A coalition of billionaires, academics and large foundations say the U.S. could unlock far more money for charity just by tweaking a few tax rules.
Wealthy contributors get big tax breaks for donations even if the money then languishes in foundations or other vehicles for decades without reaching charities. The new Initiative to Accelerate Charitable Giving — which includes wealthy donors John Arnold, Michael Novogratz and Baupost Group’s Seth Klarman, along with the Ford, Hewlett, Kresge and W.K. Kellogg foundations — argues Congress should change the law to prod funders like them to get resources to nonprofits more quickly.
“There are design flaws in the tax laws impacting charitable giving that need to be fixed in order to increase and more efficiently get nonprofits the funds they need,” Klarman, Baupost’s chief executive officer, said in a statement.
More than $1 trillion is held by private foundations in the U.S., according to several estimates. The National Philanthropic Trust estimates another $121 billion is held in donor-advised funds, or DAFs, charitable accounts that are increasingly popular with contributors.
Both foundations and DAFs offer donors an upfront tax break of as much as 74 cents on every dollar given away. However, the law puts no deadline on when DAF money must be distributed to working nonprofits. Foundations must pay out 5% of their assets per year, but that 5% is often less than their investment returns. And the wealthy can legally use that payout in self-serving ways, including hiring family members and paying travel expenses for family get-togethers. A transfer to a DAF also qualifies toward a foundation’s 5% payout rule.
‘Little’ Asked
“When people get involved in this area, they’re often surprised by how little the rules ask of them,” Boston College law professor Ray Madoff, who helped develop the coalition’s policy proposals, said in an interview.
The reforms are designed to “get more money to working charities,” she said, while also increasing the legitimacy of the philanthropic sector “at this time when everyone is concerned about wealth inequality and the fairness of our tax system.”
Among the group’s proposed reforms are:
Limiting the sort of spending that counts under foundations’ 5% payout rule
Offering foundations an incentive to give more by waiving a federal excise tax for those that donate in excess of 7% of assets in any year
Letting all taxpayers deduct donations on their taxes, and not just those who itemize their returns
The coalition also argues DAFs need clearer rules.
“Human nature needs some kind of deadline to create action,” Arnold, a legendary trader who closed his hedge fund eight years ago at age 38 to pursue philanthropy, said in an interview. “We don’t want to do anything that discourages charitable giving. But it doesn’t help anyone for people to put assets in a donor-advised fund and have the assets sit there for time infinitum.”
To prevent DAF holders from permanently procrastinating, the coalition proposes a 15-year deadline on money in the vehicles. Those who want more time would only get the full tax benefits of their donation when the cash is actually disbursed, rather than upfront.
Vanguard, Fidelity
So far, providers of DAFs, which include Fidelity Investments, Vanguard Group, Charles Schwab Corp. and other large financial firms, have fought off more regulations and even reporting requirements, arguing that new rules could unintentionally discourage charitable giving.
“It’s a great tool that’s not broken, so don’t mess with it,” Schwab Charitable President Kim Laughton said in an interview earlier this year.
There are signs that Congress is growing concerned about the lack of rules on DAFs and other vehicles. The $2.2 trillion CARES Act approved in March created new incentives for charitable giving this year, but barred DAFs from taking advantage of them.
The Initiative to Accelerate Charitable Giving, funded by Arnold and other members, plans to lobby both parties in Congress to adopt their proposal. Other prominent members include Kat Taylor, wife of hedge fund billionaire and former presidential candidate Tom Steyer.
“We have a set of proposals getting more money into the community faster,” Arnold said. “That is an appealing message regardless of one’s partisan leaning.”
Covid Response
Donors have been urged to speed up their giving this year in response to Covid-19 and racial-justice protests. In June, the Ford Foundation, which has an endowment of more than $13 billion, announced a plan to borrow $1 billion and use the money to increase donations.
“The Covid-19 pandemic is deepening inequality and putting a monumental strain on nonprofit organizations that serve marginalized communities,” Ford Foundation President Darren Walker said in a statement signing onto the reform proposal.
Nonprofits worry about being starved for resources at the very time that needs are surging. In the last recession, from 2007 to 2009, total giving dropped almost 12%, according to the Giving USA Foundation.
Some DAF holders are accelerating their donations without being forced to do so. Vanguard Charitable said its DAF holders have released more than $1.3 billion to nonprofits so far in 2020, an increase of more than 20% from the same period last year. Schwab Charitable said grant-making rose 38% through Nov. 23, to more than $3 billion.
At Fidelity Charitable, the largest DAF provider, a survey of almost 500 clients released Tuesday found that 46% said they’ve given “notably more because of Covid-19,” while 50% said donations have held steady this year.
“We need to get money off the sidelines and into the game,” Novogratz, a former hedge fund manager who is co-founder of Galaxy Digital LP, said in a statement. “Donor-advised funds and private foundations that have growing resources need to help people and the nonprofits that support them now.”
This article was provided by Bloomberg News.
