If you understand “Time Value of Money,” then you’ll understand just how uncharitable these schemes are — and the users know it.
In the second article in the Born in the DSA series, I’d like to introduce you to a business school Econ 101 unit called “Time Value of Money.” In a nutshell, it works like this:
In 2025, I have $100. For that $100, I can buy $100 worth of stuff.
In 2034, that same stuff will cost me $134.39.
Alternately, in 2025, I have $100. I hold on to it.
In 2034, I will only be able to buy $78.30 worth of stuff with it.
So, in this example, which accounts for no runaway inflation, recessions, depressions, or naked materialistic money-grubbing, my buying power shrank considerably.
Now, in a slightly different scenario, using the same 3% rate and the same chart above, I invest in a Donor Advised Fund (DAF) in 2025 with my local community foundation. I donate $100. The donation tax deduction I get is immediate.
In 2034, when that money is finally given by the foundation to a nonprofit arts organization upon my advice to do so, it can only purchase $78.30 worth of stuff in 2025 dollars. However, the tax deduction is still based on the original $100 “donation,” a donation that didn’t actually get donated for ten years. In fact, in 2034 dollars, that donation is worth $134.39. It’s a bonanza for me; not so much for the charity I supposedly like.
*DSA stands for the Divided States of America (aka “One Nation, Divisible”). Periodically, I’ll be writing more specific takes on issues that are clearly wrong for this country, using the arts as context. If there are issues you’d like to take up (or that you’d like me to take up), let me know.
But wait, there’s more. As money invested in a foundation, with all its advisors and money managers ostensibly involved in community betterment, I cannot use DAF money to lobby. However, if my entire intention was to find a way to lobby for a happier life for me regardless of the community, I can direct the money be donated to a nonprofit organization’s lobbying fund, because a nonprofit can spend up to $1,000,000 on lobbying. In fact, I can even ask the foundation folks for suggestions on which nonprofits I can use for that purpose. And I’ll still get the tax deduction. Yay me.
Go with me on this. I only chose ten years as an example. Relatively speaking, this can go on indefinitely, even if the intent is pure and the nonprofit arts organization of choice is in dire need of the funds that have already been promised. In essence, and to borrow a well-worn point of advice, if a DAF walks like a pledge receivable and it talks like a pledge receivable, then it’s…
Okay, I’ll admit: DAFs are not as simple as that. And pledge receivables are a different and continuing (if not expanding) problem, or so I keep reading. As Lisa Z. Greer (author of the wonderful trade book, Philanthropy Revolution) wrote way back in 2022, Amber Heard’s $7 million pledge remained just a pledge because that’s all she thought she was required to do. “I use pledge and donation synonymously with one another….They are the same thing….That’s how donations are paid.” If pledges were horses, beggars might ride, except that the pledges would all be unicorns that don’t really exist.
And DAF donations disappear into the mist.
The reason that DAFs exist is wholly because they are complex. Wealthy people can hold onto their own money and reap the benefits at the expense of the poor and underserved. Even the IRS concedes that DAFs might have seemed to be a good idea, but in practice, they’ve been an abusive ruse.
“The IRS is aware of a number of organizations that appeared to have abused the basic concepts underlying donor-advised funds. These organizations, promoted as donor-advised funds, appear to be established for the purpose of generating questionable charitable deductions, and providing impermissible economic benefits to donors and their families (including tax-sheltered investment income for the donors) and management fees for promoters.
- Examinations of these arrangements may result in the following Service actions in appropriate cases:
- disallow deductions for charitable contributions under Internal Revenue Code section 170 for payments to the fund;
- impose section 4966 excise taxes on sponsoring organizations and managers of donor-advised funds;
- impose section 4958 excise taxes on donors or managers of donor advised funds; and/or (d) deny or revoke the charity’s 501(c)(3) exemption.
DAFs weren’t created to be vicious, horrible scams meant for rich people to seem as though they’re being charitable when they’re not. They’re not intended to be subterfuges in which rich people can make more money off their donations and still not have to lose the original donation’s actual worth. And they’re not supposed to be evil tricks intended to widen the wealth gap between the rich and the poor, let alone the middle class that has nearly disappeared.
DAFs were not invented to be a horror on society. But then, neither was Billy Mumy in that old Twilight Zone episode.
Joyce Beebe, in a balanced report on DAFs for the Baker Institute at Rice University, wrote in 2024 that among the many abuses of DAFs, “DAF to DAF transfers” offered a particularly rotten result:
“…although they were recorded as grants to charities, charitable organizations did not receive funds as a result of these transfers.”
Other abuses include:
- “the funds can remain in the DAF indefinitely because there is no required timeframe for distributions.”
- “counting private foundation to DAF distributions as qualifying distributions has become a way for private foundations to circumvent the 5% minimum distribution requirement”
- “a small group of donors may have disproportional impacts on charitable giving — including the cause, timing, and amounts.”
- “Private foundations are not allowed to lobby, whereas publicly supported entities can spend up to $1 million per year on lobbying without penalty. If funds flow relatedly from DAFs to a variety of recipients, the donors can greatly expand the $1 million threshold.”
Happily, we live in a country that, rather than allowing these shenanigans to continue, can stop them at any time. It’s called “legislation.” But, of course, that would require a steel-spined set of people to look out for the underserved communities at the expense of themselves. They’ll have to understand that as a society, we cannot continue to ramp up wealth for the mega-wealthy on the backs of the poor — or on poor people’s gravestones.
Pick up a phone. Go to an office. Tell your community foundations to stop crapping up America with this Ponzi scheme of contributions. And tell them (and your legislators) not to fix DAFs; just eliminate them. The abuse is too much.
It’s time to just flat-out outlaw them.
After all, do you really believe that wealthy donors with toxic intentions will suddenly see the abuse (abuse that directly benefits them) and decide that their best path forward is the honorable one? And are you naïve enough to believe that the same people who are abusing $54 billion (with a b) worth of DAFs in the United States at this very moment are in using them to save you?
Let’s put it this way. If you could legally get away with gaining gobs of wealth, even at the expense of charities and the people they serve, would you, even as nice as you are?
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