Grantmakers and philanthropic reform
As various proposals for philanthropic reform have emerged, most associations of grantmakers have opposed them or stayed conspicuously silent. Philanthropy Northwest – a network of nearly 140 foundations in six Pacific Northwest states – stands out.
Marc Moshcatel is the Public Policy and Research Analyst at Philanthropy Northwest, interested in understanding how public policy and philanthropy impact people – and most importantly, how these institutions can do better.
Q: Marc, unlike many philanthropy-based institutions, Philanthropy Northwest has supported regulation to increase transparency and payout by donor-advised funds (DAFs). How have foundations and donors reacted to your taking this position?
Marc: Our policy position states that "we favor regulation to increase transparency and payout of donor-advised funds (DAFs), and we support increased education and research to help us deepen understanding of the complexities and considerations to inform our stance on specific proposals." There is more on our website about DAFs and our positions.
There's been a wide spectrum of reactions to this position, with some supportive of reform, some opposed, and some in favor of some reforms and not others. Ultimately, the Philanthropy Northwest board adopted this position with the understanding that philanthropic vehicles like DAFs need to be accountable by getting resources to communities in a timely manner.
Q: Philanthropy Northwest has urged policymakers to replace the current charitable tax deduction with a universal tax credit to make it available to more people. Why would this be a better option to encourage charitable giving?
Marc: One of Philanthropy Northwest’s policy goals is to bring more resources to communities. Unfortunately, the charitable deduction isn’t the most effective solution. People across income levels and demographics give to charity, but the charitable deduction is designed for wealthy donors, the vast majority of whom are white: most of the tax break goes to the top 1% and less than 10% of the deduction benefits donors of color. Providing this benefit mostly for high-income donors costs taxpayers roughly $60 billion per year. The new tax bill will shift these numbers, but the trends will likely be the same.
And by centering the wealthy, the deduction inadvertently pushes nonprofits to cater to the interests of a select few rather than communities at large. Tax analyses have found that replacing the deduction with a universal tax credit – such as 25 cents back per dollar donated – would increase giving, bring in millions of new donors, and distribute the tax benefits more fairly. It could be refundable to some extent so that lower-income donors get the benefit. Also, putting a sufficient floor on the incentive – a minimum threshold people must donate to get the incentive – would significantly reduce the amount of taxes lost.
Q: Kudos to you and Philanthropy Northwest for taking such strong stands on DAF report and improvements to the charitable deduction!
Q: Next, after a series of Trump administration executive orders, organizations of all types are being strong-armed to step back or eliminate positions and practices on DEI (diversity/equity/inclusion) with which the Trump Administration disapproves. For example, Charity Navigator recently dropped a part of its rating system, the section of the Culture & Community beacon asking about commitment to equity and inclusion practices. How are your members reacting to these anti-DEI pressures?
Marc: The anti-DEI pressures have created uncertainty and plenty of questions from our network. [They wonder] Can I still do this program for my community? Can I still say certain things when describing my work? Is my organization next to lose federal funding, or have its nonprofit status threatened?
We have hosted conversations and programs with legal experts to keep people updated and emphasize that organizations should not preemptively halt their efforts out of fear, because doing so gives the executive orders power they might not actually have. “Do not obey in advance,” as Timothy Snyder wrote in his book On Tyranny. Charities and funders must stand up for their values by continuing to support their communities.
Q: Foundations in the Pacific Northwest have a reputation of being more progressive than in the rest of the U.S. Why do you think that is? What should other parts of the country know about how philanthropy has evolved in the Northwest?
Marc: I didn’t realize that was our reputation! Maybe it comes from having some foundations based in the Seattle and Portland areas (for reference, Philanthropy Northwest’s region includes Alaska, Idaho, Montana, Oregon, Washington, and Wyoming). The rest of the country should know that the Northwest covers a very diverse spectrum of philanthropies that come from and support a variety of communities. For examples of how the area’s work has been evolving, I recommend Philanthropy Northwest’s 2024 Annual Report, as well as our new report discussing lessons learned from a cohort of community foundations, identity-based funders and United Ways.
Q: What advice do you have for the Philanthropy Project on making the case for DAF reform?
Marc: I think DAF reform is a microcosm of a larger conversation concerning wealth inequality, as well as concerns around the accountability of moving resources in the public and charitable sectors. Most people might not know exactly what a DAF is. However, they know that the rich have too much power while most people struggle to make ends meet. They would like to see more resources reach their communities. They want these resources to be spent in an accountable manner in alignment with their communities’ needs.
We should make the case that DAF reform is one of many ways to help make that happen.
Q: Is there a question we didn't ask, but should have?
Marc: None that I can think of! We're pleased that the Philanthropy Project exists, and thank you for the chance to lend some support.
You can read more from the Philanthropy Project at www.philanthropyproject.net, and you can subscribe here.
A fundraiser asks why nonprofits and foundations aren't speaking out about philanthropic reform
Hildie Lipson recently left a long career in fundraising in Maine (she's still working for good causes!), and we think you'll find her letter compelling:
I have worked in nonprofit fundraising in Maine for 35 years, and I'm so glad to find the Philanthropy Project. I see many familiar names on your Working Group – people whose work I have read for years.
My concern is that we are not seeing any kind of response, in New England anyway, from the philanthropic sector to our immediate crisis of threats to our democracy, civil rights, planned climate decimation, and all the rest. We need a strong, urgent campaign to demand not a 1% or 2% increase in giving, but giving to make real change in the short amount of time we have.
