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philanthropy
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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It's Time for Philanthropists to Get Into Climate Emergency Mode
It’s time to spend aggressively. With the world on fire, the greatest risk, by far, is for philanthropy to move too slowly and too timidly.
Sep 10, 2024
As a clinical psychologist turned climate activist and now a funder of disruptive climate protests, I have witnessed the profound disconnect between the urgency of our climate crisis and the tepid, cautious response of the philanthropic sector. It brings me close to despair, as I know that incrementalism or philanthropy-as-usual can’t possibly be effective at protecting humanity.
The public is in a mass delusion of normalcy — sleepwalking off a cliff — and philanthropy is complicit. Philanthropy has treated the climate as one problem among many that should be dealt with in a “business as usual” way, including all of the philanthropic sector’s incrementalism and caution.
This is entirely the wrong approach. What’s needed is for philanthropy to treat the climate emergency like the crisis it is. There’s a recent precedent for this: In 2020, as COVID ravaged populations worldwide and governments seemed unable to attack the problem, the largest foundations marshaled their resources and quickly poured an estimated $10 billion into the development, testing and deployment of new vaccines. Their efforts saved millions of lives.
Unfortunately for all of us, the climate is an order of magnitude more dangerous than COVID. It’s time to spend aggressively. What good is an endowment if Copenhagen, New York City and Seattle are under water and Silicon Valley is burned to a cinder by perpetual wildfires? Foundations need to recognize that their missions — whether in medical research, education, or social justice — are all threatened by the climate emergency. There will be no hospitals, schools or social services on a dead planet.
There will be no hospitals, schools, or social services on a dead planet.
In order to meet the moment, foundations must engage in organization-wide reckonings, learning together about the scale and urgency of the climate emergency — and the fact that traditional philanthropy has thus far not been able to reduce emissions globally. Foundations should ask, given the acute nature of the crisis, what are the ways they should depart from their usual “philanthropy as normal” mode, and get out of our comfort zone.
Philanthropies must reassess their grantmaking strategies and priorities in light of the apocalyptic nature of the climate emergency. Particularly, they should re-evaluate their approaches to risk, efficacy and conflict. The greatest risk, by far, is for philanthropy to move too slowly and too timidly. Continuing down our current path will lead to horrific outcomes. To be prudent, we must be bold. That means making big bets on new groups and new people.
Philanthropies must also not be afraid of conflict — and be explicit about the need to fight and end the fossil fuel industry, and the politicians who support it. The Carmack Collective and Equation Campaign have both done this, shaping their missions to fight fossil fuels.
Foundations should interrogate and explore with an open mind what is the highest leverage, fastest, most effective way that they can use their resources to respond to the climate emergency. One way I advise funders to think about this is by asking: Who, ultimately, will cover the cost of the transition to zero emissions, which will need to be on the scale of World War II? Is it philanthropy? Of course not. Only governments have the kind of spending power — and legislative power — that we need. Philanthropy, with its significant resources and influence, has the potential to shake the public awake and spur the government to this necessary mobilization, but not to execute such a mobilization itself.
Philanthropy has a unique and critical role to play in addressing the climate emergency. By acknowledging the calamity we face and adjusting their operations, philanthropies can lead society into the “emergency mode” necessary to avert disaster.
How can philanthropy help create a society-wide mobilization? There is only one way: Funding social movements.
Throughout history, transformative change has come about through movements and social revolutions. From the civil rights movement to the women’s movement to ACT UP and the gay rights movement, authentic people-led movements drew attention to the cause, drastically moved public opinion, and forced governments to change, adapt and respond.
Philanthropies should shift from funding large legacy, incremental environmental organizations that have demonstrated an inability to act on the speed and scale necessary, to younger, dynamic groups that leverage effective tactics, crisis communications efforts and disruptive activism.
Supporting disruptive protests may be one of the most cost-effective strategies for addressing the climate crisis. A 2021 analysis by Giving Green revealed that each dollar invested in protest activities could reduce emissions by six metric tons of carbon, due to its influence on legislative outcomes. Additionally, a study published in the Stanford Social Innovation Review found that donations to organizations like Extinction Rebellion or the Sunrise Movement are six to 12 times more impactful than contributions to top-rated climate charities.
One reason is that nonviolent disruptive actions achieve media coverage at a rate no other initiatives can match. Climate Emergency Fund’s disruptive grantees were featured in over 75,000 articles in 2022 and 2023 worldwide. The disruptive activists we support are forcing a reluctant media to cover their actions, whether halting national sporting events, shutting down private airports or disrupting political speeches. These activists embody the emergency mentality. With their actions, they demonstrate the degree of their alarm and the seriousness of the crisis.
And yet these approaches are seriously underfunded. Philanthropic funding for climate change represents only about 1.5 percent of total philanthropic contributions. Within this small portion, the amount allocated to grassroots climate activism is so minimal that it isn’t even recognized as a distinct grant-making category in the ClimateWorks Foundation’s 2022 report on climate philanthropy.
The Carmack Collective, Equation Campaign and the Climate Emergency Fund, where I am the executive director, are three groups supporting people-led organizations fighting the fossil fuel industry. The larger JPB Foundation and the Sequoia Foundation have also demonstrated commendable efforts in funding people-powered movements and aggressive climate action. These organizations exemplify the kind of leadership needed.
Philanthropy has a unique and critical role to play in addressing the climate emergency. By acknowledging the calamity we face and adjusting their operations, philanthropies can lead society into the “emergency mode” necessary to avert disaster. The time for half-measures, white papers and panel discussions is over. Philanthropy must act now, boldly and decisively, to help save our planet for future generations.
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