Welcome to Spend Donate Invest! I go by GG, that’s short for Genet Gimja and I’m your host as we explore the topic of how we can align our values, our beliefs, our politics, and what we do with your money on a daily basis.
Today we’re going to be talking about this strange financial tool we have in the US where we can get a tax writeoff today for a donation that we aren’t even really giving today. Sound strange? I will break it all down in a very clear way today.
We’re going to be talking about DAFs, donor advised funds. Let’s talk about the good, the bad and the ugly.
Let’s start with the good shall we?
So here’s what’s great about DAFs,
You can donate money or art or real estate or crypto, anything that is of value, and then you immediately get the tax writeoff but you don’t have to actually decide where to donate the money yet. The money gets put aside in an account where it is invested by a DAF manager and then it will grow.
In the past, people would just open a foundation if they wanted to do this. But the disadvantage with foundations are that you have to file some IRS paperwork that indicates what you’re doing with the money in your foundation, and I think they were a little more careful about valuing non-cash assets that you were donating towards your foundation versus your DAF. The third thing that is more restrictive about a foundation versus a DAF, and this is depressing, is that if you set up a foundation you are legally required to give out 5% of the money in your foundation every year, such a small amount of money given that the whole point of the tax writeoff was that you were actually giving to charity. With the DAF, you aren’t even required to give that measly 5% a year.
And actually, foundations don’t even really have to give 5% away because there’s a loophole that allows them to just give that 5% to…say it with me….a DAF. LOL. Can you believe that? Instead of giving the money away, they can just move it into another account that they still control, a DAF.
They are super easy to set up, you can set up a DAF account at Fidelity, Schwab, you name it, they probably have a DAF that they offer.
Almost 2 million Americans have a DAF and the average size is around $117,000. I’m going to attach the DAF report from the National Philanthropic Trust in case you want to do a deeper dive on all of this data. And they have all their reports and data analysis on that site all the way back to 2014 if you’re interested.
More and more people are putting money into DAFs, but that second step, where the money actually goes to charity, that step isn’t happening. Only about 23% of the money actually gets donated. And there’s no forcing mechanism to make sure that the money actually moves along to the actual charities.
And if you think about it, there’s no incentive for the money managers who are managing your DAF to actually encourage you or remind you to make sure it is given away. They make money the longer they are managing the money, so, the incentives are clear.
Oh my goodness I forgot to say we’ve transitioned from the good to the bad. The bad is that most of the money in DAFs is just sitting in those accounts growing and not being given away.
So what’s the ugly? You know, as I was researching for this episode, I learned something new about DAFs and that is the more lax regulations of DAFs. I was aware that there was less transparency with DAFs because you don’t have to file as much paperwork with the IRS like with a standard foundation, but I didn’t know that they’re also not as lax in making sure that the value of what you put into your DAF really is what you are claiming it is. So that’s why you’re likely to see a lot of people putting things like crypto or art or real estate into a DAF versus a standard foundation, because there’s less stringent checking on that.
So what do we do with all of this info? People need a lot of help these days. I want to encourage you, if you have money to give this year, actually give it away.
If you just absolutely don’t have the time to think about where you want to donate it, but you want to take the tax writeoff this year, then go ahead and set up a DAF, but I want to encourage you to give yourself a deadline to have all of the money given away out of that DAF account by the end of 3 years.
That’s what policy experts and DAF experts are fighting for. There’s an interesting writeup of all of the policy suggestions if you go to inequality.org, it’s called “until the river runs dry.” I’ll include a link in the show notes.
So here’s what policy changes they are recommending, I’m only going to share the recommendations related to DAFs since that was our topic today:
- Establish a three-year payout requirement for DAFs
- Exclude grants to DAFs from counting toward private foundation payout- currently foundations can use the loophole to avoid giving 5% away by putting it into a DAF.
- Exclude grants to DAFs from counting toward DAF payout- there are no laws right now to require DAFs to give away any of the money, but in the instance that this requirement becomes a reality, this recommendation is to not allow a loophole like the foundations currently have.
So if you’re going to set up a DAF, I’d encourage you to set up a deadline to drain it by the end of 3 years, at the latest. And even if it does take you the whole 3 years, I’d encourage you to obviously give away all gains the account has grown by each year and some percentage of what you originally put in there. So maybe you decide you’ll give away 10% a year for the first year and second year until you finally drain the entire DAF by the third year.
To recap,
- DAFs are an alternative to opening a foundation if you want to get the tax deduction for a donation but you haven’t decided exactly where you want to donate the money yet.
- There are no legal requirements to actually give away the money that you’re holding in that account, but I am suggesting committing to giving away a certain percentage every year, for example 10% until you finally drain the entire DAF account.
- I suggest giving yourself 3 years to drain your DAF.
Let’s end this discussion with a quote today, it comes from Cecile Richards, and here is the quote:
“Don't sit around and wait for the perfect opportunity to come along — find something and make it an opportunity.”
Thank you for listening today. If you can think of someone who you think might be interested in learning more about DAFs, send them this episode!
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And I think that’s it! Thanks for stopping by and let’s talk again soon…
Links from today's episode:
Charitable Tax Reform For the 21st Century by Roger Colinvaux and Ray D. Madoff
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3462163
Until the River Runs Dry by by Chuck Collins Helen Flannery Dan Petegorsky Bella DeVaan
https://inequality.org/great-divide/charity-reform-video/
The 2023 DAF Report released by National Philanthropic Trust
https://www.nptrust.org/reports/daf-report/