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donor advised funds
It’s Time to Move the Money out of Donor-Advised Funds
Public charities are nonprofits that rely on a broad base of donors for their revenue —as opposed to private foundations, which are usually created and supported by just one or two major donors.
In contrast to private foundations, DAF sponsors qualify as public charities, and so receive the same preferential tax treatment as working charities.
As we have reported before, DAFs are growing explosively. The assets held in U.S. DAFs have grown by 513% over the past 10 years—rocketing from $38 billion in 2011 to $234 billion in 2021.
And DAFs now rake in 22% of all U.S. individual charitable giving.
Donors can claim substantial charitable tax benefits for their contributions to DAFs, but, because DAFs have no payout requirement, the money often fails to move in a timely way to charities addressing urgent needs.
Through the charitable tax deduction, taxpayers subsidize contributions to DAFs by up to 74 cents on the dollar.
Of particular concern are DAF sponsors that are affiliated with for-profit Wall Street financial corporations. As we have documented, these commercial DAFs provide enormous publicly subsidized tax benefits to their high-rolling contributors while actively encouraging the warehousing of charitable wealth.
And commercial DAFs have been growing explosively. The Fidelity Charitable Gift Fund, for example, has been the most successful charitable fundraiser in the country for the past six years.
In 2021, Fidelity extended its lead by pulling in $15 billion—more than $11 billion more than the top working nonprofit, Feeding America.
We counted the Silicon Valley Community Foundation and the Chicago Community Trust as DAF sponsors because contributions to DAFs made up 93% and 97%, respectively, of their total incoming contributions in 2021.
Some of the operating nonprofits on this list—such as the United Way and Stanford University—sponsor DAF programs as well, but we did not categorize them as sponsors because their DAF programs are relatively tiny compared to their other fundraising.
It is also worth noting that DAFs may have actually done even better relative to working charities than our ranking shows. In previous years, the Chronicle of Philanthropy has made it easy for everyone to evaluate cash contributions by publishing well-researched lists of top-earning non-DAF “cause-driven” charities, but they did not do that in 2021.
So we compiled our current rankings by pulling contribution information from the tax returns of the largest DAF sponsors in the U.S., and then combining that with lists of donations to operating charities from two separate sources: Bloomberg’s ranking of the top-fundraising nonprofit universities and Forbes’ list of the top-fundraising non-university charities.
The Chronicle’s lists only included cash donations, however, while Forbes’ list includes both cash and noncash donations—and that can inflate revenue numbers, particularly for relief organizations. If Forbes’ list had only included cash donations to Feeding America, for example, they would have slipped out of the top 20.
Through the charitable tax deduction, taxpayers subsidize contributions to DAFs by up to 74 cents on the dollar.
This gives us all an interest in making sure that the money stored in DAFs is actually used for the greater good, rather than serving as a tax avoidance vehicle for the wealthy or lining the pockets of commercial money managers.
It’s time to move the money out of DAFs—and we’ve outlined a number of reforms that would make this happen.
How Does Leonard Leo Hide All His Right-Wing Dark Money? Here's One Way
With newly released tax filings from Schwab Charitable — one of the nation’s largest sponsors of what are called donor-advised funds — we have another major piece of information on how this “dark money” moves.
During its most recently reported fiscal year (July 2021 to June 2022), Schwab made an enormous grant of $141.5 million to the 85 Fund, a key part of Leo’s burgeoning empire, formerly known as the Judicial Education Project. The 85 Fund is a 501(c)(3) public charity.
Unlike private foundations, donor-advised funds (DAFs) are not independent organizations that need to report their activities to the IRS and make those reports available to the public.
Instead, they’re accounts set up under a “sponsor” — in this case Schwab Charitable — a public charity that can house hundreds or even thousands of funds.
And while those sponsors need to file annual reports with the IRS, they do not have to report which of those DAFs make which grants.
That makes them ideal vehicles to conceal who the actual donors are behind sources of funding: if a private foundation made a similar grant it would show up on that foundation’s IRS filings attributed to the foundation, whose directors, officers, and finances are far more transparent.
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In addition to helping secretive donors avoid disclosure, DAF funding like this can also help organizations circumvent rules that prevent privately governed and funded organizations from masquerading as public charities. This is called the “public support test.”
Simply put, if a nonprofit received the bulk of its funding from a single source, its status as a public charity would be in jeopardy, and it would lose the many benefits deriving from that status.
But under current regulations, grants from DAFs are treated as grants from the sponsor, which is a public charity, and so would not tip the nonprofit out of its public charity status.
In its most recently reported filing (year ending December 31, 2021), 85 Fund’s total public support was $117 million. We don’t know how much it’s grown since, but that single grant from Schwab was more than 85 Fund’s entire revenue for that year.
It’s entirely likely that, if that grant had come from a private individual or a private foundation, 85 Fund would have lost its public charity status — the gift could not have been included in the calculation of its public support.
This merits much deeper investigation. It’s also a perfect example of one of the many ways that the regulations around donor-advised funds need fixing.
And this particular fix — attributing grants like this to the donor behind the DAF rather than the sponsor — had been stalled under consideration by the IRS for nearly 6 years.
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