The Curious Case of Donor-Advised Funds
(Previously published on Medium)
Donor-Advised Funds (DAFs) have quietly become one of the most powerful, and misunderstood, tools in modern philanthropy.
While DAFs are not new, their growing prominence (estimated at over $250 billion in assets¹) has invited a new wave of scrutiny from policymakers, philanthropy watchdogs, and tax regulators alike.
Commentators often portray DAFs as structural loopholes: mechanisms that enable donors to claim immediate tax benefits while deferring or indefinitely delaying the distribution of charitable funds. Some extend the criticism further, associating DAFs with broader ‘dark money’ concerns and funding opacity.
The claims are compelling. But are they accurate? And more importantly, do they fully account for the strategic architecture that DAFs represent?
Analysts have advanced four principal arguments against DAFs:
Donors receive immediate tax deductions before charitable disbursement.
Donor-advised funds enable donor anonymity, raising transparency and accountability concerns.
The absence of mandatory payout rules risks indefinite ‘warehousing of wealth’.
DAF managers are financially incentivized to delay grantmaking.
But, when tested against real-world data, a more precise picture of DAFs emerges.
The Tax Deduction Argument
DAFs are often portrayed as sophisticated tax shelters that allow donors to capture immediate deductions while deferring grants indefinitely. This framing misconstrues the fundamental logic behind charitable tax incentives.
Firstly, charitable deductions, codified under §170(c)(2)(B) of the Internal Revenue Code, are not unique to DAFs. They exist to promote the irrevocable transfer of personal wealth into the charitable ecosystem — an economic good that policymakers have long sought to encourage. To suggest that DAFs are anomalous in this benefit overlooks that nearly every form of charitable giving, whether direct donations or private foundations, operates on the same principle.
Secondly, the flexibility in timing that is afforded to DAFs encourages donors to make contributions during high-income years. This not only maximizes the immediate tax benefit, but also earmarks large donations exclusively for charitable use. Recent data from Fidelity Charitable illustrates this effect: during periods of economic crisis, such as the COVID-19 pandemic, DAF distributions surged, providing essential liquidity when many charities faced operational collapse.²
What analysts label as a ‘loophole’ is, in operational reality, a structural feature designed to create patient philanthropic capital that can be deployed precisely when charities need it most.
The ‘Dark Money’ Argument
Much of the recent political rhetoric surrounding DAFs focuses on anonymity while painting it as a cover for ‘dark money.’ This argument conflates philanthropic privacy with political scheming, ignoring both legal frameworks and operational reality.
The argument’s logic is as follows. DAF holders recommend charitable donations to groups like the National Rifle Association (NRA) and the Southern Poverty Law Center (SPLC). But by law, DAFs can only fund organizations with 501(c)(3) status. Contributions to politically active 501(c)(4)s, PACs, or campaigns are prohibited, and violations trigger severe penalties. Donations to the 501(c)(3) arms of ideological groups, whether conservative or progressive, must adhere to strict IRS guidelines barring lobbying. To do so would jeopardize a DAF manager’s tax-exempt status.
While donors can choose anonymity when making charitable grants, that option isn’t new or unique; it’s been baked into philanthropy for generations, protecting donors who support sensitive causes from undue pressure or scrutiny. What it does not support is political scheming. If donors choose to support ideologically-sensitive charities or think tanks, those recipients still must operate within strict IRS guidelines that prevent political campaigning. To call this ‘dark money’ misclassifies ideological differences as illicit funding.
The benefits of anonymity cuts both ways. Anonymity protects donors who support causes that may be politically, socially, or personally sensitive. It enables grants to organizations working across a wide spectrum of fraught fields: from climate innovation to the rights of marginalized people. In an era of heightened social polarization, anonymity safeguards the philanthropic ecosystem itself from political retaliation or reputational risk. Where people are publicly shrinking from causes no longer favored by institutional discourse, donors may need the privacy cover. Eliminating this protection would not merely curb potential abuses. It would deter legitimate philanthropy across sectors (irrespective of where one stands on these issues). To dismantle donor-anonymity would risk chilling charitable risk-taking across a broad spectrum of causes.
The Wealth Warehouse Argument
Another frequent charge is that donor-advised funds lack the annual payout mandate that governs private foundations. This means that donor-advised funds could potentially become warehouses of wealth and collect charitable capital indefinitely. Yet the empirical record tells a different story.
Part of the problem lies in the rules for DAFs deviating from that of the rules for private foundations. Private foundations are legally required to disburse at least 5% of their total assets annually. But donor-advised funds are not held to that same standard.
According to the National Philanthropic Trust’s 2023 report, DAFs distributed approximately 27% of their total assets in the previous year. This is more than five times the minimum required of private foundations.³
Rather than stagnating, DAFs have consistently outpaced even the most aggressive regulatory baselines for charitable distribution. Their flexibility permits strategic deployment, enabling donors to respond with agility to emerging crises or high-impact opportunities rather than being forced into arbitrary annual quotas. The absence of a rigid payout rule is not a structural failure. It is what enables DAFs to act as high-velocity philanthropic tools for change.
The DAF Manager Incentive Argument
On the surface, the argument that DAF managers delay disbursements to maximize fee revenue seems plausible. Analysts argue that DAF managers are incentivized to delay disbursements to preserve fee revenue. In practice, this critique fails both economically and reputationally.
It is imperative that we examine the motivations of DAF sponsors. Unlike private foundations, which tend to have a small circle of benefactors, the DAF ecosystem is a competitive marketplace. The ecosystem is not prone to a captive structure. Fidelity Charitable, Schwab Charitable, and thousands of community foundations vie for donor assets. If donors perceive their funds are being warehoused for fees rather than deployed for mission, they can, and do, move assets to other sponsors.
If sponsors allow assets to stagnate for marginal fee gains, they risk losing donors entirely — a reputational and financial loss far exceeding any short-term management revenue. In practice, donor satisfaction governs survival. If the pipeline of giving does not show traction, future contributors will be discouraged. Large-scale grant making is a DAF sponsor’s selling point.
Moreover, fees on DAFs typically range from 0.6% to 1.0% of assets under management. The marginal gain from retaining an extra year’s fees pales in comparison to the reputational risk of losing donor confidence and future contributions. Indeed, major DAF sponsors proactively advertise their annual disbursement rates as proof of value delivered.
Sponsors like Fidelity Charitable mandate active grantmaking standards and engage donors after even a single year of inactivity, with automatic distributions after two years without donor direction.⁴ The incentives for sponsors align toward deployment, not delay.
The criticisms of donor-advised funds, though headline-grabbing, distill into a misunderstanding of what they are designed to do. DAFs are not loopholes. They are legally structured vehicles designed to encourage giving. They are not warehouses of wealth. They often distribute at rates far higher than private foundations. They do not operate in secrecy to undermine democracy; they protect donors who serve a wide array of missions. The truth is far more straightforward and future conversations need to move beyond critique. In an era where nimble, scalable philanthropy is needed more than ever, DAFs offer a strategic platform that, if properly leveraged, could become one of the most potent forces for public good.
Further:
¹ National Philanthropic Trust, “2023 Donor-Advised Fund Report.”
² Fidelity Charitable, “COVID-19 Response Grant Data.”
³ National Philanthropic Trust, “2023 Donor-Advised Fund Report.”
⁴ Fidelity Charitable, “Policies and Procedures Document, 2023 Update.”