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donors-congress.jpg

Powerhouse Coalition of Wealthy Donors and Big Foundations Urges Congress to Spur More Giving

Photo illustration by the Chronicle
Supporters of the proposal include Bill Lewis, managing director of Lazard; the philanthropist Kat Taylor; Darren Walker, president of the Ford Foundation; and billionaire philanthropist John Arnold.
Government and Regulation
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By  Dan Parks and 
Alex Daniels
December 1, 2020

A powerhouse coalition of wealthy individual donors, some of the nation’s largest private foundations, and prominent scholars on charitable giving Tuesday joined forces to urge Congress to adopt a set of tax proposals intended to speed up distributions from foundations and donor-advised funds.

The new effort, called the Initiative to Accelerate Charitable Giving, was developed by the billionaire philanthropist John Arnold and Boston College law professor Ray Madoff. Among those joining the call on Congress to act: the billionaire investor Seth Klarman and his wife, Beth; the Giving Pledge donor Kat Taylor; and the heads of the Ford, Kellogg, and Kresge foundations.

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A powerhouse coalition of wealthy individual donors, some of the nation’s largest private foundations, and prominent scholars on charitable giving Tuesday joined forces to urge Congress to adopt a set of tax proposals intended to speed up distributions from foundations and donor-advised funds.

The new effort, called the Initiative to Accelerate Charitable Giving, was developed by the billionaire philanthropist John Arnold and Boston College law professor Ray Madoff. Among those joining the call on Congress to act: the billionaire investor Seth Klarman and his wife, Beth; the Giving Pledge donor Kat Taylor; and the heads of the Ford, Kellogg, and Kresge foundations.

The proposal has been in development for more than a year, and the recession has made the need for it clearer than ever, supporters say.

“The pandemic added more urgency to this, absolutely,” Madoff said.

Benjamin Soskis, senior research associate at the Center on Nonprofits and Philanthropy at the Urban Institute, said the coalition of support for the proposal is unprecedented. “Historically foundations have been allergic to any sort of government regulation of their payout and spending practices,” Soskis said. “This is an important step in philanthropic reform.”

Soskis said the presence of big foundations on the list of supporters will give the proposals a boost in Congress.

The proposal would reduce or eliminate the excise tax that foundations must pay if they speed up distribution of their assets to charities and create new rules for donor-advised funds intended to accelerate payout of those funds as well.

A Blueprint to Spur Giving

The following are the ideas in the Initiative to Accelerate Charitable Giving, proposed by
billionaire philanthropist John Arnold and Boston College law professor Ray Madoff.

  • For donors to get an upfront tax deduction when they deposit money in a donor-advised fund account, they would be required to distribute the funds within 15 years. Donors would be required to name a charity that would receive any funds remaining after 15 years.
  • Donor-advised-fund account holders who don’t accept the 15-year time limit would be prohibited from taking their tax deductions until donated funds are distributed to working charities, although they would still receive some tax benefits right away because levies on capital gains and estate and gift taxes on donated assets would still be waived immediately.
  • The income-tax deduction for complex assets placed in a donor-advised-fund account, such as restricted stock or real estate, would be determined by the amount of cash made available as a result of the sale of the asset instead of the appraised value. This provision is intended to avoid giving donors tax benefits that far exceed the actual value of the gifts.
  • Foundations would not have to pay an annual excise tax of 1.39 percent of their net investment income in any year when their payout tops 7 percent of assets. Newly created, time-limited private foundations with a life of 25 years or fewer would also be exempted from the excise tax.
  • Foundations would not be able to meet their payout obligations by making distributions to donor-advised funds. A recent Chronicle analysis found that $740 million in such transfers were made in 2018, the most recent year for which data was available. Such transfers can help foundations meet their annual payout requirements, but critics say the transfers accomplish nothing for working charities.
  • Foundations would not be able to meet their payout obligations by paying salaries or travel expenses of foundation family members.

Arnold, who made a fortune as an energy trader at Enron, has long been a proponent of making changes in the law that would curtail the “tax-free hoarding” of charitable assets in foundations and donor-advised funds. Arnold said the proposals are intended not only to get more money to charities in need but also to make philanthropy less “elitist.”

Wealthy donors can enjoy the immediate tax advantages of establishing family foundations or making big deposits in donor-advised-fund accounts, Arnold said, while the 2017 tax law essentially eliminated the financial incentives for millions of lower-income taxpayers to give to charity. That’s because the tax law doubled the standard deduction. In 2019, about 14 percent of taxpayers itemized, compared with 31 percent before the tax law was enacted, according to the Tax Foundation.

