Donor Advised Funds get big tax breaks but little oversight

I set up a DAF when Google went public in 2004. I've spent 25-50% of it in the intervening 13 years, despite best intentions. I sure took that full tax break in 2004 though and have compounded the value of that annually. So in my case the DAF has not worked as a great way to funnel money to actual charities. It just sits idle, compounding. The tax break I got seems to outweigh the public benefit.

The psychology of having the DAF is funny. I sort of feel the virtue of having donated to charity every single year, just looking at the balance. When I do make a grant from the DAF I don't really feel like I'm doing anything more worthwhile. Also it's a bit impersonal because you have to recommend the grant then wait several days for the DAF to actually allocate. OTOH it's nice having a pile of money I've already "spent" that I can use to give to things at a whim.

I think the solution is to require DAFs spend some large portion of their balance every single year. Charitable foundations are required to distribute something like 5%, but I think 10% or more makes more sense for an individual's DAF. There's also a strong argument that charitable donations shouldn't be tax deductible at all, remove this whole tax gimmick and economic distortion. I'm not sure I fully buy it (and the transition would be brutal) but it is worth reading: https://www.economist.com/briefing/2012/06/09/sweetened-char...

This is a weird article. It strongly implies that donor advised funds (DAFs) are storing money indefinitely and not distributing it, but the average disbursement for DAFs is about 15% per year. In general, people committing the money to charity now even if they haven't decided what they want to fund is something I strongly support, because it means they can't later change their minds and keep the money.

The article also seems to evaluate DAFs primarily on how much they spend in the Bay Area:

    And even when it did give out money, the
    Silicon Valley Community Foundation often
    spent it outside of California. Last year,
    it gave out $436 million in grants to the
    nine-county Bay Area, which was just 34
    percent of the $1.3 billion in grants it
    dispersed.

The Bay Area is one of the richest regions of one of the richest states of one of the richest countries. There are definitely people in the Bay Area who need help, but overall I think it's really good that donors are becoming more interested in figuring out where their money can do the most good as opposed to only donating to organizations targeting the region they happen to live in.

DAFs are great for giving.

The 2018 tax law changes increased the standard deduction and limited itemized deductions. This is certain to depress charitable giving, and DAFs are one thing that will help protect it.

The reason is they allow donors to separately time the tax benefit from fund disbursement. Say you wish to donate $10k a year to charity. In 2018, this may not provide any tax deduction! However a DAF allows you to make a much larger donation of $100k, realize a tax deduction, and then dish it out in $10k increments over the years.

DAFs also shields donors from providing contact info to the charity, allowing donors to escape the never-ending solicitation mail and calls. (Charities really dislike this, for obvious reasons.)

The concerns about money sitting in DAFs is overblown. A charity with an endowment also has money that "sits" and isn't being spent, but you wouldn't describe that as a "black hole."

My Fidelity DAF is the linchpin of my family's giving strategy -- I don't know how we could achieve what we want to achieve without it.

The plan has been simple: put 5% of our monthly income into mutual funds through the DAF until it hits 100k, then start additionally supporting charitable organizations from the annual interest forever, without ever donating the principle.

I view the impact of this account as probably my lasting legacy on Earth and enjoy the idea of passing it's stewardship on to my children.

So it troubles me to read that this giving strategy is somehow contentious. And I don't yet understand whether what I'm doing is somehow abusing the original intent of the vehicle, or why it would upset people that we give in this way.

The two major problems with DAFs stem from the fact that they are designed to give advantages to donors immediately but not require any further interaction.

Problem - the organization most benefited by DAFs seem not to be charities, but Vanguard/Fidelty/etc that take management fees for the DAF for the next 10 years. Just running a ballpark with 4% interest and a 1 percent total management fee, putting 500k into a DAF makes the manager about 70k, and grows the fund about 170k. Not bad, but the benefit goes almost entirely to the fund manager.

Problem - Giving to organizations is deferred to a later point in time, leading to grander visions. Theoretically, this should result in charities in the future receiving large checks, which is good. One problem with this, however, is that as numbers being donated get larger, it seems that charitable giving becomes more 'results' or 'mission' oriented. People give big chunks to bigger picture, systemic problems like curing cancer, fighting climate change, etc. These are good things. But the charities working on day-to-day problems get marginalized. My argument is certainly not that we should look for structural fixes to problems like pandemics, homelessness, or institutional racism. But a society that only gives to research universities to look for cures for pediatric cancer, and doesn't also help fund something like St. Jude, is a society with deep problems.

DAFs have significant advantages and good things. But perhaps we have, as an American society, gone the wrong way to give incentives to high-net-worth individuals to give mainly to big causes, and not to day-to-day problems.

I enjoy backseat driving as much as the next person. It's fun to tell someone with money that they should spend it on X and not Y. But it's probably not productive, though it does lead to lots of clicks and outrage.

Would it be more productive to simply promote specific unmet needs in the Valley?

I must be missing something about the benefit. Given that these funds charge a fee, what is the benefit of them, over just making charitable contributions directly to non-profits? It's not a tax benefit, is it, since the contribution size can be written off either way?

The unappreciated risk in a setup like this is that multiple donors could inadvertantly give the DAF sizable impact in voting shares. As I understand it, the Fund, not the donor, owns and votes any donated shares.

If two cofounders sign the Giving Pledge and each give 50% of their voting shares to the same, local DAF, the DAF winds up with more shares than either donor. And it can vote them as a block.

I found it odd that the article talked throughout about "dispersal" of funds, which sounds a bit like scattering money to the winds. Is this a standard use with which I'm unfamiliar, or did the author mean "disbursal?"

TLDR: "tax-subsidized contributions are being set aside indefinitely -- subject to no obligation for them ever to be put to active charitable use"

Another thing ruined by businesspeople optimizing for numbers...

DAFs let you get a nice fat tax break with your startup windfall that you can then promise to the college of your child's choice.

This is not charity.