The goodwill spirit of the holidays prompts many Americans to give big at year’s end, especially in this last week of December. As we make our final decisions for 2015, many of us will consider whether to join the growing ranks of donors and establish or add to a donor-advised fund at Fidelity, Schwab, Vanguard, or other similar charitable gift fund.
Clearly, these funds are a great deal for donors.
Donors get the emotional satisfaction of setting aside funds for charity, as well as a full tax deduction. Yet donors do not have to distribute any money from the accounts until they are ready to decide on a worthy charity, a privilege that can extend across multiple generations. Donors can even unload complex assets, like interests in closely held businesses, into their funds to escape capital-gains taxes.
With such great benefits, it is no wonder the charities affiliated with Fidelity, Schwab, and Vanguard are growing so fast they are now in The Chronicle’s top 10 rankings of the 400 charities that raise the most in the United States, alongside charity stalwarts like United Way Worldwide and the Salvation Army.
Although advised funds like these offer terrific benefits for donors, they are not necessarily so great for nonprofits — and that should send an alarm bell to policy makers. It’s time to require that every dollar put into these funds gets distributed within a reasonable time; otherwise, more and more donations will sit for too long in an investment account, doing little, if anything, to advance the common good.
This is an important issue in part because the growing popularity of donor-advised funds is diverting resources from charities that put money to use right away. Over the past 40 years, giving by individuals as a percentage of personal income has remained remarkably stagnant, at 2 percent. As donor-advised funds make up an ever-greater share of giving, gifts that once would have gone to the local soup kitchen, church, university, or museum instead come to rest indefinitely in a donor-advised fund.
So instead of the ultimate beneficiary receiving a donor’s money right away, at best, the charity may get the money the year after the donor sets it aside — or possibly five years later, 10 years later, or never.
Because the charity doesn’t know to expect the money, it can’t do anything to encourage other donors to match the gifts or plan for a new building or program. So even though donor-advised funds are growing, this comes at a cost to other charities. The stockpiling of money holds back nonprofits from providing full service to society.
This is the primary concern of a growing number of critics of donor-advised funds, but we should also give hard thought to what it means that financial companies have become such big players in collecting and distributing charitable funds.
When most people think of a charity, they often have in mind a social-services organization or other active charity that conducts programs for the benefit of those in need. A commercially-affiliated donor-advised fund like Fidelity Charitable is a far cry from the typical charity; it exists solely to raise, invest, and then distribute funds based on the donor’s advice, adding little or no value of its own.
The law has long said that raising money for other nonprofits should be considered a charitable purpose, and that might make sense. But it’s hard to imagine that Congress thought about how this could turn into a problem.
Though federal law says such organizations must distribute some of the money they raise, it doesn’t provide for a rate of spending. That is a particular concern when it comes to donor-advised funds. Each one is a separate account, so even if some funds spend money rapidly, others do not. This means that some donors get a free ride, letting their tax-deductible dollars stack up for years and years without notice because other contributors are distributing large sums. To get around this problem, the law should specify a minimum time that each account is expected to distribute every time it gets a new contribution so each donor knows what is required. This sort of spending rule should be a condition of tax-exempt status for this kind of fund.
Fidelity and the other commercially-affiliated advised funds strongly resist the idea of requiring donors to distribute all the money within a set period of time. But it’s hard to understand why. After all, some donors do distribute the money quickly — and requiring a set deadline for giving it all away would not undermine the usefulness of the advised fund.
Donors could and would continue to give for all the reasons they give right now. They could still involve family members in philanthropy by enlisting them to decide where to give the money. Donors could still use the funds to accommodate a large bonus or inheritance by taking some additional time to decide which charities to benefit.
Undoubtedly, some donors would be concerned by requirements for mandatory distribution. But which donors? Only those who are paying out slowly. And these are the donors we should be trying to reach. These are the donor-advised funds that, perhaps inadvertently, harm charities the most because of long delays in getting the money out to active nonprofits.
Most donors would probably understand the need to impose a deadline for distributions as a fair trade for getting a tax deduction. Meanwhile, those who don’t like having a deadline would still have other options, such as setting up a private foundation, which is required to distribute only 5 percent a year, on average. And those who would still be unhappy probably aren’t truly charitable in the first place but are just seeking a tax deduction. That’s not something anybody wants to encourage.
If Congress or the IRS took action to set a deadline for advised-fund distributions from commercially-affiliated funds, much would be gained. Declaring a new standard would send a clear message that donor-advised funds are a vehicle for spending — not saving.
Public policy must always strike the right balance between accommodating donor preferences and the needs of America’s nonprofits. Requiring advised funds to spend their money within a set period of time will continue to allow what donors care about: having an efficient and easy way to give. But it will also focus the public’s attention on what matters most: getting the money out to charities that are working hard every day to improve our communities, our nation, and the world.
Roger Colinvaux is professor of law at Catholic University of America, where he also directs the law and public-policy program at the Columbus School of Law. He worked as a legislative counsel at Congress’s Joint Committee on Taxation from 2001 to 2008.
