Impact Investing | February 22, 2022

From Elon Musk and crypto cashouts, more capital flows in than flows out of donor-advised funds

Amy Cortese
ImpactAlpha Editor

Amy Cortese

ImpactAlpha, Feb. 22 – One may have gotten Elon Musk’s $5.7 billion gift of Tesla stock. Others have received hundreds of millions in crypto currency from the Bitcoin bros.

Donor-advised funds were key beneficiaries of last year’s soaring value of stock and crypto investments, as owners of those assets sought to offset their tax bills with charitable donations. Donor-advised funds, or DAFs as they are known, are tax-advantaged vehicles set up by individuals or families to manage their charitable giving.  

Fidelity Charitable, the largest manager of DAF funds, took in $330 million in crypto donations in 2021, a twelve-fold increase from the previous year. Some $160 billion is held in more than 1 million DAF accounts.

For that windfall to translate into social impact, however, the money has to get to projects on the ground, and not just donor-advised accounts at financial institutions like Fidelity and Schwab, as well as community foundations and other charities. Congress is mulling rules to close loopholes that critics say allow DAF funds to accumulate – and donors to avoid taxes – without providing a commensurate benefit to society. 

“Donor-advised funds have taken on an oversized and distorting role in charitable giving,” Alan Cantor, a philanthropy consultant and frequent critic of DAFs, tells ImpactAlpha. About one out of every eight dollars contributed to charity goes into DAFs, rather than to working charities that provide actual services, he adds. 

A lack of transparency means that we may never know what groups Elon Musk or crypto whales have supported with their DAF donations, if they distribute those funds at all. 

Musk has used DAFs before. His private foundation put $37.8 million into a DAF managed by Vanguard Charitable in 2016, for example. The Tesla founder, who has signed the Giving Pledge, has publicized certain gifts, such as the $100 million X Prize for innovative carbon removal tech.

“There has to be a middle-ground btw preening, self-congratulatory mega-giving & complete non-disclosure,” tweeted historian Benjamin Soskis. “If not, we’re gonna need a pretty radical overhaul of our regs relating to individual giving & anonymity.” 

“If you are giving a gift of over $5b, you should publicly announce where the money is going to. As a fundamental matter of public interest. Absent regulations, much will have to be done through norms–pressure from the public that mega-donors respect public interest in knowing where they are giving. The bar for disregarding that interest should be *very* high,” added Skokis. 

Moving money

Introduced three decades ago, donor-advised funds enable individuals to easily set up giving vehicles without the expense of creating a foundation or the need to rush donations out the door by year end. The funds are held by intermediaries such as Fidelity Charitable, but donors get to “advise,” or direct, giving to qualified charities of their choosing. 

DAFs can accept stock, crypto and other complex assets, making them a popular option to offset taxes after the value of such assets surged over the past few years. 

The rub: Donors get an immediate tax write-off, but are under no obligation to actually give the money away. That can lead to “warehousing” of DAF funds that do not get deployed by charities that provide public services, such as feeding the poor, promoting literacy or addressing racial inequality.

As money has flowed into DAFs and private foundations, the portion of charitable giving going to working charities has declined from 94% to less than 75%, a $60 billion annual gap, according to a recent study by the academics James Andreoni and Ray Madoff. 

“DAFs have become so popular that they are sucking more money out of the charitable ecosystem than they are giving back to it,” declares #HalfMyDAF, an initiative that offers annual matching funds to encourage DAF donors to give away half of their funds in a given year. More than a third of DAFs did not distribute a single dollar in 2020 as the pandemic raged, charges the billionaire and DAF critic John Arnold.

Fidelity Charitable distributed a record $10.3 billion in 2021, a 13% increase from 2020. But its DAF assets grew by 40% over the same period, according to its 2022 giving report.  

Another issue: unlike private foundations, which must report their charitable giving, DAFs have no such requirements. Private foundations can cloak their giving by funneling money to DAFs, and there are reports of DAF funds supporting hate groups. 

An overhaul of sorts is in the works as bipartisan momentum to reform DAF laws builds. The Accelerating Charitable Efforts (ACE) Act would require that DAF funds be distributed within 15 years in order to qualify for an up-front tax break. Another option would allow for 50-year DAFs that receive some capital gains and estate tax benefits up front, but no charitable deduction until the funds are given to charities. (Donors with up to $1 million in DAF funds at a community foundation would be exempt from the pay-out rules). 

The ACE Act would also prohibit foundations from counting funds channeled to DAFs as part of the 5% they are required to distribute to charity each year.

The bill is championed by  Sen. Angus King (I-Maine) and Sen. Charles Grassley (R-Iowa) in the Senate, and Representatives Chellie Pingree (D-ME) and Tom Reed (R-NY) in the House. It builds on the work of the Initiative to Accelerate Charitable Giving, backed by Arnold and Boston College law professor Ray Madoff. 

Accelerating payouts

Of course, donors need not wait for tougher rules to step up their giving. 

HalfMyDAF counts more than 100 donors who committed to the pledge in 2021. The donors have given to organizations ranging from Black Voters Matter and Boston Ujima Project to EarthJustice and literacy-focused Worldreader. 

San Francisco-based Possibility Labs is piloting a DAF that includes yearly distributions as part of its broader goal of shifting wealth and power to communities of color. The new DAF will require at least 10% of funds to be disbursed yearly. It is funded with an inaugural $20 million commitment from Kataly Foundation. 

Possibility Labs “is fundamentally restructuring an outdated philanthropic tool that was ripe for innovation, thereby investing in an ecosystem where advisors of color and Black and brown community leaders can partner on integrated capital strategies for racial justice,” said Kataly’s Nwamaka Agbo.

The proposed legislative overhaul has ruffled the charitable industry, particularly intermediaries who stand to lose lucrative fees. The Council on Foundations said it opposes the ACE Act because it would “decelerate the expansion of charitable giving” by adding cost and complexity.  

ImpactAssets, the impact investing firm and DAF sponsor, declined a request to comment on the bill. 

“DAF sponsors are pushing back because it would cause inconvenience to their wealthy donors and to themselves,” writes Cantor in a recent blog post.  “But if the legislation were to pass, there would be enormous benefit to society and to the charities DAF sponsors say they want to support.”