Thursday, May 11, 2023

Some Benefits of Donor-Advised Funds for the Merely Rich

The books I posted about yesterday and Tuesday are both quite critical of donor-advised funds (DAFs), and I hear a lot of criticism of DAFs these days. I am persuaded that current law permits some specific abusive uses of DAFs, but I am not (yet?) persuaded that among those abuses is the fact that DAFs avoid the 5% payout requirement of private foundations. The argument that I attributed to Rob Reich yesterday – that DAFs are like kudzu, crowding out donations to operating charities and so delaying the benefits of philanthropy – is well represented in the literature. So, I’d just like to share a single anecdote today about the benefits of a DAF for one real person.

Let’s call this person Mrs. Smith to protect her privacy. Mrs. Smith spent her life as a relatively frugal middle class woman, and found in her eighties that she had amassed a greater fortune, worth several millions of dollars, than she ever thought she would. She knew that she should be increasing her charitable giving, but felt somewhat overwhelmed by the multiple solicitations she received and so ironically gave less than she thought she should. She was persuaded to open a DAF at her city’s community foundation, largely because it would enable her to choose an amount that she intended to give for the year and give it, without agonizing about each specific charity.

The DAF has several additional benefits that she likes. First, it makes her donations of appreciated securities much easier than it would be if she tried to make them to individual charities. Because she is elderly, a significant portion of her wealth is in highly appreciated securities, and the tax benefit of using them for charitable contributions is well known. But because she still makes many charitable contributions of a few hundred dollars, it is quite complicated to try to make donations of appreciated securities to individual charities, many of which would much prefer to get a cash donation from a DAF than a donation of a few shares of stock from an individual. Second, because she feels overwhelmed by charitable solicitations (which are extremely costly to the charities), she would prefer to donate anonymously. The DAF permits her donations to individual charities to be anonymous and the DAF sponsor has assured her that it keeps private its own information about her. Third, because her DAF sponsor is a community foundation in her city, she appreciates the work that it does to recommend worthy charities and she reads its annual report diligently. She has said that she feels good about the (quite small) fees that the community foundation collects because she supports the work it does in turn supporting charities in her community. Fourth, as she ages she is quite anxious about charitable fraud, and feels comforted by knowing she can conduct her charitable giving and only have to interact directly with one trusted institution. Finally, the fact that she can track all her charitable giving on the community foundation’s website both helps her feel organized about her charitable activities and helps her act on her internal commitment to be more charitable. In her personal experience, investing through a DAF has enabled her to increase her charitable donations very significantly, even when measuring only donations that actually get transferred to active charities. Looking back over the past three years she has had the DAF, about 70% of her contributions into the DAF have already been transferred out to individual charities.

Interestingly, more than a decade ago, Mrs. Smith opened a different DAF at a major financial institution. She had converted a traditional IRA to a Roth IRA and for a single year was in a higher tax bracket than normal. She was advised to use that opportunity to make a significant charitable contribution into a DAF, which she could then distribute gradually in the following years. She also thought that having the DAF would facilitate discussions with her grandchildren about charitable giving as they chose recipients together. Because of where she was in her life, that just didn’t happen, and the balance sat in the DAF paying fees to the financial institution for seven years. Perhaps surprisingly, she continued to make the small charitable contributions she had always been making out of her regular checking account, but did not use the DAF at all. Finally, she decided to liquidate the DAF by making a (very large for her) single contribution to an active charity in her community.

One could imagine changing the law to require all DAFs to function more like Mrs. Smith's current experience and to prohibit the experience she had previously. But it's not at all clear that those changes to the law are necessary. It just depends on the relative benefits and burdens imposed on donors and charities by the law.

Benjamin Leff

Federal – Legislative, In the News | Permalink


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