Co-blogger Brian Galle and University of Southern California professor Ed Kleinbard have both posted thoughtful responses to my qualified defense of donor advised funds (my initial post here; Brian’s here; Ed’s over at TaxProfBlog). Brian’s concerns about DAFs are essentially two-fold. First, he worries that DAFs — which are not subject to the same minimum payout rules as private foundations — will unduly delay distributions to non-DAF public charities. Second, he notes that DAFs can be used by private foundations for regulatory arbitrage — and in particular, to avoid disclosure requirements. Ed’s primary concern is that DAFs function as “a personal financial asset that compounds at tax-free rates.” He also worries about taxpayers contributing “high flying tech stocks and the like” to DAFs and then claiming “inflated” deductions before the price of the gifted shares crashes.

This is a debate that probably requires a law review-length article (or several) to hash out in full. We can make some progress, however, by looking for answers to four questions: (1) How do payout rates for DAFs and private foundations compare?; (2) Is regulatory arbitrage on the part of private foundations an empirically significant component of overall DAF activity?; (3) How much do donors benefit from the tax-free rate on assets held inside DAFs?; and (4) How easily can donors use DAFs to claim inflated deductions for gifts of stock and other appreciated assets? The answers to these questions, in my view, go a long way toward responding to critics such as Ed who say that DAFs are “a fraud on the American taxpayer.” They do not, however, allay all DAF-related concerns (which is why I ultimately agree with Brian that some additional regulations addressing private foundation gifts to DAFs may be warranted).

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