The Real Problem with Donor-Advised Funds
(Previously published on Medium)
Donor-advised funds (DAFs) don’t have a payout problem — at least not in the way analysts claim. But assume, for argument’s sake, that they do.
DAFs represent a critical reservoir of charitable capital. Yet they are not operating at full potential. Rather than fixating on arbitrary payout thresholds, the more fundamental question is how more of this capital can be deployed strategically at moments most pivotal for impact.
The popular consensus amongst detractors, as outlined here, is that donor-advised funds should have yearly payout requirements akin to those governing private foundations. Yet, given that DAFs tend to distribute funds at higher rates than what the IRS might require¹, it is clear that the absence of a mandated payout rule is not what inhibits DAFs from disbursing at their highest potential. So, what is?
Two structural impediments appear most responsible for this inertia.
The first is psychological.
According to an article written in the New York Review by Lewis B. Cullman and Ray Madoff²:
“The first reason for this is inertia. Once the tax benefits of charitable giving have been claimed, there is less urgency in making decisions about distributions from the DAF. In addition, after putting charitable donations into a DAF, a more subtle transformation occurs. Instead of feeling about the donated funds the way one would about an outright transfer to a museum, for example, the donor now thinks of the DAF as a charitable asset in which he has a continuing interest. To the extent that donors think of DAFs this way, they are less likely to spend DAF funds. Behavioral economists refer to this desire to keep property in which one feels one has ownership interest as the “endowment effect.” DAF sponsors encourage the endowment effect by building up the donors’ sense of ownership in the DAF. They do this by granting the donors the ability to monitor and direct investments, and by encouraging donors to pass these accounts on to their children and grandchildren, creating a “charitable legacy.” The combined effect is to subtly encourage donors to hoard, rather than distribute, their DAF funds. Of course, this approach benefits the financial companies representing the DAF as well; the longer the property is held in the DAF, the greater the management fees.*
That human behavior tends toward inertia is beyond dispute. But the conclusion that donors or DAF sponsors primarily hoard charitable assets for financial benefit is a misreading of donor-advisded funds’ underlying incentive structures.
Cullman and Madoff invoke a behavioral economics concept , ‘the endowment effect’, to argue that donors view DAFs as personal assets rather than irrevocable charitable commitments. In their framing, this attachment drives irrational hoarding rather than disbursement. Yet this misreads the fundamental structure of DAFs: once contributed, assets are legally dedicated to charitable purposes and can only be directed to qualifying organizations.
For this theory to hold, it would require the supposition that the ideal practice of philanthropy is immediate and total disbursement. This is neither realistic nor grounded in the operational needs of charitable systems. It also misreads donor behavior, conflating deliberation with witholding, and overlooks the structural realities that govern DAF deployment.
Unlike private foundations, which may permit familial salaries, DAFs offer no personal financial benefit to heirs. Once contributed, DAF assets are legally dedicated to charitable purpose. If a donor passes a DAF to their heirs, those successors cannot reclaim the assets for personal use or redirect them outside the bounds of IRS charitable standards³. What is inherited is not ownership, but a designated right of recommendation.
The second constraint is lack of advisory infrastructure.
While some donor-advised fund sponsors, particularly larger commercial firms and community foundations, offer nonprofit recommendations, donor education, and cause-specific research, these resources remain uneven across the sector. Unlike major private foundations, which often maintain dedicated grantmaking teams, most DAF sponsors operate without comprehensive advisory models. Without consistent guidance, donor capital often stalls: not from lack of intent, but from lack of navigational guidance.
A few institutions, including Silicon Valley Community Foundation and East Bay Community Fund, are closing the gap, but system-wide advisory infrastructure remains uneven.
The solution is not forcing donors into arbitrary yearly payout requirements. It is leading discouraged donors towards sponsors with better tools, better guidance, and better frameworks to align their giving with maximum impact.
Further:
¹ National Philanthropic Trust, “2023 Donor-Advised Fund Report.”
² Lewis B. Cullman and Ray D. Madoff, “The Undermining of American Charity.”
³ IRS §170(c)(2)(B), Internal Revenue Code.