The team at the DAF Research Collaborative recently published a working paper, (“Self-Regulating Donor Advised Funds; An Analysis of Inactive Account Policies and Endowed DAFs”) which analyzed the policies regarding inactive accounts and endowed funds at DAF sponsor organizations.
Authors Dan Heist and Kendra Stone from Brigham Young University offer a fascinating and concise look at the processes of sponsor organizations, what their priorities are, and what that may suggest for how we approach DAF donors.
Heist and Stone sampled policy documents from 158 DAF sponsor organizations. They also collected information on inactive accounts from 103 sponsors and on endowed accounts from 136 sponsors. This sample included national sponsors, community foundations, religiously-affiliated sponsors and several universities.
Recently-introduced legislation in Congress called the ACE Act is designed to encourage distribution of grants from DAFs in a timely manner, but that legislation remains stalled in Congress. The Heist and Stone paper found that sponsor organizations are “already regulating grantmaking and that the time periods related to grantmaking are much shorter than the 15-year window proposed in the ACE Act.”
Even so, in their research Heist and Stone that found that nearly 14% of donor advised funds didn’t make a single grant between 2017 and 2020.
WHAT HAPPENS WHEN A FUND GOES DORMANT?
When giving from an account stops, Heist and Stone found that the majority of DAF sponsors formulate their response based on several stages:
- Dormant/inactive: One respondent described a dormant or inactive account as “when no grant recommendations are received for a period of one year and the fund advisor(s) cannot be contacted.”
- Organizations response: The sponsor attempts to contact the donor advisors to encourage them to make grants or attempt to find another solution. 25% of the sponsor organizations make several contact attempts.
- Donor action: The donor has a specific timetable to take action, if any. This can range from 90 days to 18 months, per the report’s findings.
- Sponsor action: If the donors do not take action, the sponsor organization can take over grantmaking for the account (in a minority of cases after consulting the account’s granting history or succession plan) or closes it and redistributes the assets.
The sponsor organizations follow a similar pattern, per the paper’s findings. On average, sponsors intervene after 36 months of inactivity, which can include several criteria:
- Grantmaking is below the sponsor organizations’ annual spending policy (the report cites an average of 5% of assets).
- Not responding to contact attempts.
- An account where no additional contributions are added.
- A donor cannot provide an explanation for the lack of grantmaking.
Donors of these dormant or inactive funds are generally given an average of 18 months to keep their accounts active before they are closed for good. Donors can reactivate a DAF in several ways: by recommending grants, establishing a grantmaking plan, or contributing to the balance.
Per Heist and Stone, the majority (approximately 83%) of sponsor organizations have policies in place to regulate accounts. At the top of the range were national sponsors and community foundations. Religiously-affiliated and educational sponsor organizations were less likely to have distribution policies in place.
The Internal Revenue Service currently does not offer guidelines to sponsors on how to manage inactive funds, although this would likely change if the ACE Act were to move forward through Congress. Within the industry, the Council on Foundations has created documentation samples and other guidance for members to help regulate the process.
AVERAGE PAYOUTS FOR ENDOWED DONOR ADVISED FUNDS
Endowed DAFs are defined in the report as “a DAF that limits grantmaking according to an annual spending policy, like an endowment, and allows for advisory privileges on the grantmaking, like a DAF.”
Often created for long-term donors who want their philanthropy to continue after they are gone, the endowment option makes sense for the sponsor organization, which has it in their best interest to keep funds active. However, according to Heist and Stone, less than half of sponsors (47%) offer donors the option to endow their funds. Interestingly, it’s the smaller sponsors that are more likely to offer endowment than their larger counterparts.
Donors can endow a fund by limiting the annual distribution amount from a portion of the funds or the entire balance. Per Heist and Stone, the average annual payout percentage for an endowed DAF is 4.4%.
Sponsor organizations also require a succession plan in case of the death of the primary donor(s). Nearly half of the sampled organizations offer successor advisors and sponsor organization contributions. Slightly more offer legacy endowments as an option to their donors. Succession plans reviewed by the authors include the following:
- Charitable beneficiary: A portion, or all, of the account balance is granted to one or more charities.
- Successor advisor: These pre-appointed individuals “have the same privileges as the original advisors regarding grant communications” but cannot use the principal funds or amend the fund. Typically, successor advisors may be appointed for one generation for funds with assets under $1M and on an unlimited basis for funds with assets of $1M and above.
- Legacy endowment: These “exist in perpetuity, have a designated purpose and are often named funds.” While similar to other endowed funds, they are established after the death of the donor.
- Sponsoring organization: The research found that many DAF sponsor organizations give donors the option to contribute the remainder of the fund at their death to the general endowment fund as part of their succession plan.
HOW COMMUNITY FOUNDATIONS AND RELIGIOUS SPONSORS DIFFER FROM COMMERCIAL SPONSORS
One statistic that was particularly enlightening in Vance-McMullen and Heist’s study: even though community foundations and religiously-affiliated sponsors were more likely to offer the option of endowing a donor-advised fund, “only 10% of DAF donors at community foundations and religiously affiliated organizations were officially designated as endowed…[but] many more used their DAF like an endowment – 35% [of funds] had a payout rate under 5%.”
Heist and Stone used this statistic to show that many donors take a long-term approach in their philanthropic giving without the official endowed status. They noted that smaller DAF sponsor organizations (those more focused on asset growth) hold the largest portion of total DAF assets in the United States.
Interestingly, these existing endowment policies would become illegal under the ACE Act, as endowed DAFs are designed for longer use than the 15-year period recommended in the Act. While organizations such as the Initiative to Accelerate Charitable Giving – a coalition of philanthropists, foundation leaders, nonprofits and those invested in philanthropy – is in favor of the legislation, the Council on Foundations is not. As no progress has yet to be made in advancing the bill, it is left to those in the industry to find a common ground on disbursement versus long-term planning.
In the report, Heist and Stone highlight the need for further research to be done to better understand DAF philanthropy. Endowed DAF policies are more common than previously thought, and funds are more consistently managed by sponsor organizations than many knew. As discussion of the potential regulation of DAFs continues in the nonprofit sector, this study could further inform future legislation and general policymaking regarding when and how DAF donors grant from their DAFs.