We need a massive and immediate increase in the giving rate of foundations to support the organizations and people fighting for our rights. Vu Le has made this argument for years. Where is everyone else? I am not a funder. I don't serve on funding boards. I am one of the thousands of former development directors who worked for many years, groveling for grants. How can we promote this message?
And why aren't more nonprofit leaders and nonprofit associations speaking up?
I don't have a good answer to this question.
In fact, one of the reasons I got out of fundraising was that I no longer had the stomach to explain to a wealthy foundation trustee why they should fund advocacy ("Our trustees don't like advocacy..." he said, from his midtown Manhattan well-appointed law office). How else do good laws get made to help people?
I know nonprofits fear offending the funder. Maybe we need the board members of nonprofits to be the ones speaking out. They don't have as much to lose, generally. And funders shouldn't have such thin skin. They are the ones in positions of power and I'd like to believe they are open to hearing from the orgs they fund and other potential orgs.
But I know better. For instance, a local community foundation is sitting on $732 million in assets. And once a year, they have an open application that any nonprofit can apply for, for the maximum of $10,000. It's insulting.. That program gives away maybe $2 million a year. And usually the grants are only for project funds.
So what are they saving for? A rainy day? It's storming and hailing, and the winds are over 60 MPH!
We need to work with our state nonprofit associations and with associations in our fields to promote what the funders are doing to respond to this moment. It's a frightful time, and all of us are thinking about what risks we can and/or should take as individuals and as organizations. I hope that in three years we aren't all looking back and thinking we should have said something.
Q: Amen, Hildie
You can read more from the Philanthropy Project at www.philanthropyproject.net, and you can subscribe here.
Trump Bill divide: Conservatives split on taxing private foundations
The battle over tax provisions in Trump’s “Big Beautiful Bill” has split conservatives on whether increasing taxes on private foundations is in the public interest.
The final reconciliation package passed by the House on July 3rd adopted the Senate position, and did not include any changes to the private foundation excise tax, a victory for large foundations.
Earlier in the process, as reported in the Washington Times, the conservative Philanthropy Roundtable – which often disagrees with mainstream foundation groups – has unexpectedly shown up in sync with the Council of Foundations and other "philanthropy support organizations" (PSOs).
The Washington Times reports that the Roundtable sent a letter to Senate leaders saying that the proposed increased tax on foundation assets "contradicts" conservative goals and the goal shared with the Trump administration of reducing government.
According to the conservative paper, “Tax writers on the House Ways and Means Committee said the tax increase was designed not just as a revenue raiser to offset other tax cuts in the bill, but also to encourage foundations to spend more of their money.”
At the same time, Oklahoma Republican Congressman Kevin Hern supported the increase in taxes on foundations. Echoing themes from the Philanthropy Project, Hern argued , “If you’re going to hold onto the money, why shouldn’t you be taxed like other companies that make money? “I’m sure there are people that don’t like it, but our deal is: Deploy the money.”
Another advocate for increased foundation giving is Arizona Republican Congressman David Schweikert: “If it’s a charitable foundation, maybe the money should be being spent on charitable [causes] instead of the foundation acting like a hedge fund . . . They’re participating in the markets like they’re a hedge fund since they don’t have the tax exposure.”
While some House members see low foundation activity as a problem, their version provides little incentive to increase payout, and leaves transfers to DAFs an easy workaround.
When it comes to philanthropic reform, neither Republicans nor Democrats have lined up along party lines, nor along conventional conservative/liberal lines. For the most part Congress has shown little interest in changing current arrangements for regulation of philanthropy, perhaps until now. Regrettably the changes in this bill make no sense. Our tag line for the Philanthropy Project – Charitable funds should benefit the public – should be something that unites people across these divides, but this legislation does none of that.
How the Big Beautiful Bill Could Shrink Foundations and Increase DAFs
Philanthropy Project is experimenting with shorter, one-topic emails rather than our usual newsletter with several articles.
A relatively unnoticed provision in the House version of Trump's colossal bill is a tax change that is supposed to increase tax revenues by almost $16 billion, in part to offset the big tax breaks for the wealthiest Americans.
This new tax? A tax on private foundation assets (a wealth tax of a sort).
- Foundations with less than $50 million in assets: no increases; tax remains at current 1.39%
- Foundations with assets between $50 million and $250 million: raise to $2.78%
- Foundations with assets between $250 million and $5 billion: raise to 5%
- Foundations with assets above $5 billion: raise to 10%
But there's a giant available loophole in the House version right in front of us.
A private foundation can transfer a large chunk of its assets to an account at a donor-advised fund sponsor, while effectively still controlling how the assets are invested, what grants are made, their purposes, and how much money (or how little) is put into active charitable use. For example, if a foundation moves $20 million into a DAF, they would pay $0 in taxes on that $20 million. And the foundation's asset size would shrink to a lower tax bracket.
And as an extra enticement, the foundation would have no payout requirement on those funds, and no longer have to publicly disclose what grants, beneficiaries or amounts it made through its donor-advised fund.
Industry publication Chief Investment Officer predicts exactly that. In other words, if the bill passes the Senate, the tax increase won't bring in the promised revenue, and it will likely move billions of foundation dollars into donor-advised funds where they are even more hidden than where they are now.
