Pressure builds to increase giving requirements and expand charitable deductions
More than $1.1 trillion currently sits in private foundations and donor-advised funds (DAFs) in the U.S. These two charitable intermediary tools have grown tremendously in recent years, fueled by tax-deductible contributions for the wealthiest of Americans. By 2019, 12.7% of all individual giving went to DAFs and an additional 15.1% went to private foundations — an over 500% growth in individual giving to these warehouse/intermediaries over the past 30 years.
While private foundations and donor-advised funds amass huge sums of money, demands on nonprofits to provide essential social services have skyrocketed. Despite the growing need and increased contributions to foundations and DAFs, average giving to charity in the U.S. has remained constant for 40 years at roughly 2% of disposable income.
Donors who make contributions to private foundations or DAFs receive an immediate tax deduction. A well-planned donation from the wealthiest Americans can save those donors (in tax deductions) up to 74% of the value of the donation. Because of 2017 changes in tax laws, this privilege is only available to the wealthiest, leaving the remaining taxpayers to pick up the tab.
Consider these facts:
- Although private foundations are required annually to distribute 5% of their assets, there is no requirement that those payouts go to charities. Under current law, foundations can satisfy the 5% rule by paying salaries, administrative and travel expenses (often to family members), by making program-related investments in for-profit companies, and by making contributions to DAFs.
- There is no DAF payout requirement at all. More than $140 billion sits in tax-advantaged DAFs without any assurance that it will go to charity in any time frame.
- Although DAF supporters argue that they have high payout rates to charities, these numbers are misleading and inflated. Some DAF accounts donate 100%, while a fourth of DAFs donate less than 5%, and some nothing at all. Moreover, the numbers include DAF-to-DAF donations — resulting in no benefit to working charities.
At a time when demands on charities are greater than at any time in memory, and local, state and federal governments are straining to meet the needs of a society with growing income inequality, the movement to change the giving rules in the U.S. is growing.
The Initiative to Accelerate Charitable Giving (IACG) has been formed to advocate for changes that could significantly increase and accelerate the resources flowing to charities. The bipartisan organization has proposed some common-sense changes in the tax laws to accomplish three broad goals:
- For private foundations, close loopholes to better ensure that distributions qualifying for the payout requirement are available to charities; and incentivize greater and earlier payouts through reforms to the excise tax. Under these proposals, private foundations could not meet their 5% payout obligation by paying salaries or travel expenses of foundation family members (or circular donations to DAFs). They would also encourage greater payouts by eliminating the excise tax on private foundations that pay out more than 7% a year, or all of their assets within 25 years.
- For donor-advised funds, adopt measures to make sure that DAF donations are distributed to charities within a reasonable period of time. The biggest change would be to offer DAF donors a choice between delaying the income tax deduction (but not the capital gains or estate and gift tax savings) until money has left the fund for a real charity, or taking the deduction immediately but committing to distribute the money within 15 years.
- For individuals, incentivize greater giving by expanding and extending the new non-itemizer charitable deduction to more taxpayers.
Two key U.S. senators, Grassley and King, have very recently introduced legislation that closely tracks the IACG proposals.
Professor Ray Madoff, director of the Forum on Philanthropy and the Public Good at the Boston College Law School, and one of the founders of IACG, sums up the proposals this way: “We count on charities to fulfill essential functions of society, and charitable tax rules to encourage the flow of money from donors to charities. Unfortunately, workarounds have been created so that taxpayers are able to get all of the tax benefits of charitable giving with no assurance that those funds will ever make their way to working charities. The effect of this is empty deductions — costing the government significant revenue and producing no certain public benefit. These proposals close these loopholes and bring charities back to the center of charitable tax rules.”
Regular readers of this column know that I’m a huge supporter of both foundations and DAFs — when they actually get money to working charities. These suggested tax law reforms are the first modest, yet significant, steps to help our charity system achieve its intended goals.
Bruce DeBoskey, J.D., is a philanthropic strategist working across the United States with The DeBoskey Group to help families, businesses, foundations and family offices design and implement thoughtful philanthropic strategies and actionable plans. He is a frequent keynote speaker at conferences and workshops on philanthropy. Visit deboskeygroup.com or @BDeBo