What’s Next for DAF Reform?

On June 9, 2021, a rarity occurred in Congress: a new bill managed to reach across the aisle.

Senators Angus King (I-Maine) and Chuck Grassley (R-Iowa) introduced the Accelerating Charitable Efforts (ACE) Act in an attempt to rein in donor-advised funds (DAFs), a philanthropic mechanism favored by the ultra-rich.

DAFs are accounts designed to funnel money to charitable organizations while letting donors maintain autonomy over the assets. Donors receive tax breaks for using DAFs, but the mechanism doesn’t engage in charitable activities on its own.

They typically represent an account held by investment firms like Fidelity and Charles Schwab, or community foundations, which serve as the legal owners of the donations; the sponsor gets to dictate where the money goes on their own time.

Donor-advised funds now rake in the majority of philanthropic giving in the United States, and not without reason: DAFs provide donors with benefits that traditional foundations don’t offer. Private foundations, like the Rockefeller Foundation, are required to pay out at least 5 percent of their assets every year, but there are no similar payout requirements for DAFs, which tend to sit on mountains of cash as a result.

These rules enable less civic-minded sponsors to hoard wealth—and, thanks to the tax breaks and investment options, accumulate even more. A report from Boston College found that the rise of DAFs contributed to a $300 billion shortfall in additional revenue for charities over a recent five-year period.

Aaron Horvath, a postdoctoral fellow at the Stanford Center on Philanthropy and Civil Society (PACS), characterized DAFs as “tax-subsidized private warehousing of charitable funds with no clear public accountability and no payout requirements.”

“They’re such a strange artifact of our charitable system and our culture of wealth that it’s a wonder that they exist,” he said, “but of course they exist in America.”

The ACE Act was designed to set a 15-year deadline for DAF assets to be allocated to charities, as well as impose a 50 percent penalty on DAF donations if sponsors fail to meet that deadline. It was seen by advocates as an imperfect but important step toward regulation.

The bill managed to gain bipartisan, bicameral support in a historically divided Congress. But by December 2022 it stalled out, throwing the future of DAF reform into question.

The War On DAFs

“There’s a war right now around DAFs,” said Jan Masaoka, CEO of the California Association of Nonprofits.

Masaoka’s organization, which represents nonprofits that are set to continue losing funding from DAFs’ rise, has been a frequent voice for reform: last year, they invited California Deputy Attorney General Elizabeth Kim to speak about the state’s efforts to enhance disclosure requirements for DAFs. “The misuse of donor-advised funds is something that could easily be affected by disclosure,” she told me.

Masaoka is just one of many advocates exploring options for DAF reform in the wake of the ACE Act. But some philanthropic leaders, like Network of Jewish Human Services president Reuben Rotman, don’t want more restrictions on the mechanism. DAFs allow donors to move money quickly in an emergency, he argued, while private foundations typically require donations to be approved by a board.

“There could be a hurricane in October and, unless the board schedules an emergency meeting, they may not be meeting again until January,” he told me. “With a donor-advised fund, you don’t have to wait.”

Two months after the ACE Act was introduced, for example, a Category 4 hurricane touched down in Grand Isle, Louisiana. The storm caused an estimated $75 billion in damages, displacing hundreds of families in the process. As Rotman argued last year in The Hill, many nonprofits were able to swiftly provide relief for Louisiana families through DAFs. “It’s sort of like a philanthropic checkbook for individuals,” he said.

Still, critics like Horvath have argued that as DAFs have grown more popular, “more money is going into DAFs and private foundations than is being used for actual charities.” The National Philanthropic Trust (itself a DAF sponsor) released a report in November finding that grants from DAFs held by sponsors increased by nine percent to more than $50 billion in 2022, while the grant payout rate declined from 27 percent to 22 percent over the course of that year.

Horvath argues that DAFs should have a minimum five percent payout requirement of their own. “If you’re going to get the benefits of giving the control over how these funds are distributed, then you should at least be subjected to the requirements that a private foundation is,” he said.

The Institute for Policy Studies, meanwhile, continues to push for reforms including establishing a three-year payout requirement for DAFs; excluding grants to DAFs from counting toward private foundation payout; and excluding grants to DAFs from counting toward DAF payout.

‍What’s Are Possible Paths for DAF Reform?

We spoke with a number of advocates and leaders in the field to gauge a few possible paths forward.

“The ACE Act was a conversation-starter,” says Gerry Roll, CEO of the Foundation for Appalachian Kentucky. “Whether the details of the Act were right or wrong isn’t as important to me as the fact that we have to do something.”

Since the ACE Act failed to move forward, there's a lack of clarity about next steps for a bill in Congress. (Senator King’s and Senator Grassley’s offices did not respond to a request for comment.) But that hasn’t stopped advocates from moving the issue forward. Last month the Institute for Policy Studies released a report repeating calls for regulation around DAF payout and disclosure requirements. Organizations like the Patriotic Millionaires and Initiative to Accelerate Charitable Giving continue to echo those calls in DC and beyond.

