Donor-Advised Fund Payout Rates
Last month, the New York Times ran an op-ed by academic Ray Madoff on donor-advised funds (DAFs). In her piece, Ms. Madoff painted a picture of DAFs as a kind of “warehouse” for charitable contributions. As the President and CEO of a national DAF program, I find this characterization misleading and a disservice to donors and the charitable sector.
While many DAF programs are not legally required to meet a minimum annual payout, the majority have guidelines to ensure that DAFs actively make grants. In fact, the overall payout rate for DAFs is nearly four times that of private foundations.
The data NPT collected for its annual Donor-Advised Fund Report shows the average payout rate of DAFs in 2010 was over 17 percent. This total includes all charitable sponsors, including community foundations and single-issue charities, like universities and hospitals. The average payout rate for national DAF programs, of which Ms. Madoff is particularly critical, is even higher at 19 percent. Over time, many of the national programs have far exceeded that level—NPT and our donors have granted out more than half of our assets since inception in 1996.
According to the IRS, private foundation payout rates hover around the obligatory 5 percent each year. That payout includes overhead costs of operating a private foundation, so the total amount reaching smaller charitable organizations is actually much less than 5 percent. I contend that placing a minimum on grantmaking from DAFs may also be suggesting a maximum to donors—ultimately having a negative effect on grants paid out.
The crux of Ms. Madoff’s argument seems to be that money in DAFs is languishing, out of reach to worthy charitable organizations. However, that logic assumes that all contributions to a donor-advised fund would be given directly to charitable organizations instead of another charitable giving vehicle. It is far more likely that those funds would go to an alternative giving vehicle, such as a private foundation with a substantially lower payout rate or a charitable remainder trust with a substantially deferred payout.
DAFs allow philanthropists to create concentrated source of charitable capital. Investments in DAFs grow tax-free, creating more money for charity.
I presume Ms. Madoff and I can agree that philanthropy is of critical importance and a hallmark of American society. If giving patterns continue, DAFs will keep granting out vastly higher percentages of their assets than other charitable vehicles, thereby supporting important charitable programs and services in the U.S. and around the world.
You can find another industry response to Ms. Madoff’s op-ed here.