In 2021, when two U.S. senators introduced the Accelerating Charitable Efforts Act to speed up the payout of funds from donor-advised funds, it was the first time many lawmakers became aware of the issue.
But the ACE Act was not the first major legislative battle over DAF reform. Before DAFs were debated in the halls of Washington, D.C., they were discussed in the halls of Sacramento.
In the months before the COVID-19 pandemic, Bay Area Assembly Member Buffy Wicks introduced two bills that would require companies and foundations managing DAFs to disclose key information about the accounts, including DAF “payout rates.” The idea was to see how much money sits idle in these accounts, data that could inform guardrails for an increasingly powerful but largely unregulated sector.
The bills met opposition from DAF sponsors and foundations, ultimately stalling. That could have been the end of the story. Instead, California’s then-Attorney General Xavier Becerra took the unprecedented step of moving forward on his own, systematically collecting information about the DAF landscape, setting an example for how other states might push for greater transparency even without legislation.
Now, as some advocates for DAF reform look toward any action that can be taken as they await the introduction of new federal legislation, they see state efforts such as California’s as central to pushing the issue back onto the federal stage – and a bellwether for future advocacy.
The role of attorneys general
Popular among the wealthy, DAFs provide donors with an immediate tax deduction for irrevocable contributions, while allowing donors to retain control over how and when the funds are distributed to working charities. There is no mandatory minimum annual payout for a DAF, and no set timeline for dispersing funds to charity.
Advocates for DAF reform focus on two major issues: speedier payouts from DAFs and greater transparency. Only Congress can mandate payout requirements, but states can push for transparency either through legislation or at the state attorney general’s request.
Jon Pratt, co-chair of The Philanthropy Project and former executive director of the Minnesota Council of Nonprofit, said that state-level legislation surrounding DAFs is possible, but can be a tough sell, as many legislators do not consider tax reform a state issue. (To date, Wicks’ bill has been the only legislation introduced)]
The more likely path, according to Pratt and others, is through the offices of state attorneys general. In the United States, these offices are tasked with protecting charitable assets, including funds held in DAFs (in some states, the Secretary of State’s office is granted this responsibility). While AG offices cannot change the tax code, they do have the authority to demand greater transparency from DAF sponsors to understand how these funds are being used.
Currently, DAF sponsors are subject to the same reporting requirements as working charities, but the form they file with the IRS lacks detailed reporting on individual contributions and grants. Even money put into DAFs by foundations cannot be tracked, making it impossible to know if charitable donations are being misused or misdirected. It’s why Jan Masaoka, co-chair of The Philanthropy Project and former CEO of CalNonprofits, likens DAFs to “a black box.”
As California demonstrated, however, attorneys general can shine light into the black box, which advocates hope can spark conversations and ultimately inform federal legislation.
California’s landmark audit
After the California DAF legislation fizzled, California’s Attorney General office sent large California-based and national DAF sponsors a mandatory survey asking for detailed information about their DAF accounts over three recent years, including how much of their funds were granted to nonprofits and how much was being held or transferred between different DAF accounts. The survey also inquired about DAF donations from private foundations, as well as the fees sponsors garnered for managing DAFs and investing funds.
California received responses from 57 DAF sponsors that managed more than 400,000 DAF accounts. Some findings were surprising, said Geoff Green, executive director of the California Association of Nonprofits (CalNonprofits), which represents more than 100,000 organizations across the state and is one of the few nonprofit associations to publicly support and call for reforming donor-advised funds (DAFs)
For instance, community foundation DAFs had lower payout rates than their commercial counterparts, with more than 40 percent reporting that less than 5% of their funds were granted to charity annually.
In one year alone, un-donated DAF funds collectively generated more than $275 million in administrative and investment fees. Particularly concerning was the discovery that a hefty amount of DAF money — about 11 percent— passed between DAF accounts, rather than going to working charities. About 5 percent of total DAF contributions came from foundations, causing some to suspect that foundations may be using DAFs to skirt the law, said Green.
In the wake of the ACE act, as advocates are look toward actions that can be taken without legislation, some regard California’s landmark survey as a much-needed example of what states can do. Surveys like that allow them to “get the data necessary to come up with a regulatory framework,” said Green.
Community foundation DAFs had lower payout rates than their commercial counterparts, with more than 40 percent reporting that less than 5% of their funds were granted to charity annually.
In a recent interview with The Philanthropy Project, Tania Ibañez, who worked on the survey as the senior assistant attorney general of the charitable trust division, also urged states “to start asking different questions,” noting that “the AG in any state – if he’s interested – could easily go through the regulatory process and develop a form that would ask these questions.” While it would require a public comment period, it would not require legislative change, she noted.
But so far, few other attorneys general have wielded their authority to this end.
It’s not because they lack awareness of the problems surrounding these accounts. In 2020, the Minnesota Council of Nonprofits released a study in which current and former attorneys from state attorney general offices across nine states expressed frustration at DAFs. One former associate attorney general observed that DAFs “seem like more of a tax break for folks as opposed to an alternative path for philanthropy.”
“Where does society benefit from these bounced-around tax benefits?” asked another respondent, rhetorically.
Respondents from state attorney general’s offices said that states’ ability to investigate DAFs is hampered by a lack of precedent and protocol for handling DAF-related matters, along with shortages of staff dedicated to charitable activities. One 2016 Urban Institute survey found that about a third of charity oversight offices in the U.S. employ fewer than one full-time employee focused on charitable activities.
A few AG offices are well-positioned for the work, said Pratt while others have a skeletal staff. “There’s varying levels of ability by the AGs regarding charitable activity.”
An uncertain future
In 2020, when the Minnesota Council of Nonprofits presented findings from their report about DAFs at the National Association of Attorneys General, Pratt sensed excitement about taking on the issue among AG staff.
But when the pandemic hit, the momentum faded.
Ibañez notes that there may also be a political element to state reticence to taking on DAFs. “Lots of people are making money from this situation and no one wants to anger the big commercial funds like Fidelity or Schwab,” she said in the recent interview. “The people that run those institutions are also big donors to political candidates of both parties.”
In the past, when reform efforts have been proposed, parties with a financial stake in DAFs, including wealth advisors as well as DAF sponsors and their umbrella organizations such as the Council on Foundations and Philanthropy Roundtable, have formed a united front against reform, arguing that regulation would harm giving. Collectively these groups spent an estimated $11 million lobbying against the bipartisan ACE Act, according to a report by the Institute for Policy Studies.
In November, as the country prepared to usher in a Vice President who has professed an appetite for philanthropic reform – including DAF reform – Masaoka and Jon Pratt, former executive director of the Minnesota Council of Nonprofits, launched The Philanthropy Project to enlist nonprofits in the fight for reform. One long-standing rule of philanthropy is to not challenge or criticize funders, which has led nonprofits to traditionally take a behind-the-scenes approach to philanthropic reform. “There’s a reluctance to sort of rattle the cages of potential funding sources,” said Pratt.
The Philanthropy Project aims to change that by mobilizing nonprofit leaders nationwide to nudge state attorneys general to “to ramp up, pay attention,” and “demand better information about charitable activity,” said Pratt.
Green, who is on Philanthropy Project’s working group, is hopeful. “We’re on the right side of history,” he said. “DAFs will be better regulated eventually.”
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