The billionaires, former government officials and academics gathered in a Manhattan conference room to brainstorm solutions to a problem they had all been working on from various angles: How best to update the laws governing philanthropy, most of which were half a century old.
Over sandwiches, sketching their ideas out on whiteboards, they discussed donor-advised funds, a kind of financial way station that allows givers to claim all the tax benefits of donations up front while leaving the money parked with large firms like Fidelity Charitable or Schwab Charitable or with large community foundations like the Silicon Valley Community Foundation. Today, one out of every eight dollars bound for charities in the United States is channeled into a donor-advised fund.
The participants wanted, among other reforms, to ensure that money stashed in donor-advised funds, which had already earned those donors significant tax savings, ended up in the hands of working charities more quickly. But there was a general recognition in the room that movement would be slow and incremental, if it happened at all.
That was January 2020.
On Wednesday, the effort will make its way to Congress, where Sens. Angus King of Maine and Chuck Grassley of Iowa are introducing legislation to attempt a version of what the group outlined in that first brainstorming session: a way of ensuring that money promised to charity more quickly gets to the people who need it.
The promise of philanthropy was that the wealthy could enjoy generous tax breaks for their charitable contributions in return for helping society in the ways they saw fit. The pandemic laid bare how, with a few exceptions, accumulation trumped distribution.
More and more of the money given to charity has been delayed, sometimes for decades, if not marooned indefinitely in the endowments of private foundations and in the donor-advised funds, which are akin to 401(k)s for philanthropy but have few regulations or requirements. Over $140 billion sits in these accounts. Another $1 trillion resides in endowments of private foundations like the Bill & Melinda Gates Foundation, which are required to pay out only 5% of their assets each year.
“There’s an awful lot of charitable money sitting in warehouses that people have taken deductions for but the money has never reached working charities,” said King. “That’s the fundamental problem that we’re trying to remedy.”
The sponsors expect the measure to move forward in some capacity with bipartisan support. King is an independent who caucuses with Democrats, while Grassley is a Republican fixture on the Finance Committee who has pursued investigations into tax-exempt organizations during his tenure. “Some of these funds have accumulated and paid very little out,” Grassley said, and in those cases “the purpose of the charitable giving deduction is abused.”
Over the course of the pandemic, American billionaires added over $1 trillion to their wealth, leaving them collectively worth more than $4 trillion.
“The gap between social need and private philanthropic resources was always big,” said Stanley N. Katz, a philanthropy expert at Princeton, “but it’s huge now.”
Howard Husock, a senior fellow at the Philanthropy Roundtable and an adjunct scholar at the American Enterprise Institute, said donor-advised funds make it easier for people to give generously without the high overhead that a foundation requires. The money cannot legally revert to the donor once it’s been given to the DAF, he said, so it shouldn’t matter if the donor wants to wait a few years and let the money appreciate before directing the gift to a favorite charity.
In a recent report, the National Philanthropic Trust noted that the average donor-advised fund account had $163,000. “The thing that appeals to me about donor-advised funds is there is a democratization of philanthropy that they permit,” Husock said.
They are clearly a force. Fidelity Charitable reported that its account holders directed $9.1 billion in grants from donor-advised funds to 170,000 charities in 2020, a 24% increase over the previous year. Fidelity says it does its part to encourage faster payouts, nudging account holders who don’t pay for a year and making distributions from accounts after the second inactive year.
But proponents of changing the way DAFs operate say the pandemic revealed how urgent the need for reform is: While the most vulnerable Americans were forced to line up outside food banks, the share prices of publicly traded companies climbed ever higher. Yet the charities and nonprofits that helped care for the children of front-line medical workers and brought clean diapers to the poor were forced to lay off staff.
“Philanthropy is where wealth inequality is playing out in the public realm,” said Ray Madoff, a law professor at Boston College and one of a group of people backing a push to rein in donor-advised funds. “When the super wealthy claim charitable tax benefits, they are supposed to be putting their money to use for the benefit of society at large. The rules we set down about that are incredibly important at a time when there are more and more super wealthy and greater and greater needs of society.”
Madoff and others pushing for change see a growing gap between reputation-burnishing promises of money and distributions to people who need it. The Giving Pledge, which was started by Bill Gates, Melinda French Gates and their friend and collaborator Warren Buffett, gave billionaires a space where they could announce their intention to give away half their fortunes or more, often to great acclaim. But it provides no mechanism to monitor or ensure the giving actually happens.