While the Senate left out the increased tax in its version, the final result is unknown, and could fall somewhere in between.
We know that some foundations already make only one grant per year – to their donor-advised fund. The Big Beautiful bill calls it "raising tax revenue" but in this one area at least it looks more like an incentive to hide money.
The Philanthropy Project believes that charitable funds should benefit the public. Join the movement/subscribe here. Email us info@philanthropyproject.net. We want to hear the good, bad, and the ugly from you. — Jan Masaoka and Jon Pratt, Co-Chairs, Philanthropy Project
Is this really the right time for philanthropic reform?
With everything going on in the U.S. and the world, is this really a good time to take up the cause of philanthropic reform?
Is this the right time to focus on this particular $1.5 trillion?
These are fair questions, and we've heard two versions of why the time might not be ripe for reforms in philanthropy:
- There are more urgent, more important issues to take up now, including Trump attacks on public services and civil rights, wars in Gaza and Ukraine and elsewhere, accelerated environmental degradation, and heightened violence against people of color and women.
- With the above problems (and environmental deterioration in particular) – we should preserve resources for the future when conditions will be even worse, but political progress more possible.
In fact, the importance and urgency of today's crisis is one of the key reasons we think we need to press forward with philanthropic reform:
- Freeing up some of the billions of dollars languishing in donor-advised funds (DAFs) and foundation’s stored assets could reduce some of the suffering we are seeing. As anchor nonprofits from basic needs to scientific research and the arts falter and/or collapse, timely funding could stabilize core, anchor nonprofits where they are crucial to their ecosystems.
- Economic uncertainty right now is different from similar situations in the past. Typically ups and downs of the economy are based on complex economic factors, including global factors. This particular period of economic uncertainty is fundamentally different: it's been driven by decisions based on ideology and personal gain from the Trump Administration.
- Typically when sectors of the economy shrink and people are getting laid off, the stock market goes down, too. But this time, while foundation stock portfolios have seen big swings, they have mostly held their enhanced value. As dramatic federal retrenchment is having ripple effects communities, local governments and nonprofits, foundations have more resources than they have had in other economic downturns.
Institutional philanthropy’s proclaimed role as public venture-capital and society’s “passing gear” has led to many innovations and pilot projects that made the case for a variety of established federal and state funded programs, many carried out by nonprofit contracts. To stand by during the elimination and erasure of decades of lessons of the value of everything from afterschool programs, AIDS treatment and community arts would be foolish.
And as for the idea that philanthropy should be saving now for future generations – it's a bit like not repairing your car's brakes because you are saving for when the transmission fails.
What the current Congress is on the verge of achieving is petty revenge on nonprofits and foundations through increased excise taxes on foundation assets, punitive fees on private higher ed endowments, accompanied by a symbolic level $150 income tax deduction for the 90% of taxpayers who don’t get to itemize their deductions.
We believe that public policies on active use of philanthropic funds need to be upgraded, and building this campaign does not take away from any of the current struggles to get adequate resources to where they are most needed.
Who is Blocking DAF Reform?
Who is Blocking DAF Reform?
BY ALAN CANTOR
Given the outcry over donor-advised funds on both the right and left, why aren't even simple reforms going through? The insightful philanthropy critic Alan Cantor points his finger at the culprits.
The walls are caving in on American nonprofits.
The White House has ordered a vast rescinding of grants, current and future, to the nonprofit sector, with no concern for the lives damaged, programs destroyed, or critical research halted. The Trump Administration is threatening to order the withdrawal of 501(c)(3) status – a previously unimaginable and existential threat – from nonprofits ranging from small agencies to Harvard University. And nonprofits are frantically scrubbing their websites of what the Administration deems to be offensive words and phrases.
This is a frankly terrifying time to be in the nonprofit sector.
In the midst of so much trauma, it might seem incidental or even irrelevant to dredge up the topic of donor-advised funds and the crying need for DAF reform. As my mother used to say, "When the house is on fire, you don’t worry about the curtains!" But at a time when government grants and contracts are disappearing, the financial resources warehoused in DAFs could serve as a lifeline to nonprofits. Moreover, the political crisis has actually been underwritten by the DAF status quo: donor-advised fund grants have been an important revenue stream for the creation and execution of the Trump vendetta against nonprofits.
A Philanthropic Disaster
First, some context, which is painfully familiar to observers of the charitable sector:
- Donor-advised funds live in a grey zone of tax law. DAFs provide donors with all the tax advantages of an outright gift to an operating charity, but function much like private foundations, only without the oversight, transparency, and requirements for annual charitable distributions required of foundations.
- DAFs have grown wildly in recent decades. As The Independent Report on DAFs from Inequality.org notes, donor-advised funds now take in a sixth of all individual giving each year, and nine of the top 20 recipients in the country, including the top three, are DAF sponsors. Total DAF assets reached $254 billion in 2023, a 67 percent jump in only four years. That’s a lot of money that could do a lot of good.
- Notably, a significant portion of the "charitable giving" credited to donor-advised funds is actually in the form of grants to other DAFs. These DAF-to-DAF transfers, which the Inequality.org report estimates to have been $4.4 billion in 2023, inflates DAF grantmaking dollars (and implied impact) considerably.
Moreover, and critically, DAFs offer virtually no transparency. The public has no access to the activities of particular DAFs, including controversial and politically potent grants.
