Zombie Philanthropy: What I Learned About Donor-Advised Funds as a Foundation Insider

Editor’s Note: This article was originally published on February 5, 2019.

Not long ago, I woke up to the sudden realization that I’d been doing a terrible disservice to society.

That moment of clarity came at the start of 2018, during the heaving sigh that always follows the crush of activity that is Q4 in Big Philanthropy. It was my second full year as a development officer at Silicon Valley Community Foundation (SVCF), the largest community foundation in the world. By that point, I was leading our efforts to open new donor-advised funds (DAFs).

DAFs were our core line of business on the way to successfully raising $1.3 billion for the second year in a row. A staggering figure for any nonprofit, but also one to which our team had become numb. We didn’t really feel connected to the money that was coming in, or whatever good in the world a donor might do with their DAF—which I later realized wasn’t just an oversight, it was by design.

The DAF Seduction

In case you haven’t heard of them before, DAFs are charitable grant-making funds that an individual or company can create by donating a wide assortment of assets, from cash and stock to real estate, cryptocurrency, and more.

The donor enjoys an immediate and maximum tax write-off when they make their donation to a DAF sponsor like SVCF or Fidelity Charitable Trust, which then administers the fund on their behalf. The donor can then “advise” their fund to make grants to nonprofits—or not—until the end of days.

Because while individual sponsors like Fidelity, the Jewish Communal Fund, and the Sierra Club Foundation vary in their individual policies, there is no requirement by law that the donor ever make a grant to a nonprofit.

Under this system, individuals can write off millions in taxes immediately even if they have no plans to truly give away their money anytime soon. And I was greasing the wheels for it, each and every day.

To be clear, donors can never get back the money they put into DAFs. When the gift is completed, it can only ever be used for a charitable purpose, and thus will likely make it into the hands of various nonprofits at some point in time. But when that might happen is entirely up to the donor.

A big selling point of DAFs is that a donor who needs to give away a large sum of money, but who isn’t sure what they want to do with it, can put it into a DAF and work out their giving later. Many sponsors offer philanthropic advising as part of the package, so that donors can be more strategic about their impact than if they had been rushed into something. And because the fund is invested, their charitable dollars should grow while they decide.

Supporters also argue that DAFs democratize philanthropy by allowing someone with as little as $5,000 to open a fund that operates more or less like their own private foundation.

Indeed, these are all things I said many times to many people who needed convincing.

What I say now is that in an era when 40 percent of Americans are living paycheck to paycheck and can’t cover a $400 emergency expense, it is disingenuous to say a $5,000 requirement is “democratizing” anything. It does expand access to a unique set of services, but not to a group that was previously disenfranchised. If you have that much to give away, whether it gets you over the standard deduction or not, you are already amongst some of the most privileged people in this country—and not in need of a convenient shelter for your wealth while you think about who deserves a piece.

As for strategic support, the majority of donors who created DAFs at SVCF (typically referred to us by their CPA, wealth manager, or similar advisor) did so because it served their financial goals, not because they were moved to become philanthropists. Having mitigated their tax burden, they accomplished their goal, so those who actually tapped their philanthropy advisor on any regular basis were few and far between.

Likewise, community foundations and other DAF sponsors make their dollar by taking a percentage of the total assets in their donors’ funds, creating obvious incentives to continue building up those assets instead of encouraging donors to make grants. The entire business model depends on it.

It took me awhile to understand why we were never encouraged to ask donors what inspired their giving. Then I realized that it didn’t matter.

Charity that Amplifies Inequality

The tragedy here is that everything is working like it’s supposed to. Financial advisors look good for helping to preserve their clients’ wealth, which is their job. DAF sponsors increase their revenues and maybe their prestige while promoting it, all through the lens of “fundraising.” Donors get their tax write-off and are now bona fide philanthropists who can make official grants to nonprofits whenever they get around to it.

Philanthropy is defined in the Oxford dictionary as “the desire to promote the welfare of others, expressed especially by the generous donation of money to good causes.” The donors who work through SVCF, Fidelity Charitable Trust, the Goldman Sachs Philanthropy Fund and others undoubtedly make generous donations in their time, and indeed, have some desire to promote the welfare of others.

But the “good cause” that is best served here is, without question, the donors themselves.

Even when a donor feels compelled to make a grant, it’s often because they were solicited by someone in their circle to give to their prestigious alma mater, their kids’ private school foundation, their local symphony, etc. Which, as Stanford Political Science Professor Rob Reich points out in his new book, Just Giving, leads to “charity that does not serve to redress disadvantage… [rather] it serves to amplify and exacerbate the advantage” of the wealthy.

This is what inevitably happens when you create something that looks and acts like a private foundation but doesn’t have any mission to guide it—or any rules to govern it.

In an email interview for this piece, David Callahan, founder of Inside Philanthropy and author of The Givers: Wealth, Power and Philanthropy in a New Gilded Age, puts it this way: “DAFs have rendered moot the regulatory regime that surrounds foundations and the civic compact it embodies—namely, you can get a deduction for storing big piles of cash, but there are payout and transparency requirements. That compact is dead because being regulated is now purely optional—thanks to DAFs.”

That compact is dead, and philanthropy with it. But it can live again.

Long Live Philanthropy

To start, we need to require annual payouts, compelling donors to put their money to work every year. I recommend 10 percent annually, ensuring that most funds can’t get a better return on investment than what they are deploying to the community. This will also reorganize the incentives of DAF sponsors so that accruing assets is a less viable strategy than providing exceptional philanthropic advising (and charging a higher rate, if they think they’re worth it).

DAFs should also be required to spend down within a certain number of years (a decade at most), because 10 percent per year doesn’t nearly rise to the challenge of this moment in history.

This is the beginning of the reform we need to discuss on a federal level and, preferably, with the full participation of DAF sponsors, to justify the continued existence of donor-advised funds.

And to anyone reading this who is managing a DAF right now: In an age of extreme wealth inequality, opioid epidemics, failing institutions, near-irreversible climate change… please give. Give all you can, and don’t be afraid of what you won’t be able to give tomorrow. Ask people for help if you’re not sure how—there are a lot of us who do that work. Reject this zombie philanthropy and embrace the urgency of freeing us all from a system that is on the brink of failure.

Chuck Brown is the founder of Orion Advising, an Oakland-based consultancy supporting entrepreneurs and funders who seek a just transition to the new economy.