Accelerating Charitable Giving
Donor-advised funds (DAFs) allow donors to make a charitable contribution to a public charity that will manage giving on the donor’s behalf. The donor, who can be an individual, family, or organization, receives the full tax benefit in the year the gift to the DAF is made. But the accumulated DAF funds can be paid to charities over an extended period, with no minimum annual giving requirements or time limits.
U.S. Sens. Angus King, I-Maine, and Chuck Grassley, R-Iowa, proposed the Accelerating Charitable Efforts Act in June. Their bill’s introduction spotlights arguments that have been brewing for years about charitable giving regulations. The bill targets donor-advised funds and private foundations and proposes to incentivize—and in some cases to require—faster DAF spending: 15 years if a tax deduction is taken immediately, or a maximum of 50 years, with the donor only allowed to take an income tax deduction in the year the charitable distribution is made.
The ACE Act’s primary provisions would ensure that DAF funds are more quickly distributed to nonprofit organizations and with greater transparency. “We are not against donor-advised funds,” says Jon Pratt of the Minnesota Council of Nonprofits, “but we believe it is in the public interest that more money reaches more charities faster.”
DAFs are particularly attractive in the following circumstances: selling an appreciated asset or inheritance; “bunching” multi-year charitable gifts into a single year to take advantage of tax laws; or placing money in a DAF that can be allocated to charities by multiple family members.
DAFs function as helpful intermediaries, enable an immediate deduction, direct funds to charities with input from fund managers as needed, and, in the meantime, invest money so that dollars can continue to multiply.
Financial services companies, including Vanguard, Charles Schwab, and Fidelity, have successfully competed in the DAF marketplace. They manage large giving programs through entities such as Fidelity Charitable, which claims to be the largest DAF holder in the United States.
Fidelity reported managing more than 153,000 separate funds in 2020, which together granted more than $9 billion to charities.
ACE Act advocates are disturbed by the charitable arms of large financial services firms, which they say have lacked transparency, operated without community-based boards of directors, and functioned with less accountability than other entities in organized philanthropy.
They argue that high-net-worth individuals have accumulated unprecedented wealth in recent years through a rising stock market, while charitable giving has plateaued and community needs have greatly increased. They describe large DAF management organizations as places where donors can “warehouse” money, immediately avoid tax payments, and take their time choosing charitable causes to support. Meanwhile, they contend, cash-strapped charities are kept waiting for downstream gifts and grants.
Substantial money is at stake. According to Giving USA, 13 percent of all charitable giving in the U.S. went to DAFs in 2018, compared with 4 percent in 2007. Donations to DAFs totaled $38.81 billion in 2019, according to the National Philanthropic Trust, while contributions from DAFs totaled $25 billion.
While some of the nation’s largest philanthropies, including the Ford and Hewlett foundations, actively support the ACE Act, several people who work in the nonprofit sector think that, while provocative, it’s misguided. Average giving from DAFs to charities is much higher than what’s required of an endowed foundation, and DAFs are clearly a rising consumer preference for planning charitable giving.
Nationally, the Council on Foundations, a service organization for private, independent, and community foundations, opposes the legislation.
“Community foundations were not consulted prior to this bill being introduced. We were not part of the bill’s drafting, and we don’t believe it will boost philanthropic giving,” says Jeremy Wells, senior vice president for philanthropic services at the Saint Paul & Minnesota Foundation. “That doesn’t mean that strengthening certain kinds of accountability, transparency, and spending policies should not be thoughtfully and collaboratively discussed.” Further, Wells explained, DAFs established today have dormancy clauses that prevent the money from sitting unspent in DAF managers’ investment accounts.
One thing is certain. Shifts are easily visible in how the public makes financial contributions. People are moving from giving money to traditional charities to texting contributions directly to causes and businesses. Some are using Kickstarter and other crowdfunding platforms.
The charitable sector is facing an inflection point, and it’s healthy to vigorously debate ways to strengthen support for charities that meet critical needs.
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Charities want fewer tax perks for the ultra-wealthy, but nobody wants new rules that could unintentionally curtail giving by average taxpayers. Expect considerable debate among nonprofits, donors, and community foundations before Congress can hope to find a majority on a charities reform measure.
Sarah Lutman is a St. Paul-based independent consultant and writer for clients in the cultural, media, and philanthropic sectors.