“Fewer and fewer people are getting a tax deduction for their philanthropic endeavors,” Arnold said. “So you have the government subsidizing the wealthiest philanthropists but not lower- and midtier givers. I don’t think that’s healthy for the field.”

Arnold said the push to persuade Congress to make tax-law changes that would spur more giving from foundations and wealthy individual donors is in its “quiet phase,” and he expects more prominent donors to add their public support soon.

“Every week we’re getting people from across the whole spectrum who are joining the coalition,” he said. “I expect that momentum to continue.” John Arnold’s wife, Laura Arnold, also is a signatory on the proposal.

Madoff said she also expects more prominent philanthropists and foundations to join the call for Congress to act. And she’s expecting the plan to get traction on Capitol Hill, although she declined to name legislators who might be interested in pushing it.

Seth Klarman cited flaws in the tax code as the reason he wanted to see changes.

“Each of us in the philanthropic community has a role to play, especially now, to make sure charities have enough resources to address the crises we face today and to meet future challenges,” Klarman said in a statement.

Other wealthy supporters of the proposal include Bill Lewis, managing director of Lazard; California technology-industry veterans David and Jennifer Risher, creators of the #HalfMyDAF” movement; and real estate developer Melanie Lundquist.

Prominent scholars supporting the effort include Rob Reich of Stanford University and law professor Roger Colinvaux of Catholic University of America.

Prospects in Congress

Dean Zerbe, a former senior counsel to the Senate Finance Committee, said he agrees the proposal could get serious bipartisan attention in Congress. The current rules governing private foundations and donor-advised funds create enormous tax benefits for the wealthy “that don’t amount to a hill of beans for the poor,” he said.

Foundations generally must distribute at least 5 percent of their assets annually. Donor-advised funds have no such rules about how much to give or when, yet donors get immediate tax benefits for their full distribution.

Zerbe said that private foundations and donor-advised funds have become “a jobs program for money managers,” adding, “Ray is very well respected. What she puts out gets considered.”

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But Jeffrey Moore, chief strategy officer for Independent Sector — which lobbies for the interests of both grant makers and grant recipients — disagreed and said he didn’t see much appetite in Congress for the type of changes being proposed. “Ray Madoff and John Arnold have been making pretty steady attempts on the Hill to socialize their proposal, but we don’t see anything gaining real traction at this point,” Moore said.

Still, that could change if wealthy donors make a strong advocacy push. Taylor and her husband, Tom Steyer, signed the Giving Pledge, and Taylor says she is pushing her network of wealthy donors to advocate for the changes crafted by Arnold and Madoff.

Some donors, she says, are unaware that they even have donor-advised funds; they were created as part of a broader tax-planning process. Others, she says, have long enjoyed the prospect of encouraging their children and grandchildren to develop philanthropic habits and see an intergenerational fund as a way to keep giving in the family.

Taylor, who last month announced she is going beyond her Giving Pledge commitment to give one-third of her wealth to help nonprofits in financially struggling areas build assets, is confident her conversations will bear fruit. One of her main arguments is that getting a tax deduction for a charitable gift, even if that gift does not flow to a working charity for years, deprives government of tax revenue needed for public safety, education, climate-change mitigation, and other issues.

“I have a lot of friends who are rethinking their strategy,” she says.

Meeting of the Minds

In September of last year, Arnold published an opinion article in the Chronicle of Philanthropy calling for changes to federal policies that would spur more giving. Madoff said that article prompted her to reach out to Arnold, and the two had a productive “really in the weeds” conversation about what kinds of changes to current law might accomplish their goal.

The two of them hosted a gathering in January of about a dozen foundation leaders, philanthropists, academics, and others interested in the issue, Madoff said. She declined to disclose the other attendees. That meeting led to the formation of the proposal and efforts to bring more people together in support.

Assets held by foundations and donor-advised-fund accounts have grown rapidly in recent years. John Seitz, a former Wall Street portfolio manager who now tracks foundation assets, estimates that U.S. foundations currently hold about $1.1 trillion in assets. The National Philanthropic Trust says donor-advised-fund accounts hold about $121 billion.

So you have the government subsidizing the wealthiest philanthropists but not lower- and midtier givers. I don’t think that’s healthy.

The growth of those assets has deepened a rift in philanthropy between people like Madoff and Arnold, who want Congress to take action that would send more money to working charities, and powerful entrenched players who oppose those efforts. Some foundation leaders say boosting their annual payout requirement would hurt their ability to handle future crises.

“Whatever crises we are facing now, there will be subsequent crises,” said Adam Falk, president of the Alfred P. Sloan Foundation. “If you pay out more than 5 percent, you cannot responsibly assume you will sustain the future of the foundation and its work.”

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Falk added: “We have to be really humble about our ability to see into the future.”

