Philanthropy has received significant criticism of late — some warranted, some not. One fair critique is the often long gap between when donors receive their tax deduction and when the money is actually employed for its philanthropic ends. Rather than being immediately spent, those funds are allowed to accrue in a foundation, donor-advised fund, or other endowment.
This tax-free hoarding runs counter to the spirit of the rules governing charitable deductions, contributes to a harmful inefficiency that infects all too many foundations and makes philanthropists vulnerable to some well-deserved criticism.
Two simple tweaks to federal policy can get this money working sooner and help put an end to the hoarding. These changes will also make philanthropic giving more efficient in the long term.
First, the rules governing the minimum spending for foundations should be updated to provide incentives for immediate giving.
The law requires that foundations spend at least 5 percent of their assets each year — a rule that many boards view as the default setting. Too often, both boards and donors seek to preserve and increase their endowments rather than simply spending the money.
Raising this mandate to 7 percent would ensure that more money is sent out the door to do good in the world and not left to accumulate in some well-invested fund.
Second, these rules should also be applied to donor-advised funds. Roughly $110 billion has been amassed in donor-advised funds in recent years. Unlike foundations, individual accounts are not subject to any annual minimum distribution. Often these endowments are distributed upon the donor’s death according to a will.
Future Generations Will Be Fine
While this might seem practical, in practice it means that the biggest winners are large organizations that don’t really need much help. Small charities require annual operating revenue, and the promise of some big, one-time check at some random point in the future is not an efficient funding mechanism. Only well-established (and well-funded) institutions like hospitals, universities, and museums have the financial infrastructure necessary to accept this type of giving.
By adopting these two changes, we can ensure that money donated today will be spent today instead of left to linger.
Certainly some people will worry about what future generations will lose if we don’t maintain these “zombie donations” that continue after donors die. But the fact is that people don’t live forever, and neither should their money. Each generation will have its own wealthy people ready to spend on whatever challenges the future holds.
Besides, governance from the grave is filled with pitfalls.
Philanthropy plays a key role in funding riskier ventures that government and business typically avoid. The longer a foundation operates after a donor’s death, the more bureaucratic and risk-adverse it tends to become — losing its advantageous niche.
What’s more, these zombie donations have a bad habit of coming under the control of banks and investors that have an incentive to let endowments (and the related fees) accumulate.
Drifting From Donor Intent
Designing a legacy foundation also faces a dual challenge: Its mission can be too narrow — and risk focusing on yesterday’s problems well into the future — or too broad — and risk drifting away from the original donor intent.
A recent episode of Vox’s Future Perfect podcast addressed the real-life example of the Buck Trust in Marin County, Calif.
The philanthropy ballooned in value after the creator died, but it was limited to helping the needy residents of what happened to be the second-wealthiest county in the nation.
The funds ended up being spent on bizarre and unnecessary projects such as intensive French gardening. The San Francisco Foundation even sued — unsuccessfully — to compel the trust to stop ignoring the litany of charitable opportunities just across the Golden Gate Bridge.
In the end, there is no replacement for a donor individually dictating how his or her funds should be spent — and we should start updating the regulatory structure to ensure philanthropists spend those charitable dollars right away.
Simply increasing the mandatory payout and applying that rule to donor-advised funds would increase the money distributed to nonprofits by an estimated $20 billion a year. That’s good for charities, good for the public, and — given the warm glow of seeing your money spent on a noble cause — good for the donors, too.
John Arnold is co-chair of Arnold Ventures.