A simple solution, blocked
In the 2021, a reform effort called the Accelerating Charitable Efforts (ACE) Act received bipartisan sponsorship in both houses of Congress, but the bill never came to a vote. Among many other provisions, the ACE Act would have required most – though not all – DAFs to grant out their assets within fifteen years. The ACE Act was an important – if modest and pragmatic – effort to rein in the unregulated world of donor-advised funds. Its goal was curbing bad practices and getting money to good causes. But it never had a chance.
Why not? And who are the forces blocking common-sense reform efforts?
The list of culprits
The first set of culprits protecting the DAF status quo are the financial services firms. We’re talking about Fidelity Investments, Schwab, Vanguard, UBS, Morgan Stanley, Goldman Sachs, and the others. Virtually every financial services firm has an associated “charitable” 501(c)(3) donor-advised fund operation.
This is a lucrative enterprise for the financial services industry. How do the firms make money from DAFs? Well, most dollars held by these affiliated (though technically independent) nonprofit donor-advised fund shops are invested in mutual funds managed by their parent investment companies. Those dollars add up. I laugh (grimly) when people from the commercial DAF world assert that profit has nothing to do with their motivation, that these companies are simply trying to help their clients be philanthropic. Sure.
Fidelity Charitable had assets of $55 billion as of June 2023. Assuming an average fee of 50 basis points (that is, ½ of 1%) for investment management, that’s a haul of $275 million a year for Fidelity Investments. And the longer the money stays in the DAFs, the more Fidelity and its fellow financial firms earn in fees.
Now, some in the financial services world might claim that I’m overstating the income. My response? I’m simply making my best guess, because there is no transparency into the financial arrangements between the investment firms and their closely held "charitable funds." If it turns out I have overestimated the haul by a few million dollars, my point remains: Wall Street firms make money off of DAFs – and the longer the funds remain undistributed, the more money they make.
And, of course, the financial services industry’s lobbyists have an enormous influence in Washington.
The second set of culprits are financial advisors. These are the folks who interact with individual clients and advise them on their investments. In the old days, we called them stockbrokers.
Brokers largely earn their income by taking a fee on assets under management. Back in 1990, if, say, a donor asked her broker to transfer $100,000 worth of IBM stock to the local Boys & Girls Club, that reduced the broker’s funds under management, and the broker would have earned less income in the future. But the broker would have had no options other than to follow the donor's instructions.
Today, it is often financial advisors, rather than the potential donors, who raise the issue of contributing stock to DAF – either within their company or even to Fidelity or another DAF sponsor, which will pay management fees to financial advisors for large donor-advised funds. So long as the assets remain in the DAF account, the management fees continue to flow into the financial advisor’s pocket as if the funds still belonged to the client, rather than to the client’s DAF.
In short? DAFs are a cash cow for financial advisors, and the bigger the cow, the better.
The third set of culprits are community foundations. This breaks my heart, because community foundations are core institutions supporting and often leading their communities. Community foundation staff members by and large are great people who care about helping local charitable causes. But the assets of many community foundations, particularly the younger foundations that don’t have generations of unrestricted assets, are largely comprised of donor-advised funds, and most new contributions go into DAFs. This focus on DAFs causes challenges.
Community foundations draw fees from their assets to fund their operations, a business model that drives some unhelpful behaviors. The community foundation business model relies on most constituent funds being invested in perpetuity, or at least for a long time.
Consequently, many community foundations speak to their donors about creating family legacies, multi-generational funds, and "endowed DAFs." This perhaps explains why grant distributions from community foundations in 2023, according to the Inequality.org report, were only 9.0%, compared with 16.3% from commercial gift funds.
This focus on long-term funds may explain why community foundations fought vociferously against the ACE Act, even though its provisions specifically excluded community foundation DAFs under a million dollars from having to spend down their assets.
The fourth set of culprits are the associations purporting to represent the nonprofit sector. When the Accelerating Charitable Efforts (ACE) Act was proposed in the 117th Congress, virtually no nonprofit associations spoke out in favor of it, even though, if passed, a huge amount of money would have been flushed out of donor-advised funds to support operating charities.
The usual opponents of DAF reform – the libertarian Philanthropy Roundtable, the Council on Foundations, and the Community Foundation Public Awareness Initiative – actively worked to torpedo the ACE Act. Two other opponents:
- Independent Sector, which has both foundations and operating nonprofits as members, embraced the priorities of the foundation world. Foundations are generally supportive of the DAF status quo.
- Meanwhile, the National Council of Nonprofits chose “to study” the issue until it died. As I’ve written before, the National Council of Nonprofits receives what seems to be significant support from the Fidelity Charitable Trustees’ Initiative, as do Independent Sector, Giving USA, and many other influencers within the field. (My hope is that the National Council, under the impressive new leadership of Diane Yentel, will shift its stance and sever ties with Fidelity.)
While all of this was going on, the commercial DAF funds – the behemoths like Fidelity – stood by, smiling while the nonprofit associations and community foundations did all their lobbying work for them.
The fifth set of culprits are the private foundations who use DAFs to hide their activities and avoid distributing any funds at all. This is a neat and unconscionable trick.
Since 1969, private foundations have been required to use five percent of their assets each year for charitable purposes. These charitable distributions are part of the public record. But when a private foundation makes a grant to a DAF, the accountability trail goes cold, and the foundation (which presumably controls the DAF) can do whatever it wants with the money, without anyone knowing.
