Back in the summer of 2019, I received an intriguing and unexpected email from a woman I know named Ray Madoff, a professor at Boston College Law School. Madoff, who bears no relation to the disgraced Ponzi-scheming financier, had spent the better part of a decade developing a reputation in academic circles as the country’s most fervent critic of a once-arcane financial vehicle known as the donor-advised fund, or D.A.F.
On their face, D.A.Fs are merely plug-and-play vessels that make it easy for the wealthy to donate their money to charity. They offer what is essentially a charitable checking account—a place to deposit bulk contributions in stock or cryptocurrency, before a tax year ends, that can then be doled out gradually to nonprofits, much like the way you can use a debit card to spend proceeds from your paycheck. In theory, D.A.Fs increase the total money set aside for charity over the long run.
But during the decade since Madoff first inveighed against D.A.Fs, a new generation of rich founders and investors, encouraged by their lawyers and accountants, were overwhelming this tax-planning tool. A staggering $140 billion now fills the coffers of these instruments. Unlike traditional philanthropies, after all, D.A.Fs offered the same extraordinary tax benefits but operated outside existing law governing foundations. In particular, D.A.Fs imposed no payout requirement, meaning that if managed a certain way, an account could potentially sit on billions ad infinitum, as a tax shelter.