DAF Reform Is on Biden’s Wish List. Does it Stand a Chance?

Billionaires love donor-advised funds. Just look at the hundreds of millions of dollars in gifts that their foundations shower on DAFs each year.

Google co-founder Larry Page sent all but 0.000004% of his foundation’s grants to a DAF in recent years. Hedge fund billionaire Stephen Mandel Jr. gave 99.9% of the half-billion dollars his foundation has granted over the past decade to a DAF. And Elon Musk has given tens of millions of dollars — three-quarters of his foundation’s distributions — to a DAF since 2015.

But President Joe Biden has once again signaled his desire to rewrite the rules of this romance, and for good reason. While we’ve acknowledged the clear advantages DAFs offer, there are some pretty messed up rules governing them, including how they interact with foundations. A 2024 budget proposal released this month by the Biden administration rekindles last year’s attempt to stop foundations — whether of billionaires or any other donor — from counting grants to donor-advised funds toward their legal requirement to distribute at least 5% of assets each year.

While experts give it no chance of passing this year, the proposal from the very highest levels of government for reform adds to an ongoing push for change, and may signal a longer-term commitment by Democrats to include such reforms within a broader vision of rebalancing the tax system. That builds on growing concerns about payout and transparency as DAFs continue to climb in popularity with billionaires and the general public.

“The pressure will keep building because of the volume of money going into DAFs,” said Chuck Collins, director of the Charity Reform Initiative at the Institute for Policy Studies and an IP contributor. But for now, would-be reformers are simply outmatched. “There isn’t enough of a countervailing organized group to push for it, whereas there’s very powerful defenders of the status quo.”

Reports last year from the Institute for Policy Studies and Bloomberg News demonstrate the sheer volume of cash flowing to these accounts. IPS found that foundations gave more than $900 million in 2018 alone to commercial donor-advised funds, while Bloomberg reported at least $4 billion has moved from foundations to DAFs since 2016. The news outlet also determined that foundations would have fallen short of their required payout in more than 1,000 instances if not for their grants to DAFs.

That’s likely not even the full picture. Both analyses relied on digital filings — meaning the many paper filers who gave to DAFs were not counted — and omitted donations to community foundations, such as the New York Community Trust or Silicon Valley Community Foundation, whose DAF business has grown by leaps and bounds in recent years.

What would the proposal do?

The idea is to prevent the foundations of billionaires and other wealthy Americans from using DAFs to postpone putting those dollars to work to help others, potentially for decades, even as many of those same donors receive billions in tax breaks each year when giving to their philanthropies.

Like last year, the administration is proposing requiring any contributions from foundations to donor-advised funds be distributed within the next tax year, as laid out in its budget Greenbook. Other than the addition of a provision about foundations paying family members, the language is identical, according to Alex Reid, a partner at the law firm BakerHostetler, where he leads the charitable giving team.

DAFs have no annual payout requirement. A one-year timeline seems to be aimed at sidestepping concerns that such changes would discourage the popular use of DAFs by small-scale donors as a cheaper and easier alternative to setting up a foundation, or as pooled funds by sometimes massive foundation collaboratives.

For instance, hedge fund billionaire Stanley Druckenmiller’s foundation gave more than $50 million to a DAF between 2017 and 2019, but the grantmaker says all of that funding went to antipoverty group Blue Meridian Partners, which could not at that time receive direct contributions.

Brian Mittendorf, an Ohio State University accounting professor, told me the proposal addresses only “the lowest-hanging fruit” of the various concerns about DAFs. For instance, DAFs are not required to disclose their recipients, leading some to accuse them of being “dark money” pools. Foundations that use them therefore bypass their own legal transparency requirements. That would not change under Biden’s proposal. “This proposal allows you to even sidestep that issue,” Mittendorf said.

“Almost a nonstarter”

Biden’s proposal might mean change is in the air, but the president’s budget is always more of a wish list than a final product, especially given Republican control of the House.

“It is almost a nonstarter,” said Reid. “The whole budget is a bit of a messaging piece rather than legislation that we actually expect to see.” He sees the measure as one arm of a bigger push on taxation. “It’s part of a message that says inherited wealth is going to get taxed,” he added.

All the same, this is the rare Washington fight that features some bipartisanship. Biden’s budget drafts of this year and last are an encore of sorts to a 2021 bill, the Accelerating Charitable Efforts Act, that was introduced in the Senate by a Republican, Chuck Grassley of Iowa, and an independent, Angus King of Maine.

There are also prominent DAF critics, such as William Schambra of the Hudson Institute and Philanthropy Daily, who hail from the right-leaning side of philanthropy. “DAFs are an enormous whirlpool sucking that money away from charities into accounts that are institutionally inclined to be reluctant to disburse money,” Schambra told the New York Times in 2021.

And politicians of all stripes are increasingly agitating for philanthropic changes. J.D. Vance’s flame-throwing campaign that won him an Ohio Senate seat included broadsides against the Ford Foundation and rules governing legacy foundations.

Yet even the technicalities stand in the way of change. Reid, who also chairs the American Bar Association’s Tax-Exempt Organizations Committee, says that due to the bill’s negligible revenue impact, it is unlikely that Senate rules will allow it to be included in a reconciliation budget bill, the vehicle used in recent years — including to pass the Inflation Reduction Act — to avoid filibusters, as it requires only a simple majority vote.

Even getting out of committee might be a challenge. So far, no legislative proposals have come when the mood is right. The Senate bill did not get any traction. Biden has tried before. Earlier efforts like the Emergency Charitable Stimulus Act also fell well short.

What do would-be grantees think?

Jan Masaoka, CEO of the California Association of Nonprofits said DAFs provoked uniquely “visceral” reactions of “outrage” among her network’s more than 10,000 members. “That emotional sense of this is not seen by the foundation community because it’s hidden from them,” she said.

Masaoka’s organization partnered with Buffy Wicks, a state senator in California, to push for DAF reform in California in recent years, introducing several bills, though none reached a vote.

Wicks told me that hundreds of nonprofits engaged with her office on the bill in what she described as a “courageous” display of support. “What they were essentially calling into question is the community foundations who fund them, and being in opposition to the people that fund you is not a super-comfortable place to be,” she said.

Both Wicks and Masaoka were heartened to see the Biden administration reintroduce the proposal, even if it would be a narrow reform. For now, however, the likelihood of even that narrow change seems slim.

“Private foundations are institutions of the very, very wealthy,” Masaoka said. “And in our society, the very, very wealthy usually get their way.”

Featured