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donor advised funds
Real-Life Scrooges Are Hoarding Charitable Donations in Foundations and Funds
Current rules enable wealthy donors to bank their tax break immediately, but the donated funds may remain sidelined for decades.
Dec 05, 2024
For as long as we can remember, the end of the calendar year has marked the start of America’s giving season.
The holidays that light up our darkest months also invite us to celebrate (and practice!) generosity. Food banks, youth groups, arts and civic organizations, and community service programs heavily depend on the support they receive in November and December.
Year-end giving is big for tax purposes, but many people donate without regard to whether they’ll get a deduction. In fact, fewer than 10% of donors claim a tax deduction for charitable giving.
So, big donors: You want a tax break? Make sure the money gets to a working charity—and fast.
The super-wealthy, who do take advantage of itemizing their tax returns, give differently. They give more to large hospitals and universities, where you can get your name on a building. That kind of giving can be valuable too.
But a less visible difference is crucial to recognize.
Increasingly, wealthy donors are parking money in entities they control, like private foundations and donor advised funds (DAFs). These intermediaries then, in theory, donate money to working charities.
But private foundations are only required to “payout” 5% of their assets a year to these other charities. And DAFs have no requirement to payout at all. So wealthy donors bank their tax break immediately, but the donated funds may remain sidelined for decades.
According to a new report we co-authored,Gilded Giving 2024: Saving Philanthropy from Wall Street, over 35% of all charitable donations now go to one of these two intermediaries.
There’s now $1.7 trillion parked in private foundations and DAFs—money that could be flowing to working charities in a timely way to solve problems. We estimate that by 2028, half of all donations will go to private foundations and DAFs.
As wealth has concentrated in fewer hands over the last four decades, so has this kind of dubiously “charitable” giving—a trend we call “top-heavy philanthropy.” And it’s increasingly profitable for financial advisers to the ultra rich.
Wall Street financiers promote DAFs as a way for donors to receive immediate tax reductions in the year they give, but then they sit on those funds and collect wealth management fees. The financiers have no financial incentive to ever see the money go to a mental health center, food bank, community theater, or other working charity. It’s more profitable for them to keep assets under management.
The rest of us subsidize this system. For every dollar a billionaire donates to charity, including to their own foundation or DAF, the rest of us chip in up to 74 cents in the form of lost tax revenue.
So how did we get a charity system that works for multi-millionaire donors and wealth managers but not for nonprofit charities, small donors, and the taxpaying public? In part, it’s because lobbyists for the financial industry and DAF sponsors fight vigorously against any change.
But a growing coalition of donors, nonprofit charities, and people who care about tax fairness are pushing back. They point out that lawmakers could easily fix the rules to increase the flow of charitable funding, increase transparency, and shut down the tax avoidance and self-dealing practices currently corrupting philanthropy.
The message is getting across. A 2024 Ipsos poll found that 71% of respondents believe Congress should raise the annual payout rate for private foundations and require the same for DAFs. Across the political spectrum, a clear majority of Americans believe if a donor gets a tax break, they should move the money in a timely way to a working charity.
So, big donors: You want a tax break? Make sure the money gets to a working charity—and fast. You want other taxpayers to subsidize your giving preferences? Tell us where the money’s going.
Don’t like these rules? Then don’t ask the rest of us to subsidize it. Let’s make sure the season of giving actually centers on giving, not hoarding.
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For Wall Street-Fueled Philanthropy Industry, Every Day Is Giving Tuesday
"The financial industry aggressively markets DAFs for uncharitable reasons: advantages as tax avoidance vehicles, especially for complex assets; no payout requirements—and secrecy to donors and grantees alike," said one of the report's authors.
Dec 03, 2024
A new report released on this year's philanthropic holiday known as Giving Tuesday details how the "profit motives of the financial services sector have increasingly and disastrously warped how charitable giving functions."
The analysis by the Institute for Policy Studies—titled "Gilded Giving 2024: Saving Philanthropy from Wall Street"—shows how donor-advised funds (DAFs) increasingly serve the economic interests of donors and the Wall Street firms that manage the funds, rather than the interests of nonprofit charities.
Rather than donate to a cause directly, wealthy people have the option to donate to foundations or DAFs, which can be sponsored by for-profit wealth management firms like Fidelity Investments or Charles Schwab. Firms like Fidelity Investments, in turn, benefit from being able to offer this type of service to wealthy clients.
"At last count," according to the report's authors, "DAFs and foundations together take in 35 percent of all individual giving in the U.S." If they continue to grow at the rate they have for the past five years, they're expected to take in half of all individual giving in the country by 2028.
Why is this a problem? For one thing, according to the report, some of the money that's intended for donation is scraped up by the DAFs and foundations, meaning that dollars meant for a cause are diverted elsewhere.
"With each passing year, an additional 2 cents of each dollar donated by individuals is funneled into intermediaries and away from working charities. Assuming that their assets will grow at the same rate they have over the past five years, the assets held in DAFs and foundations will eclipse $2 trillion by 2026," according to the report's authors.
What's more, there is no requirement that DAFs disburse their assets, according to the report's authors—meaning there's no guarantee the money is given to charity, and in practice the money in these accounts tends to move slowly, often generating gains instead of being dispersed.
DAFs also facilitate anonymous giving, because donations from them need only be credited to their sponsors, not the original person directing the contribution, according to Inequality.org, a project of IPS.
