Is the Era of Foundation Dominance Coming to a Close?

As AI fortunes mount and a fresh generation of billionaires emerges from recent IPOs, the social sector’s intelligentsia is in a heated conversation about what all this new wealth will mean for philanthropy. This is the right conversation for the moment, but it is grounded in the flawed assumption that wealthy people will engage in the public good, and that their funds will largely flow to the public good through foundations. 

Staffed private foundations have been the locus of attention in philanthropy in the United States for some time. Increasingly, though, wealth isn't flowing into these particular institutions. Instead, wealth is moving into donor-advised funds (“DAFs”), LLCs, family offices, and other vehicles. Once inside these non-foundation homes, this wealth is subject to fewer and far different rules.

The discourse around philanthropy has not caught up to this reality. Sector commentators have spent the last decade debating trust-based philanthropy, participatory grantmaking, board governance, and power imbalances. All of these are important discussions, but they are conducted from within a foundation-centered view of the world, one where boards wrestle with values and impact, staff want to improve their practice, and foundations are, first and foremost, actually giving money away.

These conversations are increasingly limited as the wealthy shift their charitable-intent money to other vehicles. In essence, the conversations about reform keep trying to make foundations behave better, justifiably with more focus on community and equity, while the money itself is leaving the foundation system altogether and going somewhere with far less accountability attached.

DAFs have fundamentally changed the game

The U.S. tax code encodes a deal with private foundations: the foundation gets a deduction and control of the assets, and the public gets disclosure and assurance that the legally prescribed amount of money goes toward the public good as the foundation board sees fit. This has proven to be a flawed system, but it is at least a legible one. 

With DAFs, this deal doesn’t exist. The foundation still gets the tax deduction and control of the assets, but the public’s side of the deal is erased.

And over the past ten years DAFs have gobbled up traditional philanthropy's lunch. DAFs used to be a backwater of giving, but now distribute well over $50 billion each year, nearly half of the $110–120 billion from private foundations. If current trends continue, more wealth will come from DAFs than from foundations in the next ten years. 

Even beyond that, DAFs have fundamentally changed the calculus even of many traditional foundations. Some foundations are making just one grant a year, and that is to their DAFs (effectively turning themselves into DAFs). More than $3 billion per year is flowing from private foundations into their DAFs where there are neither disclosure nor payout requirements.

Where is wealth going?

Because the tax deduction has less and less pull for wealthy individuals, today's new wealth isn't being used the way it has been in earlier generations. 

Very wealthy individuals are not just wealthier than wealthy people have been, they are younger than in the past, and still active adults. Some of these people gained new tech wealth (like the much-touted OpenAI windfall), some have inherited or marital wealth. They prioritize making themselves and their families financially secure, using their assets to increase wealth, health, admiration, social access, and self-fulfillment. 

In general, wealthy people are relying less on the charitable deduction to reduce income taxes, and are turning more attention to avoiding capital gains taxes, property taxes, and estate taxes. When they do seek what they think to be social impact, they have far more options on the table than only nonprofits and philanthropy. Instead, they are putting money into a variety of vehicles that fund technology solutions, longevity research, conservation, international development, and private education.

Not all of this money is even that well-intentioned, and many foundations and DAF account holders are not concerned about the public good, but rather are attracted by the cloak of invisibility that many of these non-foundation philanthropic vehicles can provide. 

One egregious example is the rise in wealthy people using their riches to create new, “bespoke” private schools for their own children and those of their peers. Schools have always been a locus of philanthropy and giving. But something different is happening now. At a moment when the gap between the richest and everyone else is growing, wealthy parents are increasingly creating entirely new private institutions: schools designed from the ground up around the preferences of a small group of families, and often even more insulated than the private schools that came before them.

This is one example in which the boundaries of “philanthropy” are changing. Wealth that might once have flowed to a foundation is instead being used to create institutions that primarily serve the donor’s own family and community. The giver may still understand the project as socially beneficial, as an investment in education or a better model for schooling, but the definition of the public being served has become remarkably narrow.

The Philanthropic Beltway is missing the story

Given all this, the obvious question is why the discourse hasn't followed the money. 

The answer is structural. Over the past two decades, a Philanthropic Beltway has emerged that, like the Beltway in Washington, D.C., has developed its own dense ecosystem of associations, consulting firms, think tanks, academic programs, and financial intermediaries. This Beltway soaks up money, dominates "thought leadership," and keeps practical, ground-level realities from reaching HQ insiders. (In fact, the only nonprofits that receive more than 50% of their money from foundations are these philanthropic beltway organizations. The Beltway seems very interested in reflecting on itself.) 

The bulk of conversation among this Beltway – including those in the philanthropic reform movement – makes two critical mistakes.

The first mistake is assuming that improving foundations is the same thing as improving philanthropy. Most of the field's brightest innovations, from trust-based philanthropy to participatory grantmaking, presume a staffed institution making grants. But it’s difficult to democratize a funding process that no longer takes place inside a grantmaking institution. 

