Pressure mounts to increase donation requirements and expand charitable deductions
More than $ 1.1 trillion is currently in private foundations and Donor Advised Funds (DAFs) in the United States. Both of these charitable intermediary tools have grown dramatically in recent years, fueled by tax-deductible contributions for wealthier Americans. In 2019, 12.7% of all individual donations went to CFOs and an additional 15.1% went to private foundations, representing a growth of over 500% in individual donations to these warehouses / intermediaries over the past 30 years.
As private foundations and donor-advised funds raise huge sums of money, demands from nonprofits to provide essential social services have skyrocketed. Despite the growing need and increasing contributions to foundations and CFOs, average donations to charities in the United States have remained constant for 40 years at around 2% of disposable income.
Donors who make contributions to private foundations or CFOs benefit from an immediate tax deduction. A well-planned donation from the richest Americans can save these donors (in tax deductions) up to 74% of the value of the donation. Due to changes in tax laws in 2017, this privilege is only available to the wealthy, leaving the remaining taxpayers to foot the bill.
Consider these facts:
- Although private foundations are required to distribute 5% of their assets annually, there is no requirement that these payments be made to charities. Under current law, foundations can meet the 5% rule by paying salaries, administrative and travel costs (often to family members), making program-related investments in businesses in profit and by making contributions to CFOs.
- There is no DAF payment requirement. Over $ 140 billion is in tax-advantaged DAFs with no assurance that they will go to charity at any time.
- Although DAF supporters claim they have high payout rates to charities, these numbers are misleading and inflated. Some DAF accounts give 100%, while a quarter of DAFs give less than 5% and others nothing at all. In addition, the figures include DAF donations to DAF, which does not bring any benefit to active charities.
In an age when the demands on charities are greater than ever and when local, state and federal governments struggle to meet the needs of a society characterized by growing income inequality, the rule change movement of donation in the United States is gaining momentum.
the Accelerating Charitable Giving Initiative (IACG) was formed to advocate for changes that could significantly increase and accelerate the resources going to charities. The bipartisan organization has proposed common-sense changes in tax laws to achieve three broad goals:
- For private foundations, fill in the gaps to better ensure that distributions eligible for the payment requirement are available to charities; and incentivize larger and earlier payments through excise tax reforms. Under these proposals, private foundations could not meet their 5% payment obligation by paying the salaries or travel expenses of family members of the foundation (or circular donations to CFOs). They would also encourage larger disbursements by eliminating the excise tax on private foundations that pay more than 7% per year, or all of their assets within 25 years.
- For funds advised by donors, adopt measures to ensure that DAF donations are distributed to charities within a reasonable timeframe. The biggest change would be to offer DAF donors the choice of delaying the deduction of income tax (but not capital gains or inheritance and gift tax savings) until the ‘money left the fund for a real charity, or take the deduction immediately but commit to distributing the money within 15 years.
- For individuals, encourage more giving by expanding and extending the new non-itemized charitable deduction to more taxpayers.
Two key US Senators, Grassley and King, very recently introduced legislation that closely follows the IACG’s proposals.
Professor Ray Madoff, director of the Forum on Philanthropy and the Public Good at Boston College Law School, and one of the founders of the IACG, sums up the proposals: “We rely on charities to perform essential functions of society, and tax rules to encourage the flow of money from donors to charities. Unfortunately, workarounds have been created so that taxpayers can enjoy all the tax benefits of charitable donations without any guarantee that those funds will one day go to charity. The effect of this is empty deductions – costing the government significant revenues and producing no definite public benefit. These proposals close those loopholes and bring charities back to the center of charitable tax rules. “
Regular readers of this column know that I am a strong supporter of foundations and CFOs when they donate money to charity. These tax law reform proposals are small but important first steps to help our charitable system achieve its goals.
Bruce DeBoskey, JD, is a philanthropic strategist working across the United States with The DeBoskey Group to help families, businesses, foundations and family offices design and implement thoughtful philanthropic strategies and action plans. . He is frequently invited as a speaker at conferences and workshops on philanthropy. Visit deboskeygroup.com or @BDeBo