A federal measure that would impose minimum annual payout requirements on donor-advised funds and boost distributions from foundations is touching off a fierce behind-the-scenes lobbying battle by grant makers and other donors arguing it would put the brakes on charitable giving.
Until Wednesday, efforts to boost payout from donor-advised funds and foundations was largely a theoretical exercise. But now a bipartisan bill in the Senate has been introduced by Angus King, an independent from Maine who caucuses with the Democrats, and Chuck Grassley, Republican of Iowa. Supporters of the effort are hunting for more legislators to attach their names and back the measure and working on a legislative strategy to push the bill through to enactment this year.
If the bill advances to a committee or Senate floor vote, “we expect a big, pitched battle over it,” said Kathleen Enright, CEO of the Council on Foundations, which opposes the bill saying it would hurt charitable giving, among other complaints.
In a phone interview, King said the concept behind the bill is clear: Money deposited in foundations and donor-advised funds avoids taxation because it’s supposed to help society, and that money should be distributed to working nonprofits “within a reasonable period of time.”
“I don’t know quite how you oppose that,” King said.
The bill would allow donors to get an upfront tax deduction for donor-advised-fund deposits only if they distribute the money within 15 years. The bill also includes an incentive,, but not a requirement, for foundations to boost their annual payout from the 5 percent minimum required by federal law to 7 percent.
Supporters of the effort include Global Citizen, Give Blck, and Rehabilitation Through the Arts.
Generally, foundations and organizations that sponsor donor-advised funds oppose new payout requirements. There are exceptions, however. The heads of the Ford, Kellogg, and Kresge foundations have all publicly supported the academic framework that became the basis for the legislation introduced Wednesday. And Enright acknowledged that some of her organization’s members support the legislation. “We have some sponsors of the effort and some of the biggest opponents,” she said.
Meanwhile, some organizations find themselves stuck in the middle and are staying on the sidelines, including Independent Sector, a national coalition of charities and foundations. The National Council of Nonprofits and the Nonprofit Alliance also declined to comment for this article.
Jan Masaoka, chief executive of the California Association of Nonprofits, says many nonprofits are afraid to speak out in favor of legislative efforts to boost payout because they fear antagonizing donors.
She says she’s pleased that these issues are rising in prominence, although she’s also concerned that Congress is in “rush” mode to get legislation enacted before the new president’s political capital wanes. The issues raised by the bill need to be carefully considered, she says, adding that her organization isn’t ready to take a position on the legislation. “It’s complicated, and we don’t completely understand it yet,” she said.
Long List of Concerns
The Silicon Valley Community Foundation, the National Center for Family Philanthropy, and the Jewish Federations of North America are among the organizations that recently signed onto a letter to congressional leaders complaining that “many of the proposed reforms could actually result in less charitable giving in the long run,” and warning that “the sector is far too fragile to be regulated by unnecessary one-size-fits-all mandates.”
“More mandates and regulations on giving will make it harder for all Americans to support the causes they care about and those who are struggling — the people who benefit from charity the most,” Elise Westhoff, CEO of the Philanthropy Roundtable, said in a statement.
“It’s hard to see how it would propel more charitable giving,” said Matthew Evans, director of public policy at the United Philanthropy Forum.
Fidelity Charitable, the nation’s largest sponsor of donor-advised funds, with more than $35 billion in assets, issued a statement touting its charitable activities. While it did not state opposition to the bill, Fidelity and other large donor-advised-fund sponsors have generally opposed efforts to impose minimum distribution requirements on their account holders.
Enright of the Council on Foundations that while her organization supports getting more money flowing to charities, the bill has numerous problems. For example, a provision that would bar foundations from meeting their payout obligations by making distributions to donor-advised funds would discourage collaboration between foundations and donor-advised funds.
A provision that would not allow foundations to meet their annual distribution obligations by paying salaries or travel expenses of foundation family members is “dismissive of their contributions to the charitable mission,” Enright said.
A salary to a family member is not a charitable event.
The provision that would waive foundations’ annual excise tax of 1.39 percent of net investment income if their payout tops 7 percent of assets would reverse recent successful efforts to simplify the foundation excise tax, she said.
And generally speaking, Enright said, the bill is motivated by the mistaken idea that the wealthy are using the tax benefits of foundations and donor-advised funds to warehouse their wealth.
“We disagree with the premise in the legislation that endowed philanthropy is inherently wrong,” Enright said.
She added, “I think the bill is focusing in the wrong place. The sponsors are conflating wealth inequality with things to do with charitable tax incentives. But these are wildly different issues.”
George Hartmann, deputy communications director for Grassley, called the ability of foundations to meet their payout requirements by shifting money to a donor-advised fund “a loophole that has been somewhat abused up to this point.”
Authors of the bill responded to pressure from many community foundations by waiving the reporting requirements for accounts of $1 million or less at those organizations.
However, the Community Foundation Public Awareness Initiative, which includes more than 130 community foundations across the country, still opposes the legislation.
“DAFs are popular for donors because they make giving flexible and easy,” it said in a statement. “When it’s easy to give, people give more. Critics assume that all the money donated to DAFs would automatically be given directly to charity if DAFs did not exist. But this assumption is simply not supported by data.”
Supporters Make Their Case
King said he feels good about the bill’s chances, given Grassley’s prominence on the Finance Committee. (He is its former chairman.) King also said he is just getting started trying to line up additional supporters of the bill. He indicated there are lawmakers in the House who are interested in pushing the legislation in that chamber, but he said it’s too early to mention names.
Of all the complaints lodged against the bill by its opponents, King expressed particular disdain for those who say there’s no problem with foundations paying family members to meet their payout requirements.
“They argue that with a straight face? That makes a mockery of the whole concept of a family foundation,” King said. “A salary to a family member is not a charitable event.”
