According to the recently released 2022 Giving USA report on charitable giving in the United States, foundations have hit a significant milestone. A full 20% (1/5th) of all charitable giving is now coming from foundations. One reason for this is that private foundation endowments experienced double-digit investment growth in both 2020 and 2021, which presented an opportunity for increased giving in 2022. Strong financial markets are just one part of the story of what is driving growth in this sector, however. In fact, since 1982, funds given by foundations have increased every single year with the exception of four years (two following the dotcom bust and two following the 2008 financial crash).
Some presume that this growth is being driven by the increasing popularity of Donor Advised Funds (DAFs). In fact, some would argue that DAFs are supplanting private foundations.
To understand this, we must first dispel the Donor Advised Fund (DAF) myth. The myth goes something like this: "DAFs are private and easy so wealthy donors are putting their money there versus starting or growing private foundations anymore." The data simply tell another story than the hype.
In 2022, The National Philanthropic Trust (NPT) published their 16th annual Donor Advised Fund report. The data set is robust - 995 DAFs - so, this study is clearly representative. There is an estimated $234.06 billion in DAF charitable assets and more than $1.3 trillion in private foundation assets estimated for 2021. Comparing the two, DAF charitable assets amount to 18 percent of those in private foundations. Grants and expenditures from private foundations totaled $96.27 billion, while grants from DAFs to qualified charities totaled $45.74 billion - only 43% of what foundations gave in the same year. And, many foundations are giving to DAFs while retaining their private foundation status, so the actual number of individuals giving to DAFs without a private foundation pushes that number down - probably below a third.
It is also important to note that Giving USA removes grants from donor-advised funds (DAFs) housed in community foundations from the giving by foundations total, with the assumption that they would be double-counted if present in both giving by foundations and giving by individuals. Hence the growth in Foundation giving is not merely being driven by giving from DAFs, as many presume.
According to the NPT, there are now approximately 1.2 million DAFs currently active. The average size of an individual DAF account is estimated to be $182,842, with a payout rate of 24.2%. According to Fidelity Charitable, the largest DAF sponsor in the country, the average DAF holder makes 10 to 12 grants per year with an approximate average value of $5000. That’s not insignificant, but it is unlikely most donors giving at this level would consider setting up a private foundation, given that it typically costs thousands in legal and professional fees to start up and administer a foundation each year.
In a sense, DAFs are “democratizing” philanthropy, providing mainstream major donors many of the benefits of a private foundation without the costs associated with them. But the reality is DAFs aren’t “supplanting” private foundations amongst this group, as most who use them would never likely consider setting up a private foundation in the first place.
For those with more net worth to give away, however, a private foundation still makes more sense. The reality is that wealthy families and donors who are serious about philanthropy are doubling down on private foundations.
One big reason for this is because the lack of control over funds in DAFs is starting to become more known. Many assume it is only a matter of time before they become more and more influenced by social policy and political pressure. In 2019, both Schwab Charitable and Fidelity Charitable, two of the largest DAF sponsors in the country, announced that they would no longer give to the National Rifle Association. Recently, the Attorney General of Florida publicly accused Fidelity Charitable of having refused to facilitate donations to some other religious and conservative groups as well. Even so, when donors filed suit against these groups, the federal district court essentially told the litigants that they had no standing, and the merits of the cases were never heard. In both cases, the judge took one look at tax law and said all DAF holders have absolutely no legal recourse for anything a DAF does once it gets their money. They literally sign away all their rights.
Additionally, DAFs are notoriously bad at exercising any kind of control over funds or evaluating projects, deciding who to give to, etc. They are transactional charity banks. So, donors are finding themselves in a situation where not only do they have no control over their funds, but they still must do all the work to develop their own grantmaking criteria, process, and procedure.
DAFs have become a popular giving instrument for many, but it is unlikely they have or will supplant private foundations for those who have the means to start one.
Donors who are serious about their philanthropy will always want to know that their money is accomplishing their goals. At a certain threshold of giving, the best and most efficient way to do this is through a private foundation. What they pay in fund management and legal and accounting fees to keep the foundation operating the way they want, with their bylaws, and their intentions clearly written out and supported by all courts, is well worth the price. And, it gives them a legacy to share with their children and family that doesn't depend on the whims of others.
