The president’s war on donor-advised funds imperils the flexibility and innovation that help truly effective philanthropy thrive.
In unveiling his fiscal year 2025 budget blueprint, President Joe Biden has laid bare his administration's policy manifesto. At the heart of this budget lies a broad vilification of “wealth.”
Of particular concern is the proposal for a new 25% tax on assets, extending its reach to encompass illiquid assets. This, alongside proposed tweaks to capital gains and carried interest taxation, casts a long shadow over the landscape of charitable giving. The ripple effects of such measures, compounded by new reporting obligations for trusts, could severely constrict the flow of funds to charitable causes and therefore the communities they support.
Much like Biden’s 2024 and 2023 proposed budgets, this year’s budget includes a provision that would “limit the use of donor-advised funds to avoid a private foundation payout requirement.” While Biden levies criticism against DAFs for their perceived potential for abuse by foundations, data paint a different picture.
According to the National Philanthropic Trust, donations from DAFs to charities reached an estimated $52 billion in 2022, demonstrating their significant contribution to the philanthropic landscape. These flexible giving vehicles, increasingly popular with individual donors, are also occasionally utilized by private foundations as a giving tool. Philanthropy Roundtable found several of the innovative and valuable ways in which private foundations use these giving vehicles to pursue their charitable missions to benefit communities in need.
The vast majority of private foundations are small, with lean resources for required administrative functions and grantmaking. DAFs, in this context, act as catalysts for pooling resources from multiple donors for larger, more impactful grants. This was evident during the COVID-19 pandemic, when foundations and generous individuals joined to pool funds in order to increase their impact. Rather than shutting off DAFs as a vehicle for such activity, we should celebrate their ability to facilitate effective giving during times of crisis.
Beyond simply amplifying financial firepower, DAFs offer an additional layer of expertise and due diligence. DAF sponsors, often national charities, community foundations or mission-based organizations, possess deep knowledge of the charitable landscape and best practices. They collaborate with foundations, offering valuable insights into effective giving strategies and ensuring grants are well-aligned with the foundation's mission and targeted toward organizations demonstrably creating positive social change. This collaborative approach fosters strategic philanthropy.
For instance, the Knight Foundation, with deep local roots in communities where it once held newspapers, uses DAFs in partnership with local community foundations. This allows them to leverage the expertise of these partners while offering larger grants to support local initiatives and amplify their impact.
Furthermore, DAFs may act as an administrative lifeline, freeing foundation resources from some of the complexities of grant management. This is particularly valuable for intricate grant structures such as challenge grants or multi-year commitments. DAFs handle the burden of record keeping, tax reporting and disbursement, allowing foundations to focus on their core mission, identifying and supporting worthy causes. This streamlining effect empowers foundations to be more efficient and effective in their philanthropic endeavors.
The true strength of DAFs, however, lies in their ability to unlock innovation. They may provide a platform for foundations to experiment and test the waters—piloting innovative approaches like social impact investing or collaborative funding models. These ventures, conducted through DAFs, act as trials, allowing foundations to assess the viability of these approaches before scaling them up. This sandbox environment fosters innovation, ultimately leading to more effective and fruitful philanthropic strategies.
Instead of stifling innovation with restrictive regulations, as with Biden’s proposed budget, we should celebrate the spirit of experimentation that DAFs facilitate among Americans seeking to give back. Foundations are not faceless bureaucratic entities; they are driven by individuals with a passion for positive change. It is crucial to foster an environment that empowers them, not one that binds them with the chains of excessive regulation.
The philanthropic sector thrives on flexibility and innovation. Donor-advised funds embody these principles, playing a pivotal role in amplifying the impact of private foundations and their philanthropic endeavors. Dismantling this system would only serve to impede the sector's ability to address pressing social issues and deliver positive change. Let us instead champion the innovative spirit that DAFs aid, fostering a future where philanthropy continues to flourish.
