Community Funds Urged to Set Annual Distribution Rate
Community foundations that sponsor donor-advised fund accounts should required to distribute at least 5 percent of those assets annually to working charities, according to new recommendations from the Council on Foundations.
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Community foundations that sponsor donor-advised fund accounts should distribute at least 5 percent of those assets annually to working charities, the same amount private foundations are required by law to distribute, according to new recommendations from the Council on Foundations.
However, a prominent critic of donor-advised funds who has called for tighter regulations on them said the central elements of the recommendations are so weak that they are “utterly meaningless.”
Donor-advised funds are essentially charitable checking accounts. People put money in the funds and get an immediate tax deduction. They can distribute the funds to nonprofits as they wish. Critics say the money in such accounts often languishes for years, ringing up fees for the community foundations and other organizations that hold and manage them while doing nothing for people in need.
Legislation introduced in the Senate would impose minimum annual payout requirements on donor-advised funds, while also boosting distributions from foundations. Opponents of the legislation say it would hurt giving.
The Council on Foundations created a working group to explore donor-advised funds and produce recommendations for community foundations.
The recommendations do not apply to donor-advised fund accounts managed by nonprofits affiliated with commercial investment firms, such as Fidelity Charitable. However, Kathleen Enright, chief executive of the Council on Foundations, said, “We see these as applicable to all DAF sponsors.”
The 5 percent minimum payout recommendation would apply in aggregate; in other words, some accounts could give nothing while others could give far more than 5 percent, and over all a community foundation would be in compliance as long as the total payout for all accounts was at least 5 percent of available assets. The recommendation includes a “carry-forward” provision in which payments in excess of 5 percent in any given year could be applied toward future payout calculations, for up to five years.
Those provisions substantially weaken the potential impact of the 5 percent payout recommendation. Some account holders churn large amounts of gifts every year through donor-advised fund accounts, placing funds in those accounts only briefly before they are distributed to working charities, which means that those account holders could cover the 5 percent requirement for scores of other account holders who direct nothing to charity.
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, 22 percent distributed less than 5 percent of their assets, and 43 percent distributed more than 5 percent
“This is such a minimal requirement that it’s utterly meaningless,” said Alan Cantor, a former vice president of the New Hampshire Charitable Foundation, currently a consultant who works with nonprofits, and a frequent contributor to the Chronicle. “The Council unfortunately cares vastly more about the convenience and welfare of wealthy donors than they do about nonprofits and the people and causes in the community.”
The Council on Foundations was unable to provide an example of any community foundations that wouldn’t already meet the payout minimum as outlined in its recommendation. “We don’t have that data yet. In any given year, there may be a few,” a spokeswoman for the council said in email.
Enright said that if the goal is to get money out the door to working charities, it doesn’t matter whether a payout requirement is an aggregate that applies to all accounts combined versus a requirement for individual accounts.
Donor-advised funds have been growing rapidly. A recent report from the National Philanthropic Trust found that $159.8 billion was held in such accounts in 2020, a 10 percent increase over the previous year.
The report also recommends that community foundations establish an “inactive funds policy” for distributing assets to charity from funds that have seen no activity for three years and that the Treasury Department require community foundations to disclose on their annual public tax forms the percent of their funds that have been inactive.
The Council on Foundations report was created by community foundation leaders from across the nation.
The recommendations are unlikely to placate critics of the current laws governing donor-advised funds. Gerry Roll, CEO of the Foundation for Appalachian Kentucky, supports the Senate legislation, saying the current system “prioritizes donor needs, with little if any regard for the charitable needs those untaxed dollars were meant to address.”
The Foundation for Appalachian Kentucky is a member of the Council on Foundations.