approaches. For some of the larger donors who give less frequently, fundraisers may want to focus on bequests, Heist said.

Another insight from the research: Although the flow of money into donor-defined fund accounts tends to spike at the end of the year, as it does for most types of charitable activities, likely largely due to donors claiming tax deductions, the granting of grants from donor-advised funds tends to be more regular throughout the year.

The takeaway, Heist says, “If I’m a major gifts manager, I don’t have to wait until the end of the year” to ramp up outreach to donor-referred fund account holders.

Heist noted that some of the largest donor-advised funds accounts studied were formally structured as “endowed” accounts, and others behave informally as endowed accounts. These accounts are similar to university and foundation endowments, with rules designed to allow grants to be made regularly at rates intended to maintain or increase principal, Heist says. Under such arrangements, the assets of these accounts are often given to the sponsoring organization or another non-profit organization when the donor dies.

Other study findings:

  • 14% of accounts had no activity over the four-year period studied.
  • The four-year average annual payout rate among all accounts studied was 11%.
  • 42% of donor-referred fund accounts opened in 2017 had paid in full their opening contribution by the end of 2020, and a further 22% had paid at least half.

More research on DAFs

The Institute for Policy Studies has also recently published a series of studies criticism of donor directed funds. The institute has publicly stated that it supports stricter regulation of DAFs, saying “the rules regarding DAFs are being broken”.

One of the studies found that donor-referred fund accounts operated by organizations with commercial subsidiaries such as Fidelity, Schwab, and Vanguard moved at least $1 billion in 2019 from one donor-referred fund account to another, what the institute characterizes as a huge amount of money flowing between donating vehicles rather than being distributed directly to charity. Such transfers also artificially inflate the payout rate claimed by DAF account managers, the institute remains.

Another study looked at transfers from private foundations to donor-advised funds managed by affiliated business organizations, which count towards the requirement that foundations distribute at least 5% of their assets annually.

These transfers amounted to more than $938 million in 2018, the institute noted. “The dollars donated by private foundations to DAFs represent a considerable amount of money diverted or delayed from reaching active charities,” the study said.

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