We’re hearing a lot of legislative noise lately out of our nation’s capital concerning donor advised funds (DAFs). Views vary significantly about what if anything should be done to address the perception that charities aren’t being given funds quickly enough out of DAFs. It’s undeniable that DAFs are accumulating significant money because contributions to DAFs qualify for the immediate income tax charitable contribution deduction, even though the donor’s DAF account might not distribute funds to an actual functioning charitable organization for a long time. Under current law, there are no minimum distribution requirements on DAFs, but some in Congress are aiming to change that.

Not unexpectedly, many in the philanthropic world have circled the wagons around the DAF sponsors and the status quo by arguing that change is unnecessary. Indeed, some have even described legislation as needless and as a solution in search of a nonexistent problem.

Notwithstanding these protestations, I wouldn’t be too quick to dismiss the possibility of legislation affecting DAFs. In my opinion, significant reform is necessary and would be beneficial. For starters, I believe that the law should clearly favor local community foundations over the big box DAF sponsors like Fidelity Charitable for several reasons.

First and foremost, most charitable giving is made to have local impact, and community foundations, because they tend to be local or regional, align well with that reality. The problem for the big box DAF sponsors is that when the donor’s advisory privileges end, which, while changing a bit, tend to only last a generation or two. Upon termination of the advisory privileges, the donor’s account is reallocated to the general unrestricted charitable fund of the big box DAF sponsors.

Unfortunately, the impact of termination and reallocation is similar to the Walmart effect, where the money is relocated to Bentonville AR every night. The big box DAF sponsors always cease to support not only the donor’s preferred charities in the locale, but all local charitable organizations. The money leaves town.

While my strong preference would be to force the big box DAF sponsors out of the DAF business, their lobby may be too strong for that to happen. However, I believe that there would be bipartisan support for a compromise that would impose a local attentiveness requirement on the big box DAF sponsors to continue to support local charitable organizations after the end of the advisory privileges. The law could essentially be based on the attentiveness requirement for Type 3 supporting organizations in current tax law.

I am fairly certain that we will see significant reform in the DAF space and fairly soon. It will be interesting to see how it all shakes out.