What happens next depends on where Americans’ interests lie. Public attention that could have pushed the ACE Act further is limited, as the U.S. remains embroiled in steep political divides, gun violence and ongoing public health crises. “It’s hard to rally around this issue in a lot of ways,” Horvath said. “You would need a very tech-savvy populist movement… but I think it would probably be hard to get a lot of political energy around that.”

On the other hand, conversations around philanthropy reform have become more salient in recent years, as high-profile members of Congress like Bernie Sanders and The Squad popularize movements around taxing the ultra-rich. And leaders in the nonprofit sector are unlikely to drop their concerns about the issue of wealth hoarding anytime soon. “This is the most emotional issue for many of our members,” Masaoka said.

Some advocates are pushing the conversation in new directions. Roll, whose foundation funds nonprofits in one of the highest-poverty areas of the country, has been an outspoken advocate for reform. While she is disappointed in the developments around the ACE Act, she has her sights set on a longer fight. Her concern lies with how DAFs continue to concentrate money in the wealthiest parts of the country.

“The biggest issue for me has to do with whether DAF money is going to community foundations or commercial gift funds,” she said. Whoever manages those funds benefits from a significant level of fees.

“My question for Congress is: what can we do to change the law to incentivize philanthropists to put their DAF money into smaller foundations that are proximate to communities?” Roll asked. “Congress created credit unions and CDFIs—can they create something similar here? Why aren’t we using philanthropy reform to incentivize investments in places like Kentucky?"

She plans to continue the fight. “I’m planning to organize a couple hundred of us like-minded, community-based foundations to pay lobbyists to bring that argument to Congress,” Roll said. “What I need is a couple hundred thousand dollars to help start this movement.”

The federal government isn’t totally overlooking DAFs, either. On November 14, the Department of Treasury and IRS released proposed regulations seeking to further define the parameters of a DAF and its distributions.

D.C.-based tax lawyer Alexander Reid explained that the current rules governing DAFs—which were established by Congress through the Pension Protection Act of 2006—dictate that while donors give up legal ownership of their distributions once they’re handed over to a sponsoring organization, they can still hand-pick the investment advisor overseeing the asset. But the proposed regulations would prohibit this transaction.

Simply put, if a donor recommends their golfing buddy to oversee a scholarship fund, the new proposed rules would disqualify that pick.

“They’re saying that the investment advisor that the sponsoring organization hires is getting a prohibited benefit,” Reid told me. “There’s too much economic benefit going back to the donor and their advisors if the sponsoring organization allows them to recommend investment advisors.”

The Treasury Department is also aiming to preserve protections given to scholarships and disaster relief funds in the original PPA, which carved out special criteria to exempt them from the rules.

Brian Mittendorf, an accounting professor at Ohio State University, said that these proposed changes are minor: “It was an important clarification but also very modest. When it comes to the list of things that people would like to see clarification on, that was not near the top.”

Back in March, the Biden administration released its 2024 budget proposal, which included disqualifying contributions from private foundations to DAFs from the foundations’ 5-percent payout requirement. Experts aren’t optimistic about its chances at passing, but the move signals Democrats’ ongoing efforts to address the inequitable tax system.

On the state level, tweaks to federal tax law are off the table. But advocates are nevertheless working to push through reforms that could increase transparency requirements and bring greater attention to the national conversation.

California, where residents give over $25 billion to charity each year, has seen the most activity. In 2019, California assemblywoman Buffy Wicks introduced a bill that would require DAF sponsors to disclose information on individual accounts to the state attorney general. The following year, she introduced another bill that would provide the AG’s office with broad regulatory power over DAFs.

Both bills failed, but they did raise awareness. In 2021, the state AG’s office sent DAF sponsors a mandatory survey asking for detailed information about DAF accounts over three years. The survey yielded responses from 57 DAF sponsors that managed more than 400,000 DAF accounts, providing a clearer picture of the scene.

Meanwhile over in the Midwest, the Minnesota Council of Nonprofits has written consistently about the need for a reporting requirement to “address the lack of oversight over charitable funds moved from Minnesota charitable trusts to national commercial DAF sponsors —over $34 million from 2010 to 2018.” The requirement would give the state attorney general supervision over whether those transfers are in compliance with trust restrictions on their funding.

Craig Kennedy, senior fellow at the Giving Review and a longtime leader in the philanthropic world, said in a recent Chronicle of Philanthropy webinar that he hopes to see state attorneys general take up the issue of DAF reform from their offices, but he’s seen “limited interest” from them thus far. “I wish we could find five or six ambitious state attorney generals that would make philanthropy their issue,” he said.

“I think we’re gonna see a donor rebellion… people who care about taxes, democracy, racial justice kind of getting into this conversation,” Kennedy said during the webinar. “So I think the pressure for reform is going to keep growing.”