More than $ 1.1 trillion is currently held in private foundations and donor advised funds (DAFs) in the United States. These two charitable intermediary instruments have grown tremendously in recent years, fueled by tax-deductible contributions to the wealthiest Americans. By 2019, 12.7% of all individual donations went to DAFs and another 15.1% to private foundations – a growth of over 500% of individual donations to these camps / brokers over the past 30 years.
As private foundations and donor advisory funds amass huge sums of money, the demands on nonprofits to provide basic social services have skyrocketed. Despite growing needs and increasing donations to foundations and DAFs, the average US charity donation has been constant at around 2% of disposable income for the last 40 years.
Donors who contribute to private foundations or DAFs receive an immediate tax deduction. A well-planned donation from the wealthiest Americans can save these donors (in tax deductions) up to 74% of the donation value. Due to the tax law changes in 2017, this privilege is only available to the richest, while the remaining taxpayers take care of the bill.
Consider these facts:
- Although private foundations are required to distribute 5% of their assets annually, these payments are not required to go to charities. Under current law, foundations can meet the 5% rule by paying salaries, administration and travel expenses (often to family members), making program-related investments in for-profit companies and making contributions to DAFs.
- There is no DAF payment obligation at all. There is more than $ 140 billion in tax-privileged DAFs with no guarantees that they will be used for charity at any time.
- Although DAF supporters argue that they have high charity payout rates, these numbers are misleading and exaggerated. Some DAF accounts donate 100%, while a quarter of DAFs donate less than 5% and some donate nothing at all. Additionally, the numbers include DAF-to-DAF donations – which does not result in any benefit to nonprofits.
At a time when the demands on charities are greater than ever and local, state, and federal governments strive to meet the needs of a society with growing income inequality, the movement to change donation rules in the United States is growing.
The Initiative to Accelerate Charitable Giving (IACG) was founded to advocate change that could significantly increase and accelerate the flow of resources to charities. The bipartisan organization has proposed some sensible changes to tax laws to achieve three broad goals:
- Close loopholes in private foundations to better ensure that the distributions that are eligible for the withdrawal request are available to charities; and incentives for higher and earlier disbursements through excise tax reforms. According to these proposals, private foundations were unable to meet their 5% payout obligation by paying salaries or travel expenses for foundation family members (or making donations to DAFs in circulation). They would also encourage higher payouts by abolishing excise tax on private foundations that pay out more than 7% per year or all of their assets within 25 years.
- For funds recommended by donors, take steps to ensure that DAF donations are distributed to charities in a timely manner. The biggest change would be to give DAF donors the choice of deferring the income tax deduction (but not the capital gains or inheritance and gift tax savings) until the money has left the fund for a real charity, or with the deduction immediately but off to distribution to commit the money within 15 years.
- Incentive individuals to donate more by extending the new non-itemized charity deduction to include more taxpayers.
Two key US Senators, Grassley and King, recently passed laws that closely follow the IACG’s proposals.
Professor Ray Madoff, director of the Forum on Philanthropy and the Public Good at Boston College Law School and a co-founder of the IACG, sums up the proposals: “We count on charities to perform essential functions of society and nonprofit” tax regulations to encourage the flow of money from donors to charities. Unfortunately, workarounds have been put in place to allow taxpayers to enjoy the full tax benefits of charitable donations without being certain that those funds will ever go to functioning charities. This results in blank prints that cost the government significant revenue and do not bring any sure public benefit. These proposals close those loopholes and bring charities back to the center of charity tax rules. “
Regular readers of this column know that I am a huge supporter of foundations and DAFs – when they actually get money to charities. These proposed tax reforms are the first modest but significant steps to help our charity system achieve its intended goals.
Bruce DeBoskey, JD, is a philanthropic strategist who works with the DeBoskey Group in the United States to help families, businesses, foundations, and family offices develop and implement thoughtful philanthropic strategies and actionable plans. He is a regular keynote speaker at conferences and workshops on philanthropy. Visit deboskeygroup.com or @BDeBo