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June 14, 2021
Charities Lost $300B as Advised Funds, Foundations Grew

May 6, 2021 — As assets poured into donor-advised funds and private foundations during the last three decades, working charities in the United States, the purported ultimate destination of those funds, lost out on an estimated $300 billion, according to a report published this week.

“While individual giving has remained largely constant, there has been a substantial shift in this giving toward donations to private foundations and donor-advised funds and away from direct giving to charities,” according to the report from the Boston College Law School Forum on Philanthropy and the Public Good. “Combined giving to donor-advised funds and private foundations has increased from 5% in 1991 to 28% in 2019, an increase of over 500%.”

The report, based on research conducted by Ray Madoff of Boston College Law School and James Andreoni of the University of California San Diego, notes, “Though more funds are flowing into, and growing in, private foundations and donor-advised funds, there is no evidence that charities have benefitted from this trend.”

Total individual charitable giving encompasses direct giving to working charities, as well as contributions to private foundations and donor-advised fund (DAFs). A DAF enables donors to contribute cash, securities, or other assets to a fund and take an immediate tax deduction, and then direct which charities those invested funds should support.

While charities received on average 94.1% of all individual giving in the five-year period prior to 1991, during 2014-2018, the most recent years for which data are available, total donations received by charities equaled between 71%-75% of total individual giving, the report notes.

If charities had received donations at the rate of 94.1% of individual giving, they would have received an additional $300 billion during 2014-2018, according to the researchers.

Since Fidelity Charitable, began operating in 1991 as the first commercial DAF, “donor-advised funds have experienced exponential growth in contributions and assets,” according to the report. By 2019, DAFs held $142 billion, with one in eight dollars contributed to charity going to a donor-advised fund. During the same time, total financial assets held by private foundations increased from $166 billion to $996 billion.

Major donor-advised-funds claim that DAFs increase charitable giving by providing a place to hold funds that can be directed to charities as needed Funds held by DAFs don’t have to be distributed, which means individuals can get a tax deduction by contributing to a DAF, but working charities will not benefit if the funds held by the DAF are not distributed.

Foundations are required to distribute at least five percent of their assets each year. Some foundations, however, meet the payout requirement by giving to DAFs, which means less money goes to working charities.

At a recent forum in Boston, Massachusetts nonprofit leaders agreed that regulations surrounding donor-advised funds need to change to encourage greater distributions from those accounts.

In 1991, according to Giving USA, 5% of individual giving went to foundations (including private foundations and community foundations). By 2019, 13% was going to donor-advised funds and 15% was going to foundations, according to the report.

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