Show Me the Money: Addressing the Oversight Gap in Private Foundation Donations to Donor-Advised Funds

By Kerry Gibbons. Full Text.

Americans’ charitable giving habits are changing. Since the 1990s, a new form of charitable giving (donor-advised funds, or “DAFs”) has skyrocketed in popularity. In 2018, DAFs held at least $72 billion in charitable dollars—representing a 200% increase from four years prior. DAFs’ ascendance can be attributed to their ease of use, integration into existing investment firms, and the remarkably few regulations governing their life cycle. These funds operate much like personal private foundations, but, unlike private foundations, they are subject to very few federal regulations. Donations to DAFs can sit in funds in perpetuity, the original donor can assign succession rights, and there is no requirement to disclose the recipient of the charitable gift. In stark contrast, private foundations are subject to more stringent IRS regulations, including an annual requirement to pay out five percent of its value to charities and mandatory disclosure of all organizations’ granted funds. These requirements were put in place via the Tax Reform Act of 1969, which aimed to prevent foundations from hoarding wealth and to promote public disclosure and oversight of charitable funds.

Beyond the sheer amount of charitable dollars sitting and gathering dust in DAFs, another troubling trend has emerged in the past few years: private foundation grantmaking to DAFs. Because DAFs are registered 501(c)(3) organizations, a donation to a DAF counts towards foundations’ five percent payout requirement—even though the funds, once in a DAF, are under no time limit to be paid out. Further, because DAFs are subjected to fewer reporting requirements, private foundations can use DAFs as a way to anonymize charitable giving. In both ways, private foundations use DAFs as a legal loophole around the requirements put in place by the 1969 Act.

This Note presents a novel analysis of the private foundation-to-DAF problem and situates its call to reform within contemporary calls for greater transparency in charitable giving. It then proposes a two-pronged federal and state solution to address the payout and transparency issues created by private foundation-to-DAF transfers. This solution fits neatly into the federalist scheme that governs charities’ oversight and carefully addresses the two substantial harms named in the Note: the delay of charitable funds to working charities and the avoidance of transparency.