The good news about closed DAF accounts
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One of the perennial complaints about donor-advised funds — charitable giving vehicles that allow donors to front-load tax deductions without necessarily giving any money to charity — is that money tends to get tied up in them and never given away.
Why it matters: An important new paper from the DAF Research Collaborative suggests that worry might be overblown.
Where it stands: One of the big questions in the DAF world is how much money they end up giving to charity.
- Most of the time, that question is posed in the form of looking for something called a payout rate — what percentage of a typical DAF is given away each year.
- The DAFRC report, however, suggests that a crucial and largely overlooked role is being played by account closures.
How it works: An account closure happens when a DAF gives away all of its money and closes down.
Reality check: It's very difficult in practice to distinguish between account closures and account transfers, where a DAF is moved to a different custodian. But two data points suggest that closures could be driving a very large proportion of DAF giving.
- The chart above shows that more than half of all currently operating DAFs were opened just in the most recent five years. That's not because DAFs are seeing a massive surge of new openings — they're not. So it must be because older-vintage DAFs have mostly been closed.
- While the mean payout rate for active DAFs is 17%, the rate for all DAFs, including closures, is 22%. That's well above the standard foundation payout rate of 5%.
Between the lines: Some 22% of DAFs are inactive and have paid out no charitable contributions in the past 3 years. Those DAFs, however, tend to be smaller and younger than average.
- While 65% of DAFs contain less than $100,000, those DAFs in aggregate account for only 3.1% of all DAF money.
The big picture: Some DAFs act a bit like cheap-and-easy foundations, designed to exist in perpetuity and across generations.
- There's reason to believe, however, that most don't.
- Instead, the money is placed into the giving vehicle while it still has windfall status, before it becomes an entrenched part of personal wealth. Then, a few years later, when a suitable destination for the money is found, it's given away.
The bottom line: If young DAFs have low payout rates, that might not be a major cause of concern. There's a good chance that, within a few years, they'll be fully given away.
