GivingTuesday — the global effort to encourage generosity that kicked off this morning — was built on a well-known truth: If you want something done, put it on the calendar. For a movement that generated nearly $2.5 billion for charity in 2020, it sure seems like a calendar reminder helps focus people’s attention.
When Congress enacted charitable tax benefits in the early part of the 20th century, it too was mindful of the importance of putting things on the calendar: If taxpayers want to claim charitable tax benefits in April, they must give the money to charity no later than December 31 of the prior year. In 1969, Congress put private foundations on the clock as well by requiring them to distribute at least 5 percent of their assets each year or else face a penalty.
The deadlines clearly work. Nearly one-third of annual giving occurs in December, and 12 percent of all giving happens in the last three days of the year.
When Congress wrote these rules, it did so at a time when charitable giving meant giving directly to food banks, houses of worship, schools, hospitals, and the many other charitable organizations that could put those donations to use to enrich people’s lives.
However, in 1991, a big change occurred when the financial services industry got involved in the world of charitable giving by creating their own eponymous charities. Fidelity Charitable, Schwab Charitable, and Vanguard Charitable were able to attract contributions by offering donors the ability to control the charitable distribution of the donated funds. This form, called the donor-advised fund, was originally developed by community foundations to connect donors with their communities, but in the commercial context, the purpose was simply to provide donors with maximum upfront tax benefits and maximum ongoing control of donated funds.
No Distribution Rules
The problem is that no requirement exists for money set aside in donor-advised funds to ever get distributed to charities. Even more troubling, private foundations can use donor-advised funds to technically meet their requirement to distribute at least 5 percent of their assets annually. The combination of these rules means there is no assurance that any of the $1.2 trillion currently set aside in private foundations and DAFs will ever be made available for charitable use.
Since the creation of the first commercial donor-advised fund 30 years ago, charitable giving by individuals has remained largely flat, at roughly 2 percent of disposable income, according to data from ‘’Giving USA’s’ annual report on philanthropy, but each year more and more of these contributions are going into DAFs rather than to working charities. In 2020, nearly $48 billion went into DAFs, which is the same amount that went to the 85 most popular charities combined. Moreover, year after year the vast majority of the funds — most recently over 82 percent — available for distribution remain in DAFs.
While some charity experts like to say that the average payout rate of DAFs is higher than the payout rate imposed on private foundations, the reality is that payout rates vary widely among individual DAF accounts, and averages hide a lot of ills. According to a recent report of account-level activity, 57 percent of the donor-advised funds distributed less than 5 percent of their assets— and 35 percent didn’t make a single dollar in distribution in 2020 — a year of unprecedented charitable need.
Speed Money to Charities
In the spirit of GivingTuesday, it’s time for Congress to fix the broken connection between charitable tax benefits and benefits to charities by getting these contributions back on the calendar. Last year, we founded the Initiative to Accelerate Charitable Giving to promote common-sense approaches for change: close loopholes to ensure more money from private foundations gets into the hands of working charities; ensure reasonable payout periods for DAF accounts; and expand and extend the non-itemizer deduction to incentivize the donor base and boost charitable giving.
In June, Senators Angus King, a Maine Independent, and Chuck Grassley, Republican of Iowa, introduced the Accelerating Charitable Efforts Act , which reflects many of these principles and has a simple goal — get more money to America’s charities, faster. The bill thoughtfully recognizes the role of community foundations and other charities that promote informed giving in specific cities or regions to encourage long-term support and reduce administrative burdens. The bill has earned the support of charities and nonprofits, philanthropists, scholars on nonprofit issues, and a bipartisan cross-section of the American people across the country who believe it’s time for Congress to act.
GivingTuesday has rightly focused global attention on giving for the sake of our communities and the enduring needs across the nation. We urge Congress to recognize the ability of the U.S. tax code to do the same. While innovative charitable vehicles are very advantageous to donors to enable flexibility, when taxpayers are footing the bill, the benefits to society need to be secured as well.
John Arnold and Ray Madoff are co-founders of the Initiative to Accelerate Charitable Giving.