Thursday, September 28, 2023

Donor Advised Funds as the Gray Matter Between Private Foundations and Public Charities

Private foundations and donor-advised funds: A new CPA best practice

From Charitable Objectives or Donor Interests:  What Sponsor Language Reveals About Donor-Advised Fund Priorities and Resource Flows:

Charities in the U.S. are categorized into two distinct groups – private foundations and public charities. Due to the inherent concentration of funding and control, private foundations face more restrictions and offer less generous tax benefits than public charities. However, recent years have seen a dramatic rise in donor-advised funds (DAFs), giving vehicles which represent a gray area in this categorization. Though housed in public charity sponsors, DAFs have often been characterized as de facto private foundations due to the deference many sponsors give to donors’ wishes. The consequence has been frequent calls for reform to compel grant disbursements and limit donor control. To examine DAF behavior as it relates to these concerns, we develop a measure of sponsor priorities by examining the language used in sponsor websites. In addition to presenting a new method of classifying sponsors, we also show how this emphasis measure varies across sponsor types, with community foundations showing greater mission emphasis and national sponsors showing greater donor emphasis. We further demonstrate how variation in the emphasis measure is predictive of resource flows. Most notably, national sponsors with a measure indicating greater donor emphasis attract more noncash donations, accumulate more assets, and have lower payout rates. The results provide a means of better understanding variation in DAF sponsor behaviors and may also prove useful for policymakers seeking to ensure that all sponsors prioritize charitable objectives over donor interests.

darryll k. jones

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