Falk said that avoiding the excise tax wouldn’t be enough of a financial incentive for foundations like Sloan to boost its payout to 7 percent annually.

Community foundations, many of which sponsor donor-advised-fund accounts, also have generally opposed tighter regulations or payout requirements. In a statement, Madoff and Arnold said they were engaged in discussions about how to shape the proposal to take into account the needs of those regional grant makers.

Meanwhile, commercially affiliated donor-advised-fund account sponsors like Fidelity Charitable have traditionally opposed payout rules.

Efforts by the Wealthy to Encourage More Giving by Their Peers

The number of efforts to spur more charitable giving through legislation, pledges, and other mechanisms has multiplied this year in response to the pandemic.

  • California technology-industry veterans David and Jennifer Risher offered to give up to $1 million to donors’ favorite nonprofits if the donors pledged to empty half of their donor-advised-fund accounts and direct that money to charity by September 30 of this year. The “ #HalfMyDAF” movement says it ultimately resulted in the distribution of $8.7 million to charity
  • An effort spearheaded by Scott Wallace, the co-chairman of the Wallace Global Fund, with support from a coalition of wealthy donors, in May asked Congress to impose a 10 percent minimum annual payout requirement for foundations and donor-advised funds for three years. The effort was supported by Patriotic Millionaires, a group of wealthy donors concerned about the concentration of wealth in America; the Institute for Policy Studies; and Voices for Progress, an advocacy coalition of donors and others supporting progressive causes
  • The Crisis Charitable Commitment, begun in July by Alan Davis, a businessman and president of the Leonard and Sophie Davis Fund, asks foundations to give this year at least 6 percent of the first $50 million of their assets and 10 percent of assets in excess of $50 million. The pledge also asks donor-advised-fund account holders to distribute at least 10 percent of the assets in those accounts to charity this year.

Sandra Swirski, a lobbyist who is an adviser to several national, regional, and state-based philanthropy-serving organizations, said she is concerned that efforts to impose new rules on donor-advised funds and foundations, which she called misguided, could pick up steam among lawmakers.

“Can an uninformed populace drive legislators to change laws? Absolutely,” she said. “That’s the thing in Washington — it’s garbage in, garbage out. We want policy makers and lawmakers to be fully informed and then let them make the judgment call.”

Among the flaws in the proposal, Swirski said, is the provision aimed at curtailing transfers from foundations to donor-advised funds. Such transfers can be an efficient way for grant makers to collaborate, she said.They also can be helpful when foundations support causes that are controversial by protecting their employees who could be targets of harassment or violence, Swirski added.

But Anna Fink, executive director of the Amalgamated Foundation, which manages donor-advised-fund accounts, expressed openness to the charitable-giving plan, saying its goals should be viewed as a “floor, not a ceiling” for donors. Amalgamated has already asked donors to pledge to distribute more than 10 percent of their assets to charity each year, and more than 95 percent of the nonprofit’s donors have taken the pledge.

“Wealthy people have received tremendous tax benefits over the last generation, and their wealth continues to expand,” said Fink. “What we need to do as a philanthropic sector is to challenge and encourage donors to give back generously, not to sort of tweak the tax benefit and the calculation around it.”

A challenge for policy makers looking to encourage speedier giving to charities through donor-advised funds is to avoid making policies that prompt donors to avoid charitable giving altogether, says Hali Lee, founder of the Asian Women Giving Circle.

Lee, who is also co-founder of the Donors of Color Network, says Madoff and Arnold found a good balance between retaining tax incentives for giving while moving more money to working charities.

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“They thread the needle pretty well,” she says. “I don’t think we should over-legislate what individuals do with their money. Wealthy individuals could park all of their money in Bermuda.”

Moore, of Independent Sector, didn’t rule out his organization’s support for some changes to how donor-advised funds function, but he urged caution against major changes that could fundamentally disrupt how they operate. “They bring a lot of money into the sector, and we don’t want to turn that upside-down,” Moore said.

Correction (Dec. 8, 2020, 4:39 p.m.): A previous version of this article misidentified Kat Taylor in the caption as Ray Madoff.
A version of this article appeared in the January 1, 2021, issue.
We welcome your thoughts and questions about this article. Please email the editors or submit a letter for publication.
Government and Regulation
Dan Parks
Dan joined the Chronicle of Philanthropy in 2014. He previously was managing editor of Bloomberg Government. He also worked as a reporter and editor at Congressional Quarterly.
Alex Daniels
Before joining the Chronicle in 2013, Alex covered Congress and national politics for the Arkansas Democrat-Gazette. He covered the 2008 and 2012 presidential campaigns and reported extensively about Walmart Stores for the Little Rock paper.
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