Earlier this year, the Chronicle of Philanthropy ranked Jeffrey Bezos, the founder of Amazon, as the top philanthropist of 2020 because he committed $10 billion to his Bezos Earth Fund to fight climate change. But he had handed out less than one-tenth of that, $791 million, to working nonprofits like the Environmental Defense Fund and Natural Resources Defense Council.
Charitable giving has remained relatively steady for decades, clocking in at roughly 2% of disposable income per year, give or take a few tenths of a percent. In 1991, the year that Fidelity began to offer donor-advised funds, just 5% of giving went to foundations and DAFs. By 2019, the most recent year available, that figure had risen to 28%.
It was January 2020 when that small group gathered at the offices of the nonprofit consulting firm the Bridgespan Group in Manhattan for a wonky brainstorming session about the state of philanthropy. The group included foundation leaders, former congressional staff members, former senior IRS officials and a key constituency in any effort to change how billionaires give away their money: billionaires.
One of the organizers was John D. Arnold. Once a trader at Enron, the Houston energy company that infamously collapsed in 2001, Arnold later ran his own hedge fund, which made him one of the youngest billionaires in the United States.
Madoff, another leader of the initiative, has written a book, “Immortality and the Law,” about the growing legal power of dead people in America and has applied her knowledge of estate taxes and inheritance law to the rising field of philanthropy.
The group focused on the fact that most of the laws governing philanthropy were half a century old, dating back to 1969.
“I think the tax laws as they exist probably fit philanthropy as it was practiced 30, 40, 50 years ago,” Melanie Lundquist, another prominent philanthropist who attended the meeting, said in an interview. “It’s antiquated. In order to reflect where society is today, particularly when COVID has exposed so many of the inequities, it’s time for an overhaul.”
Last summer, Patriotic Millionaires — a group of about 200 wealthy individuals including the Disney heiress Abigail Disney — joined the left-leaning Institute for Policy Studies in asking Congress to double for the next three years the amount of their assets private foundations are required to pay out, to 10%. Separately, a group of top foundations, including the Ford Foundation, announced that they would issue bonds to allow them to ramp up their giving in the face of growing need.
At the same time, Arnold, Madoff and others began recruiting support for proposals to regulate donor-advised funds and to curb practices by private foundations like counting salaries and benefits to family members toward their legal payout requirements. In December, the Initiative to Accelerate Charitable Giving was announced, with the support of big names in the field like the Ford Foundation, the Hewlett Foundation and the Kellogg Foundation.
“This would have been dead on arrival in the past,” said Darren Walker, the president of the Ford Foundation. “This was a marginal idea and I think it is moving to the mainstream.”
The conservative Philanthropy Roundtable immediately signaled its opposition. Elise Westhoff, the organization’s chief executive, said that the “proposed regulations for donor-advised funds would stifle charitable giving when it is most needed,” noting that giving through donor-advised funds had tripled between 2007 and 2018.
But there has been bipartisan appeal to ensuring money moves more quickly to working charities.
“When conservatives make the argument for localism, for civil society, for a restoration of a Tocquevillian vision of America where smaller civic organizations address problems, working charities are at the heart of that endeavor,” said William A. Schambra, a senior fellow at the Hudson Institute. “DAFs are an enormous whirlpool sucking that money away from charities into accounts that are institutionally inclined to be reluctant to disburse money.”
Critics note that the for-profit financial services firms typically earn management fees for the money held and invested by their charitable arms.
The legislation proposed by Grassley and King does include a significant carve out for community foundations, which sponsor their own donor-advised funds. While there are large community foundations like the Silicon Valley Community Foundation, which has been a favored destination for many tech billionaires, many similar organizations support local institutions in smaller cities and towns across the United States. Under the bill, any donor could keep up to $1 million in a community foundation without falling under proposed new payout rules.
The bill would close loophole in order to speed giving to working charities: Foundations would no longer be able to meet the 5% annual payout requirement by giving to a donor-advised fund where there currently is no payout requirement. The bill also would prohibit foundations from counting the salaries or travel expenses of a donor’s family members toward the 5% minimum.
For donor-advised funds, the proposed legislation would require that a donor who wants the full tax benefit right away would have to ensure that the funds are dispensed within 15 years.
If that is too fast a pace, or if donors are focused on giving over a longer time span, they could take 50 years to pay out. But they would need to wait until then to claim the full tax deduction.
This article originally appeared in The New York Times.