Giving Compass' Take:

• Marques Chavez explains that concerns over hoarding in donor-advised funds may be overblown as funds have flowed relatively consistently, even as other giving was impeded dramatically by the 2008 recession. 

• Do donor-advised funds suit your philanthropic goals? How can funders work to use donor-advised funds for impact? 

• Learn how to use donor-advised funds effectively. 

The popularity of donor-advised funds (DAFs) has skyrocketed over the past several years, causing them to receive a larger share of charitable assets and making them responsible for a larger segment of grants to charities. This rise in popularity and responsibility of DAFs has made them a focus of criticism, much of which centers on the narrative that DAFs only serve as tax avoidance vehicles for the wealthy and parking lots for charitable assets. However, upon closer inspection of the data, that just doesn’t seem to be the case.

A new study released last week from H. Daniel Heist, a PhD candidate at the University of Pennsylvania, and Danielle Vance-McMullen, assistant professor in public and nonprofit administration at the University of Memphis, examined the data of 996 DAF organizations from 2007 to 2016 to provide an empirical analysis of DAF activity. Contrary to critics’ opinions, the study found that DAF grantmaking is relatively resilient to economic downturns with increased payout rates during times of recession. It also determined that DAFs granted charities nearly 90 percent of their annual contributions, identifying a new variable metric the authors call the “flow rate.”

A common critique of DAFS is that they are simply warehouses of wealth where rich people stash money in order to reap tax benefits and ultimately allow the fund to remain dormant. The findings in this study show that critique is unfounded, especially when Heist and Vance-McMullen introduce flow rate as a metric. Flow rate assesses the amount of grant money leaving DAFs in relation to the amount of money contributed to DAFs within the same year.

If donor-advised fund sponsors were likened to a reservoir, the flow rate would measure the amount of water released by the reservoir as a percentage of the amount of water coming into the reservoir. This gives us a sense of the rate at which water is flowing through a reservoir. Just as water flowing into a reservoir is not necessarily the same water that is flowing out, we are unable to distinguish whether the money being granted from donor-advised funds is the same money as that which is being contributed within a given year.

Flow rate is critical to the analysis because a DAF is an active charitable vehicle that has continually changing assets throughout its life. They are not “mini private foundations” but a wholly different type of intermediary philanthropic entity.

Perhaps the most impressive characteristic of DAFs was their performance during the most difficult economic environment. The study found that both the payout rate and the flow rate remained flat from 2007-2015 with the exception of 2008-2009, at the heart of the Great Recession.

Read the full article about Donor-advised funds by Marques Chavez at Alliance For Charitable Reform.