Strengthening Community Philanthropy: Recommendations from Your Sector Colleagues
Last July, the Council on Foundations convened a group of community foundation leaders to develop a set of principles and policy recommendations to strengthen how community foundations use donor-advised funds (DAFs). The Strengthening Community Philanthropy Ad Hoc Working Group was made up of leaders of big and small community foundations from different types of communities – urban, rural, and suburban – across the country.
Together, we as the Working Group saw an opportunity for community foundations to come together to develop sensible policy recommendations regarding donor-advised funds. We believe these ideas will establish clarity and begin to address misperceptions about DAFs that have been circulating over the past several years, while also ensuring that DAFs remain a flexible philanthropic tool for donors and community foundations in the future.
Members of the Working Group shared stories of how DAFs have been used to invest locally, direct resources to address both immediate and long-term challenges, democratize giving, and create a charitable legacy for donors that benefits our communities long after that donor has gone. DAFs are just one way our community foundations engage donors and invest in our diverse communities.
We understand that it is important, given current discussions regarding the value, purpose, and societal impact of DAFs, to articulate what we believe is best for our existing and prospective donors and communities based upon decades of experience and billions of dollars of community investment.
Over the past six months, our Working Group discussed and eventually agreed to a set of DAF guiding principles and policy recommendations that would strengthen community philanthropy. These recommendations are sensible, practical, and understandable, and would increase transparency yet continue to encourage charitable giving.
While the Working Group decided to limit our recommendations just to community foundations, we believe they could apply to all DAF- sponsoring organizations. These recommendations establish new standards to make sure DAFs continue to be a flexible, effective, and transparent vehicle to invest in and support causes and communities that we and our donors care about. Over the coming weeks and months, we will work with the Council to engage the broader philanthropic sector in a dialogue about these recommendations.
Inactive Funds
One area of discussion has been defining inactive funds—when a DAF has not made a grant in multiple years. Most DAF- sponsoring organizations have an inactive fund policy as required by National Standards for U.S. Community Foundations. We recommend that all community foundations develop and enforce a clearly defined policy relating to what happens when a fund has not made a qualifying grant in three years. We believe that such a policy should be standard for all sponsoring organizations. Additionally, to show the small percentage of inactive funds at community foundations, the U.S. Department of Treasury should include reporting requirements on the Form 990 for the percentage of inactive DAF funds. These two steps will increase transparency.
Annual Distribution Requirement
DAFs have grown in both popularity and generosity, with payouts from DAFs—how many grants they are making each year—reaching a ten-year high in 2020. On average, payout rates for DAFs far exceed the 5% requirement for private foundations. To address misrepresentations that DAFs are merely tax shelters for the very wealthy, we encourage all community foundations to establish a minimum 5% aggregate payout requirement for DAFs at the organizational level (in line with private foundations’ requirements). Community foundations that distribute more than 5 percent of their total DAF assets may carry forward the excess for up to 5 years to address any future shortfall.
Private Foundation Use of DAFs
It is not uncommon for private foundations to make distributions to DAFs housed at community foundations, although it represents a very small percentage of overall DAF activity. Often, these distributions represent one of the strengths of DAFs at community foundations—the ability to facilitate collaboration among donors and across organizations to invest back in communities. While these private-foundation-to-DAF contributions are frequently the exact type of cross-philanthropic collaboration we want to see, we also think it is reasonable to put some appropriate time limits in place. Therefore, we recommend that all funds contributed by a private foundation to a DAF as part of their annual payout obligation be distributed within a five-year window. If the private foundation doesn’t count the distribution towards their annual qualifying distribution requirement, then the five-year limit wouldn’t be applied.
Donation of Complex Gifts
Philanthropic organizations can accept complex gifts, including artwork, stocks, vehicles, real estate, property, or even farm equipment. Nonprofits, faith-based institutions, and educational and scientific organizations also receive complex gifts to further their missions and programs. To ensure fairness, consistency, and accuracy in valuations across all sectors, the broader charitable community should collectively develop recommendations for managing the donations of complex and illiquid assets that would apply to all section 501(c)(3) organizations equally, not just to donor-advised funds.
Expanding Charitable Giving
We support changes to tax law that will encourage individuals to give and will benefit all who give. These changes include efforts like the Universal Charitable Deduction or charitable tax credit to taxpayers who do not itemize, as well as those who allow distributions from an IRA to donor-advised funds as an option for individuals.
Coming up with the right policies for philanthropy is hard. America is one of the most generous countries in the world, and we want to build on that generosity, so it is critical that any steps we take do not decelerate charitable giving. Our recommendations are an important step toward strengthening philanthropy and encouraging a thoughtful and informed discussion about how we can collectively improve charitable giving. We are cognizant that they will not resolve every issue, but we believe any such discussion should be grounded in the real work and generosity of the donors who establish these funds.
If you would like to learn more about these recommendations the Council is hosting an Ask the Council on Thursday, February 3, and a conversation with Community Foundation CEOs on Tuesday, February 15. In the meantime, we invite you to send the Council your feedback and reactions.
Over the coming weeks and months, we will continue to engage with more of the philanthropic sector on these recommendations to understand your support and concerns. We also plan to educate Congress and the U.S. Treasury Department about the recommendations that require policy change.
We are confident that strong partnerships and understanding within the philanthropic sector, combined with greater education and awareness among policymakers, will enable us to make lasting changes and boost charitable giving in these challenging times.