I drew attention to this scam thirteen years ago in one of my first blog posts. More than a decade later, some of the wealthiest people in America, including Elon Musk and Larry Page, have buried hundreds of millions of putatively charitable dollars in this paper-shuffling scheme. It’s great for the privacy and influence of billionaires. It’s bad for the federal government (so much lost tax revenue!). And it's disastrous for working nonprofits.
The sixth set of culprits are nonprofit leaders themselves. The nonprofit sector is filled with idealistic, visionary, and hard-working individuals. I consistently stand in awe of the creativity and devotion demonstrated by so many nonprofit leaders. But when it comes to challenging donors and funders, these same folks are silent.
It’s generally not a wise idea to bite the hand that feeds you, and nonprofits do not want to offend their local community foundations or any of their DAF-holding donors by implying that the DAF model encourages the hoarding of charitable assets that are needed today. Ideally, nonprofit associations would be speaking up for these vulnerable nonprofits – but, as I explain above, most don’t. As a result, nonprofits need to speak up for themselves – and pressure their associations to do the right thing.
The seventh set of culprits are wealthy donors. For wealthy donors, there’s nothing not to like about DAFs. Donors get a full charitable deduction up front, just as if they were donating the money to a food pantry or a Boys & Girls Club; they avoid capital gains taxes on appreciated assets; they retain practical control of the distribution of grants, without any spending requirement, ever; and there’s complete privacy and zero transparency.
And when donors then leave DAFs to their children, they are perpetuating their power. They are passing along to their kids the prestige and influence to give (or not give) to charitable causes, on into the future.
Few people ever suggest to donors with DAFs that they are effectively hoarding both money and power. We talk about their generosity – and, indeed, there’s often a great deal of genuine charitable intent. But the fact is, undistributed charitable assets that remain in DAFs are not working to solve the significant problems facing the world. Few donors think in these terms, because those of us in the nonprofit world (as well as their professional advisors – the attorneys, accountants, and investment advisors whom writer and activist Chuck Collins calls “the wealth-defense industry”) are trained to fawn on them.
The final set of culprits are the donors and organizations providing support to the Trump Administration – and who use DAFs to do so.
Most of us are aware of Project 2025, the blueprint from the Heritage Foundation that has driven Trump’s second-term agenda. Since 2020, Project 2025 and aligned politically-driven nonprofits have received some $171 million from Fidelity, Schwab, and Vanguard DAFs alone. Meanwhile, the right-wing donor-advised fund sponsor DonorsTrust, dubbed "the dark-money ATM of the conservative movement" by Mother Jones in 2013, pours money from untraceable donors into the Heritage Foundation, the America First Policy Institute, the Federalist Society, and dozens of other groups working to further deeply conservative political agendas.
In her remarkable 2016 book, Dark Money, New Yorker journalist Jane Mayer quotes conservative megadonor Charles Koch talking about the need to “weaponize philanthropy” to further conservative causes. Part of this plan has been to create rabidly conservative organizations, such as the Heritage Foundation and the Federalist Society, that despite their partisan, political agendas earn designation as 501( c)(3) public charities. Central to those organizations’ ongoing effectiveness and power are anonymous contributions from donor-advised funds. Koch and his colleagues have accomplished this manipulation of the charitable tax laws with stunning success.
Changing the culprits into allies
The people and institutions behind the unregulated and frankly terrifying growth of DAFs need to be called out. But some of them can also help turn things around.
Let’s ignore the first two groups I list above: the financial services firms and the financial advisors. They’re never going to subvert their core drive for profit and do what’s right for the community. As Upton Sinclair noted a century ago (and forgive the gendered nature of the quotation), “It is difficult to get a man to understand something, when his salary depends on his not understanding it.” So too, the billionaire donors behind the right-wing “nonprofits” like the Heritage Foundation and the America First Policy Institute.
But community foundations can adjust their business models to be less dependent on drawing fees from assets in place. They should urge their DAF holders to spend down their assets for the good of the community. They can and should embrace the realization that passing through as much money as possible to meet current, crying needs strengthens their communities – and when community foundations show this kind of strategic generosity, new donations are sure to follow.
Nonprofits, for their part, should extoll donors who spend down their DAFs, or who leave DAFs to charity at death. Nonprofits should go on the record supporting DAF reform, and they should pressure their nonprofit associations to do the same. And those nonprofit associations should remember whose interests they were created to support — operating nonprofits and their missions — and speak out in favor of DAF reform, even if they offend some of their donors.
Those private foundations that are meeting their charitable distribution requirement by dumping money into DAFs will keep on doing just that, so long as it’s legal. It would be a relatively simple act for legislators to close the DAF loophole — but we all have to apply pressure on political leaders and regulators to make that happen. (This common-sense provision was part of the unsuccessful ACE Act.)
Meanwhile, donors – most of whom very much want to do the right thing – can be persuaded to change their behaviors. Many donors simply haven’t been told how counterproductive their perpetual DAFs have become. I have some hope that, if the situation is explained to them, donors in larger numbers will come to realize that to have real impact — and to derive the satisfaction that comes with making a difference — they need to spend down their DAFs, or transfer them to charities at their death, and not leave them to their kids.
* * *
It’s imperative to change how DAFs operate.
