Daniel Hemel Offers a Qualified Defense of Donor Advised Funds

A Qualified Defense of Donor Advised Funds

The New York Times has published a very negative article on donor advised funds (DAFs) in today’s business section. The headline characterizes DAFs as a “philanthropic loophole” that “tech billionaires” use to “hack their taxes.” The article goes on to describe DAFs as “a sort of charitable checking account with serious tax benefits and little or no accountability.” The most withering criticism of DAFs comes from the University of Southern California’s Ed Kleinbard (with whom I agree on most other tax policy questions). DAFs are “a fraud on the American taxpayer,” the article quotes Kleinbard as saying. “They’re a way for the affluent to have their cake and eat it, too.”

The remarkable rise of DAFs poses a number of interesting policy questions. But I think these questions are a lot more complicated than the Times article lets on. DAFs can serve socially useful functions, such as facilitating stock contributions to smaller 501(c)(3)s, encouraging donors to be more reflective in their philanthropic decisions, and extending the tax incentive for charitable giving beyond the very rich. It’s worth thinking about those benefits before concluding that DAFs are a “fraud.”

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Tax policy