Five Ways to use Donor Advised Funds Ethically

Joan Harrington is the director of social sector ethics (@SocSectorEthics) at the Markkula Center for Applied Ethics. Views are her own.

Charitable giving by individuals increased slightly in 2020, reaching more than $324 billion. More than 10% of those gifts were placed in donor advised funds (DAFs), where donors give to a sponsoring organization, such as Fidelity Charitable or a community foundation, which generally keeps the funds until the donor requests distribution to working charities. There is no legal mandate as to when donors must request distributions and donors take a tax deduction at the time of giving to the sponsoring organization. The amount being held in DAFs in 2019 was almost $142 billion.

Any giving is a good thing but giving through donor advised funds raises some ethical issues. In this time of extraordinary need due to the pandemic, racial justice issues, environmental disasters, and more, shouldn’t donors get their money to working nonprofits as quickly as possible? Should they hold funds for years without a clear plan for distribution? Should they get a tax deduction while not distributing their donations?

Much has been written about the benefits and problems with donor advised funds and criticism is often based on the limited funds actually distributed from DAFs, and on the fact that there is no requirement that donors ever request distribution from the sponsoring organization to working charities, leaving funds unused in the DAFs. Legislation is pending in Congress to address these types of distribution issues.

Are there reasons that justify a donor not giving directly to working charities and instead using a DAF? Presumably, the donor has decided they have funds they wish to give, and they wish to receive a tax deduction at the time of giving. What might justify the delay in distribution that DAFs allow?

Donors may use DAFs ethically when there is a plan for distribution and a solid strategy behind the delay in giving to working nonprofits. For example:

1. A donor may have a wealth event that they do not anticipate will be repeated and they may need time to plan on where to give their gifts. A DAF allows the donor to capture the tax benefit and gives them reasonable time to plan their charitable giving.
2. Some donors may choose to accumulate funds to be able to address future emergencies such as natural disasters. This requires a well thought out plan for what constitutes the event that would trigger distribution.
3. If a donor seeks to help one or more nonprofits over multiple years, it makes sense to ensure the funds will be there by preserving them in a DAF. Donors should think through whether this is the best way to address the issues and to help the nonprofits the donor cares about, ideally by communicating with the nonprofits.
4. Community foundations and single-issue charities such as religious organizations and others are often the sponsoring organizations for DAFs. These organizations generally have funds with a well-developed plan centered on their missions. Donors may choose to give through these funds to address a particular issue or the critical needs of a community.
5. DAFs may also be used as a tool for family philanthropy, through which they can teach future generations about giving. Donors should consider whether they are striking the right balance between the goal of teaching about philanthropy and the current needs of nonprofits and their clients.

The number of donor advised funds has grown substantially in the last 10 years and trends suggest they will continue to grow. There are ways donors can use donor advised funds that are both ethical and effective. Donors need to remain aware of the critical needs in the world and particularly the issues they care about, and continue to plan and strategize for best use of the donated funds.