I’m the grandfather of three little boys. They, and hundreds of millions of other children around the world, will inherit this terribly fragile and damaged world of ours. On their behalf, we have to invest in saving the planet from climate disaster now. We need to provide opportunity, healthcare, and education to the least powerful and most vulnerable people now. We need to defend democracy now. We need to tear down structural racism and sexism and bias of all kinds now. And we have to recognize that a quarter-trillion dollars sitting in "charitable" investment accounts is a tragic waste. Money percolating in DAF accounts doesn’t fix a damned thing.
ABOUT THE AUTHOR: Alan Cantor has been working with nonprofit organizations since 1982, as a staff member, executive, board leader, and consultant. You can read more of Alan Cantor's writing here, where you can also reach him.
United Way and Donor Advised Funds
Pete Manzo is President and CEO of United Ways of California. Despite being significant grantmakers in many communities, the 900+ United Ways in the U.S. are seldom discussed when it comes to philanthropy, "democratizing philanthropy," or philanthropic reform. We're glad we had a chance to learn some surprising facts and strong views from Pete.
Q: Pete, not long ago the top three nonprofits by revenue were United Way, Red Cross and Salvation Army. Today the biggest three are Fidelity, Schwab, and the National Philanthropic Trust. What do you make of that?
Pete: A primary concern is that it is difficult to see where funds in DAFs go, and even whether they are spent at all. Nonprofits are frustrated that such a large pool of funds is invisible to them, they are unable to identify and seek funding from them
The large commercial funds you mention are really investment firms – finance companies – they're not taking a strategic approach to philanthropy. Commercial donor-advised funds provide a valuable service, but in my view, they are not really charities with a mission, advancing a point of view about strategic goals, so much as they are financial firms providing services to their investment clients.
Foundations and DAFs talk about payouts of 5% or even 8%. United Way has a payout rate of 80% within 18 months. Various complications make it hard to get out everything quickly, but we work at it!
Q: 80% in grants out? So is the United Way a type of foundation?
Pete: We are a grantmaker, but not a foundation. Pledges we get this year tend to go out next year as the money comes in. United Ways are not endowed organizations, which brings both advantages and disadvantages. United Ways put their funds to work within 12–18 months of raising them, so the time-value of money means contributions to United Ways can have greater impact than if they were held and spent from an endowment. An endowed foundation would need something like $80 billion in assets to make a similar scale of philanthropic investment as the $3-4 billion or so the United Way drives in the U.S. every year. Without endowments, though, the year-to-year prospects of United Ways are much more uncertain, and they certainly are more vulnerable to economic fluctuations.
It's odd that although we give out more in grants than many local foundations do, we aren't typically included in foundation dialog. For a long time we weren't able to join associations of grantmakers.
Q: United Ways of California backed a recent bill to bring transparency to donor-advised funds in California. The foundation community and the DAF sponsors opposed it strongly. Why did United Ways break from the crowd and support it?
Pete: We care about resources going out to the people that need it. And they need it in real time. The near-complete invisibility of donor-advised funds makes it possible for them to be abused, stay inaccessible, and keep the public from understanding where public money goes. We believe in more transparency for all of philanthropy.
Q: Several years ago some United Ways around the country were experimenting with being donor-advised fund sponsors. Where did that go?
Pete: As far as I know, no one is doing that anymore. For some it was just an accounting thing: they would get a donor-restricted pledge and they would create a donor-advised for it. When the donation came in, they would empty that DAF. They realized this accounting method was unnecessarily complicated. In a few cases United Ways talked with their major donors about creating DAF accounts at their local United Way. But most United Way donors weren't interested; they wanted to see their money have an impact as soon as possible.
Q: The federal budget bill (June 2025) looks like it will mean very large cuts to Medicaid and other health and human services. How do you think funders in health and human services could be responding?
Pete: Too many are remaining silent, so far. Funders and nonprofits need to be speaking out against the cuts, and foundations should be funding nonprofit advocacy.
For many years now foundation assets have grown much faster than the 5% payout rate. For all their billions, foundations can't make up for those federal government cuts if they go through, but they could easily be giving out four or five times what they are giving now, and they should, in unrestricted grants, to organizations fighting the cuts and also working to reduce their harmful impacts.
United Ways are non-partisan, but we are not neutral about our values. We know these cuts would be devastating to working families, so across the country, United Way has been working hard to find Republicans who see the importance of maintaining Medicaid [called Medi-Cal in California] and SNAP food assistance (CalFresh).
Funders need to be organizing to make government fund the basic human needs that their communities need – the communities they say they are committed to serving. The "Big 10" universities are creating a mutual defense fund, pooling resources to support whichever of them may be attacked; funders should be looking at similar strategies together, and also should offer to help defend nonprofits, too.
Q: So many nonprofits and nonprofit associations say they strongly support philanthropic reform, but they won't say so in public. Your thoughts on this?
Pete: Well, nonprofits are overly cautious of offending any funder about anything. Some hope that a big DAF holder will someday give them a lot of money, and unfortunately, at times that includes community foundations, who also rely on DAFs and DAF donors, and like other funders, they likely aren't used to hearing any criticism at all so they may overreact to any hint of it. The commercial DAFs have far outpaced everyone in acquiring funds under their management, they are crushing everyone in competing for donors’ funds, so it’s hard to see why community foundations wouldn’t welcome more regulation of commercial DAFs.
Associations of grantmakers understandably want everyone to be happy. They don't want to take a stand that make any member unhappy. So it can stall from being effective on behalf of who their members serve.
