While many nonprofits have concerns about how much people who hold donor-advised funds distribute to charity, relatively few of them — and none of the major associations that represent them — have pushed Congress to impose regulations to require regular distributions.
Yet few issues are as important today when it comes to giving nonprofits the financial fuel they need to advance their missions. Vast amounts of money that should be going to charities tackling important work is being warehoused in funds affiliated with Fidelity Investments and other financial institutions.
Donor-advised funds can be started by people of any income level, but most have been created by the wealthiest one tenth of 1 percent of Americans, with annual incomes over $1 million. And, at a time of staggering inequality, when three billionaires hold as much wealth as the bottom 50 percent of the U.S. population combined, wealthy individuals are using DAFs to claim substantial tax benefits, while often failing to move funds in a timely way to independent nonprofits working to address urgent social needs.
The meteoric rise of donor-advised funds is not just a problem for charities but a troubling symptom of top-heavy philanthropy, a reflection of the growing concentration of wealth and power among the top 1 percent. In fact, the increasing size of donations by the very wealthy is the only reason the charitable pie is growing.
This suggests that charities may have unexpected allies if they decide to press lawmakers to take action: the nation’s army of tax-fairness advocates, as well as the activists seeking to overhaul America’s financial institutions.
Now on defensive footing, thousands of grass-roots organizations, unions, and civic groups are working on federal and state campaigns to protect and expand the progressivity of the tax system.
A similar and sometimes overlapping constellation of activist groups has come together to lessen the corrosive impact of inadequately regulated Wall Street financial institutions.
They are battling the likes of Goldman Sachs, whose donor-advised fund is now the second largest recipient of charitable gifts. And an unfettered system of donor-advised funds contributes to the inequity of benefits from the nation’s tax laws and reinforces already oversize corporate power and influence.
Wall Street Companies
Of particular concern are the growing number of donor-advised-fund sponsors founded by for-profit Wall Street financial corporations like Fidelity, Goldman Sachs, Schwab, and Vanguard.
It’s very easy for a donor to move appreciated stock from a financial account to a charitable fund managed by the same financial institution. That means more donors are taking advantage of a special provision allowed in the tax code: When you transfer stock to a charity, including a donor-advised fund, there’s no capital-gains tax, no matter how much the securities have increased in value. And that, combined with the tax deductions usually taken with DAF donations, means fewer dollars in federal Treasury coffers.
Another major attraction of a donor-advised fund is that it’s easy to donate real estate, closely held businesses, and other noncash assets that most other charities don’t have the capacity to handle. While such transactions can lead to greater generosity, they also are rife with the potential for abuse.
Adding to the problem is a conflict of interest that gets in the way of advancing society’s benefit from donor-advised funds. In many cases, financial advisers are rewarded for steering their clients toward DAFs affiliated with their corporation, and financial advisers and corporate fund managers are rewarded for keeping money in DAFs once they are established.
It’s important to keep in mind that DAFs are already now the fastest-growing recipients of charitable giving in the United States. Donations to DAFs increased from just under $14 billion in 2012 to $23 billion in 2016 — growth of 66 percent over five years. In contrast, charitable giving by individual donors nationwide grew by just 15 percent over the same five years.
In 2016, for the first time ever, a DAF — Fidelity Charitable — was the top recipient of charitable giving in the United States. In 2017, six of the top 10 recipients of charitable giving were DAFs, according to the Chronicle’s Philanthropy 400.
Fidelity Charitable grew from $1.7 billion in annual donations in 2011 to $6.8 billion in 2017, for total growth of over 400 percent.
Those numbers might appear to be good news for nonprofits; after all, people are putting money into charitable funds and can’t take it out. But the problem is that in many cases, charitable donations sit in the funds for a long time, hurting active charities that need money every day to achieve their missions.
This is because there is no legal requirement for DAFs to pay out their funds to active charities — ever.
According to one estimate, the average annual payout rate for DAFs in 2016 was 20 percent, although some DAFs give considerably less. And even as the amount of funds flowing to DAFs has increased, their payout rates to charities have been steadily going down.
What’s more, while the charitable pie has been relatively static for decades, the share of total U.S. individual charitable giving that is going to DAFs, rather than to direct charities, has nearly doubled over the past seven years — from 4.4 percent in 2010 to 8.3 percent in 2016.
Tax Law’s Influence
The new tax law makes it even more likely that charitable giving will become more top heavy and Americans will pour money into donor-advised funds: After all, it now takes $24,000 in deductions to make it worth itemizing and thus becoming eligible for a charitable tax deduction. Many experts expect that means people seeking tax breaks will pour money into donor-advised funds every two years or so rather than giving smaller sums to charities that work in their communities and around the globe.
If donors pour more money into donor-advised funds because of the new tax law, it means this trend will just get worse: more money sitting in financial institutions rather than at working charities.
In addition, as the Chronicle has reported, donor-advised funds allow foundations to skirt annual payout rules by granting money to donor-advised funds rather than sending it directly to charity. This also reduces both transparency and accountability, because donor-advised funds are not required to report how much they distribute or where the dollars go.
An Activist Agenda
As currently structured, DAFs encourage a wealth-preservation mentality in donors rather than incentives to move contributions to charities that work on important causes — such as education, health, and the arts. It’s possible to change that mind-set if Congress adopts a series of new rules.
Here’s an agenda for what should get priority if charities unite with tax-fairness advocates to seek a new policy system:
- Require donors to distribute money they put in their funds within three years of depositing it.
- Don’t allow donors to get a tax break until they grant the money out of the fund to an active charity.
- Bar foundations from distributing money to donor-advised funds and vice versa.
- Re-examine rules governing contributions of real estate, art, and other noncash assets to ensure that they focus on benefiting the public interest, not the donor.
- Limit bonuses that financial advisers can receive when they steer their clients to a donor-advised fund.
- Require that a donor’s DAF cannot be managed by the same organization that handles the donor’s personal assets.
Organizations such as Americans for Tax Fairness and the Take On Wall Street coalition will be important allies in this effort. When charities fight this battle on their own, they risk seeming self-interested and are immediately pitted against their donors.
That’s not a proposition many charities are in a position to take on.
But when activists focus on donor-advised funds as yet another sign of growing corporate power and the inequality gap, they can more easily call attention to the public interest in changing today’s system.
And it’s imperative that all of us find ways to call attention to the risks of pushing more and more philanthropic dollars into vehicles that create blocks of private, unaccountable power — and which serve as an extension of personal power, privilege, and influence for a handful of wealthy families.
Chuck Collins and Helen Flannery are co-authors, with Josh Hoxie, of a new report, “Warehousing Wealth: Donor-Advised Charity Funds Sequestering Billions in the Face of Growing Inequality,” published by the Institute for Policy Studies.