Charity. A selfless act in order to help others. It used to be as simple as giving your extra change to a red Salvation Army kettle during the holidays. The people helping people mindset - a way to do some good. However, the world has changed and, as one can expect, giving has changed too. This is where the Donor-Advised Fund (DAF) comes into play. A DAF is an investment account that allows donors to reap immediate tax deductions by placing their assets (from cash to stocks to art to even yachts) into a tax-free fund. As these assets grow unhindered by capital gains taxes - money can be distributed to nonprofit 501(c)(3) organizations. Donors receive tax deductions and charities receive gains from these investments/donations. On the surface, this sounds like a win-win situation, but as we dive deeper, we can see that there is more to the picture.
Since the rise of the dot-com boom, DAFs have taken off and unfortunately been misused. According to the 2019 Donor-Advised Fund Report, the total incoming assets increased by 8%, but the actual payouts decreased by 2%. Yeah, you read that right. There are more “donations” instead of actual donations. The questionable usage of DAFs doesn’t stop there. The donor receives a tax break the year the donation enters the DAF, not when the donation is disbursed to an actual charity. This system incentivizes donors to contribute to his or her tax-free DAF account, have the account grow forever, and never actually donate the funds. On top of that, funds within a DAF account can be disbursed to any nonprofit organization, irrespective of potential conflicts of interest, or how reputable the nonprofit is. Some so-called nonprofits have been caught spending donor funds on business debts, campaign funds, or even $60,000 self-portraits (hint: we’re talking about President Trump...).
If you’ve read this far, you can clearly see how an account designed to make charitable giving more accessible, can be easily misused. It’s time to redefine the DAF and keep it honest. An honest DAF can mitigate donor fees. An honest DAF can consolidate donor receipts. An honest DAF can quickly set up crisis campaigns, distributing funds where they are needed most. To avoid mistakes that have plagued DAFs in the past, it needs to be run differently. Here’s how we propose keeping a DAF honest.
- Only accept payments in cash; this prevents the wealthy 1% from depositing Van Gogh paintings and super yachts into these accounts.
- All money deposited into the DAF account will be emptied at the end of every month; this prevents money hoarding and ensures donations reach the end organization in a timely manner.
- Two Factor Authentication; this holds the DAF accountable and allows charities to confirm that they received their donations.