With so much wealth flowing to the top, and with commercial DAFs growing so quickly, if nonprofits, nonprofit associations and funder associations won't take stands for government funding and philanthropic reform, then who will stand for the people in our communities?
Q: Thank you Pete!
You can reach Pete Manzo and the United Ways of California here.
New Recommended Resource:
Independent DAF Report Pulls Curtain Back
The Independent Report on DAFs(28 pages, Charity Reform Initiative, Institute for Policy Studies, 2025)By Chuck Collins, Bella DeVaan, Helen Flannery, Dan Petegorsky
Go directly to report →
The remarkable growth in charitable funds going to (and through) donor advised funds (DAFs) triggers high hopes and deep curiosity across the nonprofit sector, especially among fundraisers. Where do these monies come from? Where are they going? How are they being used? Who is deciding, and who benefits? How can they be contacted?
As the $250 billion DAF sponsor industry has grown to represent 10 of the largest 20 charities in the US, and receives, one out of five charitable tax deduction dollars, so a growing literature is needed to explain this world.
For 18 years the go-to general source for DAF data has been The National Philanthropic Trust, a Pennsylvania-based public charity that each year issues an annual publication, most recently called the 2024 DAF Report. The NPT report provides baseline numbers and trends about the DAF sponsor industry, but it’s reporting only goes so far, as NPT is itself a major DAF sponsor ($30 billion assets) and an industry advocate.
The Independent Report on DAFs is a welcome and original contribution to help educate the public and charitable fundraisers about the role and mysteries of DAFs in the charitable landscape. Going beyond the well-documented growth of funds going to and from DAFs, the Independent Report’s best contributions are its willingness to share source names by reporting which DAF sponsors are included, and in what category, in its data. This is one of the biggest gaps in the NPT reports, not knowing which sponsors are compared or conflated, blurring the lines and blurring the results on issues such as payout rates. We are especially impressed with the transparency and open-source aspect: all of the Independent Report’s sponsor data is available for public download.
Traditionally reporting on DAF sponsors has categorized three types:
- National (or commercial) such as Fidelity, Vanguard, NPT and Charles Schwab
- Single issue sponsors (such as the Nature Conservancy or Ohio State University
- Community foundations
The Independent DAF report adds a valuable new fourth category of donation processors, entities formed to process thousands of small dollar donations, often crowd-sourced or through a payroll or workplace plan. The report concludes that combining payment processors with national sponsors can “understate national sponsor DAF account sizes by as much as 80 percent.” By separating these donation processors’ ability to deliver quick pass-through in contrast to national sponsors, a better picture is developed for payout rates for various DAF sponsors. Since payout is a principal point of contention for DAF’s, which currently have no minimum payout rate unlike private foundations, this has been contested ground over whether Congress should require some floor for getting DAF funds into active public benefit.
The report authors give detailed treatment to the various ways DAF payout is calculated by industry groups and by the IRS, and the issue of continued accumulation of DAF assets, especially by the commercial sponsors.
Also noted:
- DAF-to-DAF grants accounted for an estimated $4.4 billion in 2023, which affords no further tax or public benefit advantage, and has no clear rationale.
- Private foundations transferred at least an estimated $3.2 billion in grants to national donor advised fund sponsors in 2022, evading their 5% payout requirement and disclosure rules for private foundations.
- Community foundations appear to be at a disadvantage in comparison to national DAF sponsors, seeing a 9% decrease in contributions and smallest growth of assets, while at the same time actively increasing their grants by 56%.
Kudos to IPS for establishing a new go-to resource on donor-advised funds, one that is independently funded (not by a DAF sponsor), and providing its analysis for everyone to see, scrutinize, and …
The Philanthropy Project is not anti-DAF… and here's why
When people hear about the Philanthropy Project, sometimes we hear back, "But I think donor-advised funds (DAFs) can be useful."
We agree! We are not anti-DAF. We do not favor getting rid of DAFs.
We aren't anti-car, but we think there should be speed limits. We aren't anti-beer or anti-cocktail, but we support drunk-driving laws. Morphine is a crucial drug for severe pain, but we're glad it's regulated.
To be perfectly clear: we are not anti-DAF. DAF accounts can serve as efficient and generous tools to manage charitable contributions, which the world needs more of. We are, however, against the ways DAFs get used for private benefit, to support illegal activities, or when Wall Street firms manipulate tax deductions and their fees through DAFs.
"But I use my DAF responsibly and so do my friends who have DAFs!"
That's wonderful to hear. You and your friends probably also don't drive drunk. But we still need laws against drunk driving.
"If I want to put $10 million into a DAF and let my children decide after my death whether and how to give it out, I should be able to."
Yes, you should! But you shouldn't get an immediate charitable tax deduction just for socking it away now. Instead, you or your children should get a tax deduction when it is converted into an actual public benefit. That result does deserve a tax deduction.
So what do we think? The speed limits and impaired driving laws should be for donor-advised funds, private foundations and endowments. Promoting effective policies on this question is just what the Philanthropy Project is about.
When does 5% not equal 5%?
When does 5% not equal 5%?
A simple guide for the perplexed on private foundation payout
BY DAN PETEGORSKY
Super-smart researcher and analyst Dan Petegorsky explains why the "required 5% payout" for foundations isn't what it appears, in particular because their own expenses count towards the requirement.