The report's authors argue that DAFs are part of a wider “wealth defense industry” — tax lawyers, accountants, and wealth managers whose interests are more geared towards helping their clients increase assets, minimize taxes, maximize wealth transfer to descendants, and net some of those assets for themselves in the form of fees, as opposed to supporting charitable causes.
DAFS are used strategically in this way, for example, by giving donors the ability to dispose of noncash assets, according to the report. In practice, this means that DAF donors can give stocks, real estate and other noncash assets directly to DAFS when markets are doing well, meaning they are able to get income tax deductions from their contribution while side stepping paying capital gains tax on appreciation of those assets.
"The financial industry aggressively markets DAFs for uncharitable reasons: advantages as tax avoidance vehicles, especially for complex assets; no payout requirements—and secrecy to donors and grantees alike," said Chuck Collins, co-author of the report and director of the Charity Reform Initiative at IPS.
Other key insights from the study include:
- Tech companies are offering DAF-related platforms, apps, and widgets in order to make DAF granting, and by extension charitable giving, more "frictionless." Yet, these companies, also promote DAFs to advisors and donors in terms of tax efficiency and their ability to help investment advisors "maintain AUM"—or assets under management.
- That the financial industry is "blurr[ing] the distinction between investment and philanthropy." Investors will talk about philanthropy as part of a wider portfolio of financial behaviors, as opposed to something fundamentally different—"something that, by its nature, requires individuals to relinquish personal interest and control."
The report recommends a number of reforms in order to take back philanthropy from Wall Street, including enacting regulations that would ensure donations reach working charities on reasonable timelines, undertaking {agreement} reforms to eliminate "shell games and tax dodges that financial advisors craft to diminish and delay the flow of funds to qualified charities," organizing a coalition of interested partners that would apply pressure on Congress and state governments to take action, and uplifting good examples of DAF sponsors who facilitate steady and generous giving despite gaps in the law.
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Simple Charity Reforms Could Unlock Hundreds of Billions for Nonprofit Sector
An estimated $1.7 trillion in donations, ostensibly earmarked for philanthropy, are currently languishing in private foundations and donor-advised funds—while charities like Feeding America and Habitat for Humanity are under-resourced.
Aug 09, 2024
Thanks to outdated charity tax laws, the U.S. is missing out on hundreds of billions of dollars that could flow toward housing and food security, health research, education, advocacy, and other crucial nonprofit efforts aimed at uplifting the common good—but simple reforms could unlock some of the extreme wealth that is currently "warehoused" in private foundations and donor-advised funds.
This is according to a new Institute for Policy Studies analysis that shows charitable groups currently hold an estimated $1.7 trillion in donations that are "ostensibly earmarked for philanthropy," but are able to "languish in go-between funds" while working charities remain under-resourced.
The foundations and donor-advised funds (DAFs) are able to collect tax breaks while sitting on billions of dollars thanks to provisions in the Tax Reform Act of 1969 that haven't been updated in decades, wrote IPS associate fellow Helen Flannery and associate director of charity reform initiatives Bella DeVaan at Inequality.org, a project of the organization.
"Initially, in the Tax Reform Act of 1969, private foundations were mandated to give away 6 percent of their wealth or the annual net growth from their investments: Whichever was higher," wrote Flannery and DeVaan. "Foundations' tax benefits wouldn't provide license for funds to just grow forever and ever, and they were to be consistently responsive to shifting economic reality. A decade of revisions to payout requirements reflected those principles and eventually created our flat 5% mandate. But that 5% is overdue for re-evaluation, and our elected representatives have fallen asleep at the wheel."
"It's worth imagining a future in which billions more flow towards life-saving medical cures, food security, housing access, and environmental protection through organizations that are already woven into our social fabric."
While the nation's largest foundations give charitable donations at a rate of about 5%, "their gains in the market have averaged 9% over the last five years," they explained.
In other words, said Flannery and DeVaan, the funds "are growing faster than the rate at which they give" while donations to working charities like Habitat for Humanity, United Way, and Feeding America fall behind.
The wealth of DAFs has skyrocketed by 411% in the last decade, with the funds stockpiling an estimated $230 billion in assets in 2023.
IPS noted that billions of dollars in DAF gifts have been directed as dark money contributions—whose donors "might well have second thoughts" if tax laws were reformed to require both boosted payouts and more transparency.
In its policy brief, IPS proposes reforms that would:
- Increase the minimum payout rate requirement to 10% for foundations with assets of $50 million or more, and increase it to 7% for all other foundations;
- Exclude private foundation overhead expenses above 1% of assets from counting towards payout;
- Exclude grants from private foundations to DAFs from counting towards payout;
- Require DAFs to pay out funds within five years of receipt (and provide individual account-level transparency);
- Exclude grants from DAFs to other DAFs from counting toward payout; and
- Generate excise tax revenue from intermediaries that don't meet the new requirements.
The new rules would generate more than $110 billion in additional funding for working charities each year, as well as $339 billion in donations over three years.
"It's worth imagining a future in which billions more flow towards life-saving medical cures, food security, housing access, and environmental protection through organizations that are already woven into our social fabric," wrote Flannery and DeVaan, "or organizations that could and should be with strengthened access to funding."
IPS released the analysis as legislators prepare to overhaul the tax code in 2025.
"We're hopeful that this can be a watershed moment for charity reform akin to 1969," wrote Flannery and DeVaan, along with IPS program director Chuck Collins.
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