It’s difficult to democratize a funding process that no longer takes place inside a grantmaking institution. 

Foundations may never have deserved this level of attention. Foundations still only provide about 5% of nonprofit funding in aggregate, even after taking out universities and hospitals. And less than 20% of foundation funds go to benefit "economically disadvantaged" people (which includes research and intermediaries). 

And as wealth moves into DAFs, LLCs, family offices, and other vehicles, the people pushing philanthropy to become more equitable, accountable, and effective have even less leverage over what happens to it. Reformers are essentially looking at the small streams of water going out over the dam instead of how the reservoir itself is being used. Put another way, we are attempting to improve institutions that are becoming less central to the system. 

The second mistake is assuming that better philanthropic practice can solve the larger problem. Much of the philanthropic reform movement is built around helping foundation leaders, board members and program officers rethink how they deploy resources.

That work matters. But it also depends on those institutions and the people working inside them having meaningful influence over how philanthropic wealth is used. As more foundation wealth moves into DAFs and other less accountable vehicles, there are fewer institutional levers to pull. Even the most committed program officer has less power if the money itself is moving somewhere else.

‍Nonprofits are adapting

The result is that the rules and norms built for foundations are becoming increasingly irrelevant to where the money actually sits, forcing a strategic reset. While the discourse lags, fundraising consultants also have not caught up. They still advise nonprofits on "how to raise money from DAFs," as though a DAF were an institution with its own priorities to court, the way you'd cultivate a foundation's program officer. 

But A DAF isn't a funder with its own mission or strategy. It's just an account, and the money moves only if and when the person who controls it decides to move it. And the organizations closest to the money have already stopped waiting for it to catch up and more nonprofits are starting to see through the premise.

At a recent meeting with Silicon Valley fundraisers, several nonprofits shared that as they saw mid-level donors disappearing, their organizations are reluctantly abandoning the "giving ladder" model to a singular focus on mega-donors.

Others are turning to government funding which, in some ways, has always been the principal economic driver of nonprofits. Even when taking out universities and hospitals, government funding represents about 30% of nonprofit revenue, and foundations only 5%. And more nonprofits have realized that government advocacy isn't just the right thing to do for their clients; it's an effective business strategy.

Despite the cutbacks instituted by the Trump administration, they can't look to foundations for enough funding, or even stable funding. They are focusing more attention on engaging the political and policy world, and seeking board members with expertise and connections to government funding, or who can mount protests at city council meetings to demand funding.

Nonprofits are also taking note that private equity has entered traditionally nonprofit fields and has significant presence now in childcare, senior living, mental health, addiction services, K-12 education, disability services, and home health care. Private equity can draw on profit-seeking funds and has the investment capital that nonprofits have both long distrusted and also coveted. Nonprofits are therefore feeling pressured to fight these for-profit invaders while also seeking ways to subcontract to them.

Seeing the bigger picture

The conclusion here is not that foundations are unimportant. They continue to distribute billions of important dollars and are important partners to nonprofits, both in direct services and in social change. But when we think about wealth and the public good, we are asking the wrong questions.

In addition to debating how foundations can become more strategic, collaborative, or innovative, we should be asking: Where do charitable assets actually reside? What incentives govern them? And what public obligations should accompany the substantial tax benefits they receive?

Part of the answer is a legibility problem. "Show me the money"—it's in foundations and foundation-like vehicles we might not even recognize as charitable funds, and charitable-intent money has moved into vehicles with far less disclosure and no payout requirements attached. Nonprofit fundraising, public policy, and philanthropic research need to shift their attention from the institutional foundation world toward the much broader and much less visible ecosystem in which today's wealth is actually being deployed.

Also, we need to understand foundations as an industry—one that is tax-advantaged, like supermarkets, dairy farmers, car repair, and airlines. In those industries, regulation focuses on the structure of the system: what gets disclosed, what qualifies for tax treatment, and what obligations come with it—not on encouraging earnest people within the industry to be a little better. That kind of structural regulation is what the legibility problem calls for. (Just one reminder: only 12% of foundations have websites.)

So how can we use regulation and the tax code to close tax loopholes, bringing money into both philanthropy and government? One example is Dr. Ray Madoff's proposal that we repeal the estate tax in order to do so.

But part of the answer isn't a legibility problem at all, and no amount of structural regulation solves it. Some of this wealth – the bespoke schools built for a small circle of families, the vehicles that serve mainly as a cloak of invisibility for bad actors – was never oriented toward the public good in the way the philanthropic sector has assumed. Better disclosure won't change what that money is for; it will just show more clearly what it's already doing.

The era in which foundations defined American philanthropy is giving way to one where philanthropy is more fragmented, less accountable, and where wealth increasingly answers to no one but the person who holds it. The evidence points in the same direction: away from a system where a legible institution stands between private wealth and the public good.

Taken together, these changes point to a different relationship between private wealth and the public good—one that is becoming harder to see, harder to regulate, and harder to understand.

Something is happening. But do we know what it is?