It has now been nearly eight years since I came very close to showing the door to a dinner guest before the main course. The reason — he was bragging to me about the ways he took advantage of the tax laws to use his foundation’s money to purchase artwork and travel. He wanted to educate me on how I should work the system the same way. I knew what he was pushing was wrong.
It was offensive and wrong to me because of how my husband, Richard, and I practice our philanthropy — making big bets to create systemic change. Our goal is to go beyond the Giving Pledge, which we signed in 2018, and give our last dime with our last breath. My dinner guest was also wrong because of the fundamental contract that philanthropists make with our society. As philanthropists, we take tax deductions for deploying dollars for the common good — not for hoarding those dollars in essentially a tax shelter of personal benefit.
I have spent the last several years advocating for changes to federal tax policies and laws to ensure that donations made to a family foundation or donor-advised fund get to the people who need it in a timely manner. That is why the introduction of a new measure called the Accelerating Charitable Efforts Act in the Senate by Sen. Angus King of Maine and Sen. Charles Grassley of Iowa is a no-brainer and has my full support.
The Grassley-King measure sets a timeline for charitable deductions — if donors want the full tax benefits of their charitable donations to a donor-advised fund, the funds must be dispensed within 15 years. (Donors can have up to 50 years if they agree to forego the income-tax deduction until funds are distributed from the DAF.)
Most Americans would be surprised to learn that tax-deductible dollars sitting in donor-advised funds have no timeline requirement to reach charities. Fifteen years is quite a long time for fully tax-deductible dollars to sit untouched. We just marked Hurricane Katrina’s 16th anniversary as, sadly, Hurricane Ida made parts of Louisiana uninhabitable.
Imagine money that donors deducted from their taxes in 2005 just now being dispensed to charities that were on the front lines in New Orleans for Katrina. That’s why this time horizon should be considered extremely generous — and not generate the opposition that has come from some the organizations that represent foundations, donors, and nonprofits. Congress needs to help by putting charitable giving back on the calendar.
Investment Fees at Stake
Some of the loudest organizations opposing the ACE Act are the organizations that profit from parking charitable dollars. These donor-advised-fund sponsors argue that regulation will make it harder for Americans to support the causes they care deeply about. But Americans will still be supported in their charitable giving; what will be stifled are the perpetual fees that the managers of these unspent funds now collect.
When the people who profit the most from the tax-deductible money sitting untouched are the ones speaking against an overhaul to the law, it shows that we are on the right path. Currently, donor-advised funds have more than $140 billion set aside for future charitable gifts. That’s billions of dollars sitting on the sidelines with no assurance that they will ever benefit charities and nonprofits, which is the reason donors were able to take tax deductions in the first place.
A Trillion Dollars Untouched
What is perhaps more disturbing and surprising is the fact that some organizations whose primary focus is supposed to be representing the interests of charities more broadly are not speaking up in support of charitable organizations and the beneficiaries they serve. Many of them seem to fear that the measure will anger their wealthy donors (and the donors who support the organizations they represent). Well, that’s not the case for my husband, Richard, and me, and it’s not for many other Giving Pledge donors like Kat Taylor and Tom Steyer. We know that charities struggle to get donations and have legitimate fears about antagonizing their patrons, but it’s flat out wrong and insulting to suggest that all philanthropists want to hoard their money and get big tax breaks.
Similarly, foundations across America have more than $1 trillion sitting in their bank accounts, and their only requirement is to distribute annually at least 5 percent of the average market value of their net investment assets. That 5 percent goal can include salaries and travel expenses of the foundation’s family members. And believe it or not, the 5 percent requirement can also be met by transferring money from a foundation to a donor-advised fund where it never has to be distributed. The ACE Act fixes many of these items and does not allow salaries and travel of family members to go toward meeting the 5 percent requirement.
Among those hit hardest by the Covid-19 pandemic were America’s nonprofits. With a trillion dollars sitting untouched — money that could be used to support charities and the people those charities serve — that should never happen. But unfortunately, the current tax laws do not sufficiently incentivize the timely distribution of fully tax-deducted dollars.
The tax laws that govern foundations are antiquated, stretching back to the late 1960s, reflecting society and its needs 50-plus years ago. Back then, government dollars covered almost all of society’s needs. Today, they do not.
For the Public, Not Wall Street
Because today’s tax laws are so far behind the times, the federal treasury is projected to lose $230 billion in tax revenue between 2019 and 2023. It would be a real injustice to allow the wealthy to park tax-deductible dollars and then ask the average American to make up the $230 billion. Once donors get a tax deduction for their charitable dollars, that money belongs to the public good, not Wall Street donor-advised funds.
Donors — like my dinner guest nearly eight years ago — have already received the full tax benefits of their donation. Charities, too, should feel the benefits of that money. This money is for the people. That’s not an unreasonable request.
Philanthropy has such a positive impact on American society when done right. But that positive impact can be realized only if the charities and nonprofit organizations receive that money. The federal government provides incentives to donors to put money aside for giving; now the federal government needs to give them an incentive to get the money into the hands of the people who can use it for good. America will be better for it.