Critics target charitable money in donor funds
Wealthy philanthropists have long enjoyed a beneficial way to give to charity: By using what’s called a donor-advised fund, they were able to enjoy tax deductions and investment gains on their donations long before. to give the money.
These so-called DAFs do not set any deadline by which donations must reach charities; the donors themselves decide when and where the money goes.
Critics complain that because CFOs provide no financial incentive to donate money quickly, much of it ends up staying in the accounts indefinitely rather than being distributed to charities in need.
This criticism helped drive a Senate bill that would tighten CFO rules and seek to speed up donations to charities. The bill, presented by Sens. Angus King, an independent from Maine, and Chuck Grassley, a Republican from Iowa, appear to be gaining bipartisan support in Congress.
The bill would bring many reforms to CFOs by creating, among other things, new categories of accounts.
One type of account would give donors an immediate tax deduction for the money they agree to donate to a charity within 15 years.
The second type would allow them to delay the distribution of their money for 50 years. These donors would not get any tax deductions by then. But they would still benefit from capital gains and inheritance tax savings by donating shares or gifts to a DAF.
CFOs sponsored by community foundations with less than $ 1 million would be exempt from the requirement. But donors with more than $ 1 million in such accounts would only be eligible for initial tax benefits if they distributed at least 5% of their assets each year or donated their money to a charity within 15 years. . Under current legislation, assets can remain in a DAF indefinitely, tax-free.
“This is pretty much a bill as sane as I’ve ever seen,” said King, who caucus with Democrats.
“The idea of getting a tax deduction today for money that may not be paid for 50 years does not make sense,” added the senator. “I understand you might want to put it in a fund and have it managed by someone else.” But he must be released within a reasonable time. Otherwise, it is an abuse of the tax code.
The proposed reforms have opened a divide in philanthropic circles among billionaire donors, community foundations and professional associations and sparked intense lobbying efforts both for and against the legislation.
The debate was sparked when John Arnold, a Texas-based billionaire who made his fortune in hedge funds and now co-chairs Arnold Ventures, joined a group of academics and philanthropists to propose a package of reforms under the of a coalition they called The Initiative to Accelerate Charitable Giving. Members of the group met with lawmakers to advocate for the reforms, which were largely incorporated into the Senate bill.
What sparked Arnold’s interest, he said, was seeing wealthy people with philanthropic intent funneling money into CFOs while giving very little to charity.
“The money was right there to grow,” said Arnold. “There was no intention to abuse the system. But the money was only piling up because there was no forcing mechanism. “
Opponents of the bill retort that tighter restrictions on CFOs are unnecessary, as average annual payout rates for CFOs hover around 20%, well above the 5% minimum required of private foundations. Richard Graber, who heads the Conservative Bradley Foundation, calls the legislation “a solution in search of a problem.” (The foundation is affiliated with the Bradley Impact Fund, a DAF sponsor).
Yet without payment requirements, supporters of the legislation claim that the CFOs – which hold around $ 142 billion in the United States – have essentially become warehouses for charitable donations. Accounts allow donors to create endowed accounts that exist in perpetuity and can be passed on to their heirs.
A June report from the Council of Michigan Foundations showed that 35% of CAFs sponsored by Michigan community foundations did not distribute any money in 2020, a year marked by enormous need due to the viral pandemic.
Today, it is estimated that about 1 in 8 charitable dollars goes to CFOs. The New York Community Trust, a community foundation, established the first DAF in 1931. Their use accelerated in the 1990s, when Fidelity Charitable launched a national donor-advised fund program. The charitable branches of many financial companies, including Vanguard Charitable and Schwab Charitable, now run strong DAF programs.
Community foundations, as well as universities, hospitals, faith groups and large charities like United Way also sponsor CFOs. Collectively, they represent 300% growth in DAF accounts over the past 10 years, according to the National Philanthropic Trust.
Eileen Heisman, who heads the Philanthropic Trust, notes the ease of opening a DAF account online, the emergence of workplace charitable giving accounts and the low initial minimum contributions. Indeed, Fidelity and Schwab do not require any upfront contribution to open a DAF account, Heisman noted, turning it into a financial vehicle that anyone can use. Yet the average value of a DAF account – estimated at around $ 162,000 – shows that DAFs remain a vehicle primarily for the wealthy.
The Senate bill was developed with advice from Ray Madoff, a Boston College law professor who, alongside Arnold, called for stricter DAF rules. Madoff and a colleague published a study in May that showed active charities lost $ 300 billion in contributions over a five-year period as more people channeled their donations through CFOs and private foundations instead. than directly to charities.
The Philanthropy Roundtable, a conservative-leaning group that opposes payment requirements for CFOs, disputes these findings. Its president, Elise Westhoff, says “more mandates and regulations on giving will make it harder for all Americans to support the causes they care about.”
Supporters of the bill, including William Schambra, a philanthropy expert at the conservative Hudson Institute, say much of the pullback reflects a financial incentive that DAF sponsors want to preserve: the fees they charge for managing accounts.
Some community foundation leaders agree.
“The business models of community foundations are based on asset management,” said Paul Major, CEO of the Colorado-based Telluride Foundation. “They charge a fee and that’s how they fund their operations. If they have less money to manage, they earn less.
“But the goal of charitable giving isn’t to manage more money,” Major said. “The goal is to make the money work. “
Other experts agree on the need to master CFOs but favor a different approach. Edward A. Zelinsky, professor at the Benjamin N. Cardozo School of Law at Yeshiva University, says creating a minimum annual contribution requirement for all CFOs would more effectively accelerate giving to charities.
Some community foundations say they think the bill is unnecessary because their organizations already have policies that encourage faster payments. Jeff Hamond, who oversees a coalition of 130 community foundations, argues that the legislation would increase the financial burden on community foundations, requiring them to track every donation.
“For every kind of extra cost you put on a community foundation,” Hamond said, “you’re actually driving more people to Fidelity, Vanguard, and Schwab.”
The Senate bill would also prohibit donors from claiming tax benefits for complex donations – like real estate – that exceed the value of the donation. It would also encourage private foundations to increase their disbursements to 7% and prevent them from meeting their disbursement requirements by paying salaries or other expenses for relatives or donating to CFOs.
The Senate bill was referred to the finance committee, although a vote was not expected. A spokesperson for the king’s office said the senator expects a bipartisan version of the bill to be presented in the coming weeks.
“I haven’t met anyone yet to whom I’ve described him,” King said, “who does more than say, ‘Why didn’t we do this a long time ago? “”
The Associated Press receives support from the Lilly Endowment for coverage of philanthropy and nonprofit organizations. The AP is solely responsible for all content. For all of AP’s philanthropic coverage, visit https://apnews.com/hub/philanthropy.