Feb 24, 2024 - Economy

The good news about closed DAF accounts

Data: DAFRC; Note: Among DAFs that are currently open; Chart: Axios Visuals
Data: DAFRC; Note: Among DAFs that are currently open; Chart: Axios Visuals

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.

  1. 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.
  2. 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.

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