It is common knowledge that private foundations are required to pay out 5% of their assets each year, but what does this actually mean? A short answer would be some 5% of X (defined below) must be used for expenditures for public benefit.
What tends to be less well known is how and why private foundation payout numbers just don’t seem to add up when people look at foundation tax filings.
How do we get to what’s called the payout rate? The answer is relatively straightforward (with a few wrinkles), though the terminology and the details of the precise calculations can indeed be mystifying:
- “Assets” doesn’t mean the total net assets figures that show up on Part I of the 990PF form, and
- “Payout” doesn’t mean just the amount the foundation spends in grants.
So how does the IRS determine how much a foundation is actually supposed to pay out?
Instead of “payout” the IRS uses the term “Distributable Amount” (Part X, Line 7). That amount is based not on taking 5% of all the foundation’s assets, but of what it calls the “Net value of noncharitable-use assets” (Part IX, line 5). Since assets can include things like the offices and equipment the foundation uses in furtherance of its charitable activities, we’re mainly talking about the market value of the foundation’s investments. And the foundation subtracts 1.5% to allow for cash it uses for charitable activities. The IRS calls this 5% the “Minimum investment return” (Part IX, line 6). The following examples are from the 2023 Form 990PF of the Evelyn and Walter Haas Jr Fund:
To get from there to the amount the foundation is required to distribute, the IRS deducts the 1.39% federal excise tax the foundation pays on its investment income, and certain business expenses (Part X, lines 2a-c), and then adds in things like any grants that they have counted in the past but have been returned (Part X, line 4).
So that’s how you get to what we colloquially call their payout requirement (Part X, line 7).
How does the IRS figure out if the foundation has actually distributed what it was supposed to?
As noted above, “payout” doesn’t just mean grants. The term the IRS uses is “Qualifying Distributions” (Part XI). What else goes into “qualifying distributions” besides grants? In the simplest terms, the main elements are:
• Expenses related to the grantmaking activities of the foundation, reported on Part I lines 13-23, “including necessary and reasonable administrative expenses, paid by the foundation for religious, charitable, scientific, literary, educational, or other public purposes, or for the prevention of cruelty to children or animals” (from the IRS 990PF instructions, p. 16). These can include the usual categories any nonprofit incurs: salaries and benefits, occupancy expenses, other professional fees, and travel and event expenses - e.g., for board meetings. (These qualifying distributions do not include the costs of managing investments.)
Clearly there are many judgment calls involved in foundation spending decisions, particularly deciding whether these expenses are necessary and directly “relate to activities that constitute the charitable purpose(s) of the foundation.”
These expenses are called “Distributions for charitable purposes,” and are detailed on the first page of the 990PF, in Part I, column (d), lines 13-26, with the total carried over to in Part XI, line 1(a).
• Program related investments. This is a larger topic, but basically these are investments that align with the foundation’s purpose and that generate below market returns. They are allowed to be counted just like grants, and are summarized in Part XI line 1(b), with details on Part VIII-B.
The IRS form does not itself report what the foundation’s actual “payout rate” would be. Instead, Part XII reports how much the foundation’s Qualifying Distributions have either exceeded or fallen short of the Distributable Amount. In a nutshell:
- If they’ve given out more than the minimum, they’re allowed to carry over that amount into the next years (for as long as 5 years) in case they fall short in the future (Line 9).
Since the Haas, Jr. Fund consistently distributes more than the required amount, this amount grows from year to year. - By contrast, if the foundation has fallen short of the requirement, then Line 6(f) shows the amount of “undistributed income” they’re required to make up in the following year. If they then fail to distribute that amount they’re required to pay a 30% excise tax on the amount they fall short, which then gets even steeper if they still fail to pay up. (More about the surprising dollar totals in “undistributed income” to come – a critical compliance matter and trapped value problem – ripe for a future examination.) The following example is from the 2023 Form 990PF of the Lilly Endowment.
First, Part XII, line 1(d) shows the amount the foundation is required to distribute in 2023. Note, however, that Line 2(c) shows that in 2022 they had fallen some $1.4 billion short of meeting that year’s requirement:
So before applying any of their 2023 qualifying distributions (Line 4) to meet the 2023 requirement, the foundation first needs to make up for the 2022 that shortfall, leaving just $125.5 million to meet the 2023 requirement:
The result is that the foundation carried forward an even greater amount of undistributed income - $2.1 billion – that it needs to make up in 2024 (Line 6f):
That’s the fine print. And what about the payout rate? Using IRS terminology, it equals Qualifying Distributions divided by Net value of noncharitable use assets. So for our two examples:
| Year | Net value of Year noncharitable use assets | Distributable Amount | Qualifying Distributions | Payout Rate | |
|---|---|---|---|---|---|
| (Part IX line 5) | (Part X line 7) | (Part XI line 4) | |||
| Evelyn And Walter Haas Jr Fund | 2023 | 453,710,585 | 22,473,663 | 29,523,422 | 6.5% |
| Lilly Endowment Inc | 2023 | 45,493,346,401 | 2,247,414,647 | 1,548,655,658 | 3.4% |
ABOUT THE AUTHOR: Dan Petegorsky is a consultant to the Institute for Policy Studies and other infrastructure leaders. He is formerly the policy director for the National Council for Responsive Philanthropy. You can read more of his writing here: https://ips-dc.org/ips_author/dan-petegorsky/