America’s fastest-growing means for charitable giving is growing even faster. That is the takeaway from the latest report on donor-advised funds (DAFs), released by the National Philanthropic Trust (NPT).
Americans are putting aside increasing amounts in these individual charitable accounts — even as progressives (and one prominent Republican senator) inexplicably target them for onerous regulation. Among other things, the new report makes clear that hundreds of thousands of DAF account holders stepped up in a big way to help in the response to COVID-19. By the numbers, they put big foundations to shame.
We will need IRS data for 2020 to see whether this will mean that overall individual charitable giving grew last year, as the pandemic raged and the economy sputtered — but the NPT report provides good reason to think it did.
The fairly eye-popping numbers come from NPT’s 15th annual report on more than 900 donor-advised fund sponsors. The growth of these accounts — to which one makes tax-deductible contributions and then later directs grants to individual charities — is notable for anyone interested in American philanthropic trends.
Some key metrics:
- The overall number of donor-advised charitable giving accounts rose by 16.3 percent, from 864,187 in 2019 to 1.05 million in 2020. At the same time, the size of the accounts fell, from $168,355 to $159,019. DAFs, in other words, are mini-foundations for the middle class.
- More important than the growth in accounts, though, was the growth in grants and the “payout rate” — the percentage of assets distributed to charities. As assets grew by 9.9 percent, from $145.49 billion to $159.83 billion, the payout rate increased from 22.3 to 23.8 percent. Translated, that means that DAF grants increased from $27.29 billion to $34.67 billion. This is getting to be serious money, in other words.
The payout rate is important because of criticism that DAFs are a tax loophole — a way for donors to get an immediate charitable tax deduction and then “warehouse” funds. That’s the implicit problem assumed by proposed legislation — the Accelerating Charitable Efforts Act (ACE Act), sponsored by Sens. Angus King (I-Maine) and Charles Grassley (R-Iowa). The ACE Act would require DAF funds to be disbursed within 15 years — discouraging those who want to endow long-term programs and imposing a paperwork burden on DAF sponsors.
The NPT report makes clear that the real payout problem lies with major tax-exempt foundations, many of them with assets much larger than any donor-advised-fund sponsor. NPT puts it this way: “DAFs granted half of the dollar amount that private foundations granted while having about 14.5 percent of the private foundation assets.”
This is in line with my recent report for the American Enterprise Institute, which found that payout rates of 13 of the 15 major foundations are significantly less than the growth in financial assets they have experienced, and much less than donor-advised funds. For example, at least one major foundation that signaled its support for the ACE initiative targeting DAFs had a payout rate of 5.3 percent, according to the most recently available IRS 990 form (year end, Dec. 31, 2019) — just 0.3 percent above the mandated 5 percent payout rate.
Donor-advised-funds have averaged payout rates above 20 percent for the last five years, much higher than all of America’s largest foundations. It begs the question regarding the motives of some of the largest foundations’ support for the ACE initiative, without looking at their own payout rates.
Additionally, the increase in DAF giving during a time when pandemic-related economic contraction hit the U.S. demonstrates why mandated payout rates, as per the ACE Act, are imprudent. DAF assets don’t just sit there; they earn a return on investment. That means that funds are available at times of crisis — and payout rates can increase. (The same thing happened during the recent Great Recession). Mandated payouts risk addressing near-term needs — and not saving for a rainy day. It is worth noting that the National Philanthropic Trust has some skin in this game. It is a sponsor of donor-advised funds itself.
Even when the IRS releases data on the extent of individual charitable giving, its accuracy will be hard to determine. As far fewer taxpayers itemize their tax returns, fewer also have a need to claim a charitable tax deduction. (The Tax Reduction and Jobs Act of 2017 increased the so-called “standard” tax deduction and reduced the number of itemized returns from 30 to just 11 percent.) That does not necessarily mean that non-itemizers are not giving to charity — only that the IRS would have no way to know if they are.
But we can say with some certainty that the number of Americans with donor-advised funds is sharply increasing — and that, notwithstanding charges that they are employing some sort of tax loophole, they’re stepping up in a time of crisis.
Howard Husock is a senior fellow in domestic policy studies at the American Enterprise Institute (AEI), where he focuses on municipal government, urban housing policy, civil society, and philanthropy. He is the author of the latest report, “America’s largest foundations: Examining payout rates and perpetuity.”