Michigan study brings vital data to national debate on donor-advised funds
New research from Grand Valley State University shines an unusual spotlight on the spending activity of donor-advised funds, an emerging philanthropic tool that is gaining momentum with relatively little regulatory oversight.
Ordered by the Michigan Council of Foundations, the study by GVSU’s Dorothy A. Johnson Center for Philanthropy analyzed the four-year distributions of these types of funds in Michigan. It comes amid a national political debate over how Donor Advised Funds (DAFs), which are established and largely controlled by donors through community foundations and other nonprofits, distribute funds. to various causes.
While supporters say CFOs democratize philanthropy and can increase in value over time, critics argue they are a way for donors to receive tax benefits without being required to distribute money to donors. causes.
The GVSU study analyzed 2,600 DAFs held at Michigan community foundations, finding that about two-thirds of funds distributed money to charities in any given year. About 90% of Michigan community foundation CFOs donated money at least once from 2017 to 2020, according to the study. About 10% of the CFOs studied did not make contributions over the four-year period, while the median distribution of a Michigan CFO fell from $ 8,500 in 2019 to $ 9,750 in 2020.
“At first glance, this fear that large numbers of CFOs will stay on the sidelines may be alleviated as two-thirds of all CFOs have made a distribution,” said Jeff Williams, director of the Johnson data and research lab. Center. MiBiz. “If you’re worried about the huge DAFs left on the sidelines and the parking money, our study of at least the Michigan DAFs has shown that to be not true. “
The GVSU research is also touted by industry experts as the first of its kind, although it focuses on Michigan, as nonprofits are not required to disclose data on how much and when. they distribute money to charities. The Council of Michigan Foundations provided anonymous account-level data to researchers covering approximately 90% of Michigan community foundation CFOs.
The study also found “overall” that large CFOs distribute relatively less funds than smaller CFOs, Williams said. While the larger Michigan funds may distribute about 4-5% of their total, some smaller funds paid out between 20-40%.
“The bigger DAFs are starting to act like they’re a foundation,” said Williams. “Just by the behavior, it seems like the bigger CFOs are sort of acting like a perpetuity. “
Council of Michigan Foundations President and CEO Kyle Caldwell hopes the study’s results will provide data for a much-needed public debate.
“We hope this will educate our members, but also others in other regions, of how CFOs work and that they will review this to improve practices,” Caldwell said. “We’ve been waiting a decade for (the US Department of the) Treasury to issue more guidance. Hopefully, this research would even educate them on how it might work. “
Rising funds, political debate
Williams noted that CFOs have “really grown over the past decade” as a “popular tool in the philanthropic space.”
“CFOs have become an important and rapidly growing component of American philanthropy as an easily accessible method for individuals, families and businesses to engage in philanthropic giving,” according to the study.
The study analyzed 2,600 funds in Michigan, while about 70,000 funds holding about $ 34 billion exist in community foundations nationwide. A DAF suite run by Fidelity Charitable is now the largest recipient of charitable giving in the United States, Williams said.
Caldwell said research shows CFOs to be “very useful and very active tools.”
“The mix of endowed and non-endowed CFOs makes this a very useful tool for people to think about their philanthropy in the short and long term,” Caldwell said.
DAF donors say their contributions, even if they remain unused in a fund, can increase in value over time. But this is where the ideological differences start to emerge.
Williams said the public debate surrounding DAF stems from two issues: Donors receive an immediate tax deduction based on their contribution to a fund, and current federal tax law does not require a minimum distribution or timeframe for distribute the funds.
“At the heart of the debate is a discussion of timing, and this is when the donor gets the tax benefit and when an operating charity receives the dollars from the CFO,” Williams said.
While supporters note that two-thirds of DAFs actively distribute funds, critics point out that one-third of them have not.
Texas philanthropist John Arnold said The Chronicle of Philanthropy this month: “If the company is going to subsidize through the tax code the creation of private funds and foundations advised by donors, then it is the responsibility that these vehicles pass the resources on to the community in a timely manner.
Arnold supports a federal bill sponsored by U.S. Senator Chuck Grassley, R-Iowa, and Senator Angus King, I-Maine, that would set minimum time limits for spending money and set minimum distribution criteria. Arnold told the trade publication that the GVSU study “explicitly describes the problem” of DAF donors receiving a tax benefit without distributing their resources.
Caldwell called the CFO’s criticism of holding money rather than handing it out as “flawed analysis.” The report also notes that three-quarters of the members of the Council of Michigan Foundations have a written policy on inactive CFOs and require distributions every three years.
“It seems like an argument in search of a problem,” Caldwell said. “All this funding is for the charitable sector, it does not come back to the donor. … If people want to explore reforms, they should look at the research and develop legislation accordingly. “
Williams said the federal bill is “not anti-DAF, he just says the DAFs have gotten so big that we have to put guardrails on them,” noting that he is not taking a formal position on the legislation.
But based on the findings of the study on rates and payout amounts: “This bill would fundamentally change the behavior of one in 20 CFOs,” said Williams, who called the funds a “tool of ‘absolutely essential granting’. I would say they make philanthropy more democratic.