A group of high-profile philanthropists and foundations, as well as estate and gift tax experts, have come together to promote charitable law reforms that would increase the amount of money available to nonprofits.
Their goal is to free a portion of the $ 1 trillion held in private foundations and donor advised funds (DAFs) that are not legally required to be distributed to nonprofits. Known as the Accelerated Donation Initiative, the group also aims to make it easier for 90% of non-disclosure taxpayers to get a charity tax break.
“The purpose is to bring money to working charities so they can put the money to work,” says Ray Madoff, professor of estate and gift tax estate planning at Boston College and the primary force behind the US initiative along with the Houston-based Philanthropist John Arnold.
“The government shouldn’t subsidize putting money aside where it might or might not be spent for the good of society,” says Madoff.
According to the current regulations, which according to Madoff were founded in 1969, private foundations are only required to pay out 5% of their assets to charitable organizations annually. The rest can be invested at the foundation’s choice and passed on over generations.
DAFs, which have become increasingly popular for donating money to charity, allow individuals to donate to a mutual fund managed by a public not-for-profit organization and receive an instant tax deduction. There is no need to distribute funds to a qualified non-profit organization as the DAF itself is managed by one person.
The existence of these tax-privileged vehicles, now valued at $ 1 trillion, begs a question Madoff has studied for years. That means: What does society get in return for not receiving this taxpayer money? She realized that the answer was “a lot less than we think”.
One problem is that the law has not kept pace with the explosion in DAF investment. In the five years to 2018, according to the latest figures from the National Philanthropic Trust’s annual report on the sector, DAF contributions rose 86% to $ 37.12 billion. In the same year, donors granted charities $ 23.42 billion from their DAFs.
However, these donations can also include funds transferred from one DAF sponsor to another, making it difficult to track actual DAF grants to charities, Madoff says.
And while individuals do actually give grants to charities from their DAFs, they don’t have to. “It’s not that everyone is not spending, it’s that the vehicle allows for big cash contributions – and there are definitely $ 1 billion DAF accounts that have no withdrawal requirements,” says Madoff.
Another problem is that private foundations can meet their 5% annual payout requirement by distributing funds to a DAF rather than directly to an operational charity.
The US offers “significant tax breaks,” says Madoff, “but we only get them halfway, and that [law isn’t] do a lot to get the money up to charities. “
In October 2019, Madoff and Roger Colinvaux, Professor of Tax Law at the Columbus School of Law, Catholic University of America, published a research paper on tax reform for charity. Around the same time, Arnold published an article in the Chronicle of Philanthropy criticizing the lack of grant distribution requirements for DAFs and the low payout rates required for private foundations.
Arnold’s article prompted Madoff to reach out to him, and the seeds were planted to form a coalition of philanthropists and foundations to work for charity reform. Today, the initiative encompasses key forces in the world of philanthropy, including the Ford Foundation, the Kresge Foundation, and the William & Flora Hewlett Foundation, as well as individual philanthropists including Michael and Sukey Novogratz, Seth and Beth Klarman, and Bill Lewis, a managing director at Lazard.
Your suggestions come from a further effort by a separate coalition of foundations and nonprofit leaders led by Scott Wallace, whose Wallace Global Fund also works with Madoff and Arnold, and Chuck Collins, director of the Charity Reform Initiative.
This coalition calls on Congress and the future presidential administration of Joseph Biden to call for “emergency charitable incentives” legislation requiring private foundations to require their annual payout rate to 10% and for DAFs a mandatory payout rate of 10% for three years, especially around create more money for charities affected by the Covid-19 crisis. According to the Independent Sector, an organization that supports the nonprofit sector, 7% of nonprofits in the US are expected to close because of the pandemic.
The agenda for the Charity Accelerated Donation Initiative, which is in the process of reaching more supporters, is to push for lasting political reform. Below that would be a tax break that is not a tax break to encourage anyone filing taxes to donate to charity.
“When tax breaks only apply to 10% of the population, we amplify the voices of the richest,” says Madoff. “It is really important that tax breaks are available to all taxpayers.”
They also suggest tax incentives that would encourage private foundations to distribute more of their assets, including an exemption from excise taxes for foundations that pay out at least 7% of their assets in a given year.
The group also believes that Congress should ensure that private foundations cannot meet their disbursement obligations by transferring funds to a DAF or paying the salaries of family members (which is currently permitted by law).
For DAFs, the group recommends that all funds in these vehicles be distributed within 15 years. They also recommend a “concerted benefit rule” that allows a donor to take a break from capital gains taxes, estate and gift taxes in funding their DAF, but withhold income tax withheld until distributions are made to a nonprofit.
The idea is to “give a constant incentive” to give, says Madoff. “We don’t say [DAFs] are shameful, they are just not well structured. You have a lot of people who have an interest in keeping the money unspent. “