With Halloween around the corner, I thought it would be apropos to discuss “zombie philanthropy” – a term that has been gaining popularity in the charitable sector. It is a somewhat pejorative term that is being increasingly used in reference to donor-advised funds (“DAFs“). In today’s blog, I will discuss donor-advised funds and why they are being criticized as a form of zombie philanthropy.
What is a Donor-Advised Fund?
A Donor-advised fund (“DAF”) is a type of charitable giving vehicle established by a donor through an initial capital donation to a registered charity – usually a public or private foundation – for the charity to hold and invest. The capital and/or income of the DAF is in turn distributed, either outright or over a period of time, by the charity to “qualified donees” (as that term is defined in s.149.1(6)(b) of the Income Tax Act). In most cases, it is expected that the donees of the DAF will be recipient charities of the donor’s choosing. The defining feature of the DAF is that the donor has “advisory rights” with respect to the fund such that they will have a say as to where the DAF funds are ultimately donated. Hence the name, “donor-advised funds”.
However, it is important to understand the nature of the relationship between the donor and the charity in charge of the DAF. Any gift made to the DAF is fully vested in the charity and is irrevocable. While the charity will usually follow the advice given by the donor, it is not obligated to. As the legal owner of the DAF, the charity will ultimately be responsible for making decisions on how to manage, invest, and administer the DAF.
DAFs are a desirable method of charitable giving for several reasons. First, DAFs have the potential to give the donor virtual control over the distribution of the DAF funds for charitable purposes. A DAF is also less complex and costly to establish than a private foundation, and the burden of administering the DAF is offloaded to the charity. Lastly, donors receive an immediate income tax deduction for their contribution to the DAF. For these reasons, DAFs are often used by an individual both before and after their death – that is, donations to the DAF can be made by the donor personally during their lifetime or by their estate.
Are DAFs a form of Zombie Philanthropy?
While there is no formal definition of “zombie philanthropy”, it essentially refers to the phenomenon where donors make a charitable gift that immediately benefits themselves but their gift ultimately fails to reach charity. In the case of DAFs, donors receive an immediate charitable tax receipt upon donating to the DAF; however, there are no payout requirements applicable to the DAF and so the donated money that was meant to go to charity could possibly sit in the DAF indefinitely.
Zombie philanthropy has been an ongoing critique of DAFs, and one that has gained steam during the pandemic when charities, like many organizations, have been hit hard financially. To help ensure that the money in DAFs flows to recipient charities as intended, it has been suggested that DAFs should be regulated in a way that is similar to private foundations. For example, s.149.1(1) of the Income Tax Act requires charitable foundations to spend 3.5% of their assets not currently being used in charitable activities over an average 24-month period. This “disbursement quota” does not apply to an individual DAF.
Despite concerns of zombie philanthropy, DAFs remain a popular charitable giving vehicle and can be very effective at achieving one’s philanthropic objectives if set up and managed properly.
Thanks for reading!