October 23, 2015

Role of Donor-Advised Funds Prompts Heated Debate

Congressional calls to force people with donor-advised funds to distribute money to charity speedily have exposed fault lines among nonprofit leaders over what constitutes a charity and whether the federal government should draft tax policies that treat classes of nonprofits differently.

Proponents of increased regulation and fans of keeping the status quo squared off Friday at a forum held by the Boston College Law School Forum on Philanthropy and the Public Good. The event was organized by Ray Madoff, professor at Boston College Law School and a frequent critic of donor-advised funds.

While she remained neutral at the forum, she and others have suggested that national funds, created by financial firms such as Fidelity, Schwab, and Vanguard, have little incentive to place money directly in the hands of charities. As those funds have attracted hundreds of thousands of account holders in recent years, critics like Ms. Madoff have urged Congress to enact mandatory payout rules.

"Philanthropy has these wonderful ideals which are really important, but they have to be mediated by rules," she said. "It’s important that we revisit whether our rules are doing a good job." In 2014, Rep. David Camp, a Republican who chaired the House Ways and Committee, proposed a tax on accounts that weren’t directed to charity after five years.

The proposal went nowhere, but it alarmed many in the nonprofit world, especially as critics started suggesting that maybe some types of funds -- such as those offered by charities created by financial companies -- be subject to different types of tax treatment.

“If we start making distinctions about charities, we are going down a very dangerous road,” said Joanne Florino, vice president for public policy at the Philanthropy Roundtable, an organization that represents donor interests. “We are worried about creating a hierarchy of charities.”

Controversy Over Payout Rates

Discussion about the treatment of donor-advised funds begins with a basic disagreement over the best way to calculate how much they steer toward charities like food pantries, museums, and community centers. Fidelity Charitable, the nation’s largest fund with $14.9 billion in assets, emphasized in an annual-giving report in July that it had a 28-percent payout rate. To get its figure, it compared grants during the most recent fiscal year with the average of its end-of-year assets over the preceding five years.

Results using another method were presented at the forum by Paul Arnsberger, senior statistician for the Internal Revenue Service’s Statistics of Income Division. By comparing grants with end-of-year assets for 2012, Mr. Arnsberger found that the average payout rate at donor-advised funds sponsored by community funds and companies like Fidelity was 7.2 percent — lower than Fidelity’s reported payout but higher than the 5-percent payout required of private foundations. About 25 percent of organizations that offer donor advised funds paid out less than 1 percent of the money in their accounts during the 2012 tax year, according to Mr. Arnsberger’s calculations.

Proposed payout requirements are only the starting point of the debate. Other questions center on the proper tax treatment of appreciated gifts, whether foundations can include donations to donor-advised funds to meet their federal requirement to distribute at least 5 percent of their assets ever year to charity, and whether donor-advised funds operated by community foundations should receive the same treatment as the national funds.

Roger Colinvaux, a law professor at the Catholic University of America’s Columbus School of Law, questioned the notion that donor-advised funds created by companies should be treated the same as other charities. He and other proponents of more regulation, including Alan Cantor, a nonprofit consultant, suggested a requirement that donors pay out funds in their accounts after perhaps 15 years.

"Why are they exempt? Do they feed the poor? Do they heal the sick? Do they nourish the spirit?" asked Mr. Colinvaux. "No, they don’t do any of those things." Placing new regulations on donor-advised funds would cripple innovation in charitable giving, others responded. "Why would Congress want to act now?" said Victoria Bjorklund, a retired lawyer and an expert on tax-exempt organizations. "We haven’t even seen donor-advised funds fire on all cylinders."

Community vs. Commercial Funds

The heated discussion over payout requirements worries community foundations, the originators of the donor-advised fund model. Placing a time limit on the funds, they argue, would erode their ability to encourage intergenerational giving and serve as philanthropic stalwarts in the regions they serve. They maintain that they are different from national organizations whose primary expertise is in managing financial transactions.

"That is not what we exist to do," said Alicia Philipp, president of the Community Foundation for Greater Atlanta. "We are core, anchor institutions in our communities." Thomas Bridge, associate general counsel at Fidelity, dismissed the suggestion that donor-advised fund organizations like his are different from accounts run by community funds as "a meaningless distinction, by and large."

The debate was a public airing of disagreements rare in a field known for keeping its squabbles quiet.

"It’s unfortunate that a regulatory sword of Damocles is hanging over the field" and dividing people engaged in charity that have a common, altruistic purpose, said Howard Husock, vice president for research at the Manhattan Institute and a Chronicle columnist.

Welcome Discussion

While that threat is real to many at the conference, which attracted about 100 participants, most of whom signaled by a show of hands that they were in favor of keeping the status quo, new legislative treatment of the funds isn’t likely any time soon. The expected election of Rep. Paul Ryan as speaker of the House could stall things, since he now chairs the Ways and Means Committee, according to Alan Lee, an aide to Democrats on the Ways and Means Committee.

"I don’t see an exempt-organization bill going through committee anytime soon," he said. Chris Conlin, an aide to Sen. Charles Grassley, Republican of Iowa, said his boss was interested in hearing more about how community-foundation donor-advised funds differ from their national brethren but did not have a stance on the issue.

Ms. Madoff, the conference organizer, said she was glad the event drew different viewpoints. "We’ve had too few discussions that bring in people with differing views on the subject," she said. "There tends to be a lot of falling in line, a lot of cheerleading for the sector."

Note: This article was updated on October 26, 2015 to clarify that the comments by Joanne Florino were related to suggestions that some donor-advised funds might deserve different tax benefits than others.

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