Critics aim for charitable money to sit in donor funds

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Wealthy philanthropists have long enjoyed an advantageous way of donating to charity: a so-called donor fund allows them to enjoy tax deductions and investment gains on their donations long before they give away the money.

These so-called DAFs do not set any deadlines for when the donations must be used for charitable purposes; the donors decide for themselves when and where the money will go.

Critics complain that because DAFs do not offer a financial incentive to donate the money quickly, much of it remains in the accounts indefinitely instead of being distributed to charities in need.


This criticism has helped drive a Senate bill that tightens the rules for DAFs and aims to expedite donations to charities. The bill, introduced by Sens. Angus King, a Maine Independent, and Chuck Grassley, an Iowa Republican, appears to have received bipartisan support in Congress.


The bill would introduce numerous reforms to the DAFs, including the creation of new account categories.

One type of account would allow donors to have an instant income tax deduction on funds they 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 receive any income tax deduction until then. But they would still enjoy capital gains and inheritance tax savings when donating stocks or gifts to a DAF.

DAFs sponsored by the community foundation with less than $ 1 million would be exempt from the requirement. However, donors with more than $ 1 million in such accounts would only be eligible for pre-tax relief if they distribute at least 5% of their assets annually or donate their money to a charity within 15 years. Under current law, assets can remain tax-free in a DAF for an indefinite period of time.

“This is about as common sense law as I’ve seen it before,” said King, who will meet with the Democrats.

“The idea of ​​getting a tax deduction today for money that cannot be paid out for 50 years makes no sense,” added the Senator. “I understand that you might want to put it in a fund and let someone else manage it. But it has to get out within a reasonable time. Otherwise it is an abuse of the tax code. “

The proposed reforms have opened a rift in philanthropic circles between billionaire donors, community foundations and trade associations, and sparked intense lobbying both for and against the legislation.

The debate was sparked when John Arnold, a Texas-based billionaire who made his fortune through hedge funds and is now Arnold Ventures co-chair, joined forces with a group of scholars and philanthropists to propose a series of coalition reforms who have favourited The Initiative Accelerate Charitable Donations. The group met with lawmakers to lobby for the reforms that were largely incorporated into the Senate bill.

What sparked Arnold’s interest, he said, was seeing rich people with philanthropic intentions pouring money into DAFs but giving very little of it to charities.

“The money just sat there and grew,” said Arnold. “There was no intention to abuse the system. But the money only built up because there was no coercive mechanism. “

Opponents of the bill argue that tighter restrictions on DAFs are unnecessary as the average annual payout rates for DAFs are around 20% – much higher than the 5% minimum required by private foundations. Richard Graber, who heads the conservative Bradley Foundation, calls the legislation “a solution to a problem”. (The foundation is affiliated with the Bradley Impact Fund, a DAF sponsor).

But with no payout requirements, advocates of the legislation say DAFs – which hold an estimated $ 142 billion in the United States – have essentially become warehouses for charitable giving. The accounts enable donors to set up foundation accounts that are permanent and can be passed on to their heirs.

A June Council of Michigan Foundations report showed that 35% of Michigan Community Foundations-sponsored DAFs were not handing out money in 2020, a year marked by tremendous needs due to the virus pandemic.

Today it is estimated that around 1 in 8 charitable dollars goes to DAFs. The New York Community Trust, a community foundation, established the first DAF in 1931. Its use accelerated in the 1990s when Fidelity Charitable launched a national donor-advised fund program. Charitable branches of many financial firms, including Vanguard Charitable and Schwab Charitable, are now running robust DAF programs.

Community foundations, universities, hospitals, religious groups, and large charities like United Way also sponsor DAFs. Taken together, they represent a 300% growth in DAF accounts over the past 10 years, according to the National Philanthropic Trust.

Eileen Heisman, who runs the philanthropic trust, points out the ease of opening a DAF account online, the emergence of workplace charity accounts and the low initial minimum contributions. In fact, Fidelity and Schwab don’t charge any initial contributions at all to open a DAF account, noted Heisman, which makes it a financial instrument anyone can use. Still, the average value of a DAF account – estimated at around $ 162,000 – shows that DAFs continue to be primarily a vehicle for the wealthy.

The Senate bill was drafted under the direction of Ray Madoff, a law professor at Boston College, who, along with Arnold, has called for stricter DAF rules. Madoff and a colleague published a study in May that showed working charities had lost $ 300 billion in donations over five years as more people directed donations through DAFs and private foundations rather than charities directly.

The Philanthropy Roundtable, a conservative group that opposes withdrawal requests for DAFs, denies these findings. Its president, Elise Westhoff, argues that “more mandates and regulations on giving will only make it harder for all Americans to support the causes they care about.”

Proponents of the bill, including William Schambra, a philanthropy expert at the conservative Hudson Institute, say much of the rejection reflects a financial incentive that DAF sponsors want to receive: the fees they charge for managing the accounts.

Some community foundation leaders agree.

“Community foundation business models are based on wealth management,” said Paul Major, CEO of the Telluride Foundation, based in Colorado. “They charge fees and that’s how they finance their operations. When they have less money to manage, they bring in fewer fees. “

“But the goal of charity is not to manage more money,” Major said. “The goal is to get the money into work.”

Other experts agree that DAFs need to be restricted, but advocate a different approach. Edward A. Zelinsky, professor at Yeshiva University’s Benjamin N. Cardozo School of Law, argues that introducing an annual minimum contribution requirement for all DAFs would be more effective in accelerating donations to charities.

Some community foundations say they think the bill is unnecessary because their organizations already have policies that incentivize faster payouts. Jeff Hamond, who oversees a coalition of 130 community foundations, claims the legislation would increase the financial burden on community foundations as they would have to track every donation.

“For every additional cost you put on a community foundation,” Hamond said, “you actually drive more people to Fidelity, Vanguard and Schwab.”

The Senate bill would also prohibit donors from claiming tax breaks on complex donations – such as real estate – that exceed the value of the gift. It would also incentivize private foundations to increase their payouts to 7% and prevent them from meeting their payout requirements by paying salaries or other expenses for relatives or donating to DAFs.

The Senate draft has been referred to the Finance Committee, but no vote is planned. A spokesman for the royal bureau said the senator expected a bipartisan version of the bill to be presented in the coming weeks.

“I haven’t met anyone I’ve described it to,” King said, “who does anything other than say, ‘Why didn’t we do this a long time ago?’ ”

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The Associated Press is supported by the Lilly Foundation for coverage of philanthropy and nonprofits. The AP is solely responsible for all content. For all of AP’s philanthropy coverage, please visit https://apnews.com/hub/philanthropy.


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