January 11, 2016

Letter to the Editor: Spending Deadlines on Donor-Advised Funds Would Be a Mistake

As presidents of community foundations in four regions, we appreciate the distinction Roger Colinvaux makes between donor-advised funds sponsored by commercial providers like Fidelity and Schwab and those sponsored by other charitable organizations, such as community foundations ("Congress Needs to Send a Message that Commercial Advised Funds Are About Giving, Not Saving," Opinion, December 29, 2015).

Community foundations have worked closely with Mr. Colinvaux and other critics of donor-advised funds to help them better understand the unique role we play. We have a responsibility to ensure that policy makers fully understand the power and value of such funds in expanding the reach of philanthropy, and how mandating payout within a specified number of years is a flawed strategy to increase charitable giving in America. 

Even though critics of donor-advised funds focus much of their attention on commercial providers, the reality is that under current law, it’s not so easy to consider different rules for one set of sponsors. Here are several reasons why timed payouts for donor-advised funds would be bad public policy and would fail to achieve the outcome that critics seek.

If the goal is to increase the money "going out the door," a timed payout would have the opposite impact.

Even without a statutory requirement, donor-advised funds already have high payout rates. According to the National Philanthropic Trust, the average payout for the 608 community foundations surveyed for its 2015 report on donor-advised funds was 18.2 percent. Overall payout across all donor-advised funds, regardless of sponsors, was even higher, approaching 22 percent. Different methodologies yield different payout percentages, but even more conservative calculations pin the average payout at triple the rate for private foundations.

While not every family that starts a donor-advised fund is wealthy — the average fund nationally is under $300,000, and the median is much lower — any timed payout would drive some high-end donors to start private foundations instead, likely leading to a maximum payout of 5 percent. For donors not inclined to switch to a private foundation, they might continue to give but surely less (and less strategically) because the incentive to create an endowment that could outlive the donor would be sharply reduced. So a timed payout for donor-advised funds would likely reduce overall charitable giving, not increase it.

A timed payout sends the message that the concept of "endowment" — building a permanent resource that exists both now and in the future — is reserved only for the very wealthy.

Community foundations across the country work with families that want to sustain charitable giving into the future and perhaps involve their children in philanthropy, and they use a donor-advised fund as the tool to accomplish this goal. A family with a $300,000 fund is not going to start a private foundation.

What a timed donor-advised fund payout says to these families is this: The very wealthy can set aside their money in a foundation, maintain family control, grant 5 percent a year, and keep the foundation active in perpetuity; but the family that wants to engage in philanthropy by opening a donor-advised fund must spend out all gifts within a predetermined time frame, with no possibility of letting the funds grow, no opportunity to sustain support of effective organizations over the long run, and no chance to engage their children in a lifetime of giving.

This philosophy makes no sense to us. The donor flexibility offered by donor-advised funds is a virtue, not a vice. Such flexibility ultimately leads to greater — and more engaged — giving.

A timed payout implies that inactive donor-advised funds are a significant public-policy problem, but the vast majority of fund advisers are making grants regularly.

Just because it might be legal for advisers of these funds to get an up-front tax deduction and then make no grants, it doesn’t follow that this is a common problem and that a change in the rules for all donor-advised funds is required. Public policy should be based on what is actually happening in the field — and in our experience, donors want to make grants, not withhold them.

We know of the examples cited by certain critics of donor-advised funds who argue that fund sponsors can achieve admirable average payouts if only a small percentage of their funds boast high payouts. But is this the case in the real world?

At each of our foundations, more than 90 percent of our fund advisers have made grants in the last 24 months; most of the remaining few have specific giving plans in place; and we have policies on inactive funds to encourage — and in many cases require — that funds be disbursed according to a set spending policy, in the rare cases in which donors are not responsive after a certain period of time.

As philanthropic leaders, we have a dual set of responsibilities: to get money out into the community to improve the quality of life, and to build the community’s endowment for future needs. Both goals are important. It makes little sense to us to change public policy for 100 percent of donor-advised funds to address a perceived problem that doesn’t comport with reality.

A timed payout fails to recognize the important difference between endowed and non-endowed donor-advised funds.

For an endowed donor-advised fund, a donor-adviser makes a gift to a community foundation’s permanent endowment, and an annual distribution amount is determined according to a foundation’s internal spending policy. The donor can then advise grants to be made from this grantmaking "budget" for the year. The principal remains a part of the foundation’s permanent fund.

Each endowed donor-advised fund is governed by a gift instrument that functions like a "contract" between the donor and the community foundation. Any spend-down requirement on endowed donor-advised funds may require community foundations to go to court to defend the cancellation of thousands of arrangements that were designed to carry out donor intent. We’re uncertain whether advocates for a timed payout would want to exempt endowed donor-advised funds, since many critics of these instruments have issues with building endowment generally. But even if there were support for exempting them, current law makes no such distinction and a whole new set of rules would have to be drafted.

Critics of donor-advised funds imply that such funds provide value to the community only when money is "paid out," but that is not the case.

The notion that donor-advised funds (at least at community foundations) provide value only when they make a grant is flat-out wrong and demonstrates a fundamental misunderstanding of community foundations.

Community foundations are bona fide public charities, providing not only millions in grants in their communities but also useful charitable services to the nonprofit sector that are paid for by account fees. (We generally don’t do fundraising for our own budgets.) Community foundations fall into the "public charity" definition for a reason: We provide real charitable services are not simply a shell housing a collection of funds. If policies designed to remedy problems with commercial funds were applied to us, every community’s endowment would be affected.

We appreciate that many critics understand how the ultimate objectives of donor-advised funds at commercial investment companies (that is, growing assets under management and the associated profits from investment fees) differ from the goals of community foundations (which seek foremost to build stronger communities as well as better-informed and more-effective donors). Mandating timed payouts of donor-advised funds by all providers, however, won’t eliminate those differences. Rather, it would diminish our ability to provide philanthropic guidance to donors and improve the quality of life in our communities.

The authors are all chief executives of community foundations. Douglas F. Kridler is at the Columbus Foundation; Kathlyn Mead is at the San Diego Foundation; Paula Van Ness is at the Connecticut Community Foundation; and Elizabeth Brazas is at the Community Foundation of Western North Carolina.