A start-up donor-advised fund has a message for would-be donors: Don’t let your contribution gather dust.
Possibility Labs, which in August began to offer a donor-advised fund with a required annual distribution, today said it has attracted a contribution of $20 million from the Kataly Foundation based on its commitment to support grassroots social-justice organizations led by people of color. Donors are required to direct at least 10 percent of their account assets to charity each year or Possibility Labs will do it for them.
In addition to the donor-advised funds, Possibility Labs works to get investment capital to start-ups and provides back-office support such as human resources and accounting services.
“We want to disrupt the industry and get money flowing to the social-justice movement,” says Lem White, co-CEO.
The payout requirement comes as controversy surrounding donor-advised funds continues to swirl. Unlike a foundation, which must direct 5 percent of its assets to charity each year, donor-advised funds have no distribution requirement. Donors can deduct a contribution to a fund from their taxes immediately, but the money can sit in an account while a donor-advised fund organization collects investment fees on it, possibly for years.
Donor-advised fund sponsors, whether they are community foundations, charities, or nonprofits founded by large financial-services firms, point out that payout levels far exceed the 5 percent payout requirement for private foundations. Donor-advised fund payouts reached 24 percent of assets in 2020, according to a study conducted by the National Philanthropic Trust, a nonprofit that runs a donor-advised fund. But critics say that figure doesn’t capture a significant percentage of accounts that remain dormant for years. For instance, a recent study from the Dorothy A. Johnson Center for Philanthropy at Grand Valley State University found that 35 percent of the donor-advised fund accounts at Michigan community foundations distributed no money, while 22 percent distributed less than 5 percent of their assets.
Over the past several years, fund sponsors and groups of donors have pushed to increase the flow of money from the funds. For instance, a group of wealthy donors called Patriotic Millionaires unsuccessfully pushed Congress to temporarily institute a 10 percent distribution requirement for both donor-advised funds and foundations so charities could get more cash to respond to the pandemic. Separately, legislation that would give fund holders a tax incentive to spend more quickly is pending in both the House and Senate.
Other Efforts to Speed Giving
Alongside those legislative efforts, others have pushed donors to give at a faster clip. The Amalgamated Foundation in 2018 began to offer donor-advised funds and encouraged donors to pledge that they would distribute at least 10 percent from their accounts to charity each year.
Since then, Amalgamated reports the fund has attracted $150 million in contributions and distributed more than 40 percent of that amount to working charities. And through HalfMyDaf, an effort conceived of by David and Jennifer Risher, more than 50 wealthy donors have committed to channel money to charities that equates to at least half the value of their funds, resulting in nearly $20 million in grants over the past two years.
More recently, a Council on Foundations working group this month put forward a set of recommendations that would require many DAF organizations to pay out at least 5 percent of the money held in their accounts to charity. The proposal would not require a certain payout rate at the account level; the minimum is set for the aggregate amount of money held in a fund’s accounts.
Enforcing Distribution Rates
What separates those efforts from Possibility Labs is the fact that it is enforcing its 10 percent distribution rule.
Here’s how it works: Donors to a Possibility Labs donor-advised fund sign an agreement that they will direct at least 10 percent of their accounts to working charities or impact investments each year. If a donor does not hit the 10 percent mark, Possibility Labs will take money from their accounts and place it into a pooled fund. Recipients of grants from that fund will be named later, White says.
Possibility Labs charges an upfront 3 percent fee on donations and institutes an annual 1.5 percent fee on money sitting in accounts. To encourage donors to speed cash to grantees, Possibility Labs will waive the annual charges for account holders who steer at least 40 percent of their account to charity in one year.
The fund’s fees are higher than annual fees charged by some large commercial donor-advised funds, which are often less than 1 percent. But White says the charge doesn’t necessarily represent a premium placed on giving to the fund.
The fund will likely attract donors who will move enough money out of their accounts to have their annual fee waived, White explains. So while there is a 3 percent fee upfront, White says it is less likely those donors will be subject to annual fees.
At Amalgamated, where the 10 percent payout is voluntary, more than 75 percent of the fund’s donors have pledged to meet that mark, and “virtually all” have done so, according to Anna Fink, the Amalgamated Foundation’s executive director. The fund does not charge a fee on new contributions but charges an annual fee that starts at under 1 percent and drops as assets in an account are paid out to charities.
A donor-advised fee structure “should not create a perverse incentive to lock up charitable resources,” she says.
It is important for donor-advised funds to inform donors how fees are used, Fink says. At Amalgamated, fees cover operations and special projects, including a campaign to get donor-advised fund sponsors to screen out gifts directed to hate groups.
Exchanging Ideas
At Possibility Labs, some of the fees will go toward a developing a web portal for donors to exchange ideas about grants and learn more about grassroots organizations led by people of color.
The donor-advised fund’s ability to connect people with racial-justice organizations is a big reason Kataly made its $20 million contribution, says Nwamaka Agbo, Kataly’s chief executive. Started by philanthropist Regan Pritzker and her husband, Chris Olin, Kataly plans to distribute all of its assets but hasn’t set a deadline for when that will occur.
By giving through Possibility Labs, Agbo says Kataly wants to help build the economic, political, and cultural power of Black and Indigenous people and other people of color.
The fund, she says, is not simply a tool through which donors can give.
“Possibility Labs comes with a specific political analysis and a set of values,” she says. “They’re using their platform to help support donors by educating them on how to connect with BIPOC communities and grassroots organizations, move money to grantees these donors otherwise might not have had exposure to in the first place.”
For Possibility Labs’ White, the required distribution and the connections Possibility Labs wants to make between donors and grantees is all designed to get money where it is needed, and fast.
“A lot of philanthropy spaces are very talk and ideology heavy and not as practice heavy,” he says. “We are cultivating a community of donors who are in the practice of deploying capital.”
