Should Congress Establish Mandatory Payout Rates for Donor-Advised Funds?

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November 21, 2011; Source: New York TimesThe recent New York Times op-ed by Ray Madoff of BC’s law school suggests that while President Obama and Congressional Republicans purportedly wrangle over capping the charitable tax deduction (Kabuki theater like no other), the important issue that they have overlooked are donor-advised funds that sit on charitable donations while the donors take immediate tax breaks. Lacking a foundation-like payout requirement, money in donor-advised funds “can languish in these charitable holding pens for decades or even centuries” while the institutions that hold DAFs, such as Fidelity, Vanguard, and Schwab, earn “significant management and investment fees.”

Our analysis in last year’s “The Myths and Realities of Commercial Gift Funds” suggests that the DAFs managed by the big three commercial firms spend at a much faster clip than the 5 percent spending of private foundations or even by the DAFs managed by the commercial firms’ competitors—community foundations: “Between 2003 and 2007, Fidelity’s payout was 23 percent, Calvert’s 14 percent, Schwab’s around 20 percent, and Vanguard’s 21 percent, compared with an average payout of community foundations surveyed by the Council on Foundations (COF) of 13.1 percent and a median payout of 9 percent.”

Admittedly, the payout on DAFs is based on cumulative averages of all of the accounts held by the likes of a Fidelity or a community foundation, so it is entirely possible that the high spending rate of some individual funds might mask the negligible payouts of others. For the big three commercial firms, there seem to be policies meant to goose the specific funds that are not spending much at all, but we don’t know quite how those work in practice behind the confidentiality firewalls that the firms provide for donor-advised funds, and we don’t know if similar policies exist for most of the couple of dozen other DAF managers that are much smaller than Fidelity, Schwab, and Vanguard. But to criticize DAF managers for pitching philanthropic perpetuity to donors establishing DAFs and lauding the 5 percent mandatory spending (not grantmaking!) payout of foundations—nearly all of them established for perpetuity—is off the mark. Foundations control much higher levels of assets than the cumulative assets of DAFs controlled by commercial firms, community foundations, and others, and private foundations’ payout rates are laughably small compared to their commercial DAF manager competitors’. Most foundations tightly manage their spending for perpetuity (which is a long, long time) and fight efforts to change the payout requirement—to 5 percent all-grants or something higher—as if their very existence is at risk.

Perhaps a 5 percent payout floor for all individual donor-advised funds is worth examining. But foundations as the exemplary spending model? Hardly. Perhaps Madoff could have called for better disclosure of the grantmaking beneficiaries of DAFs, something that most private foundations report reasonably well in their 990PFs. But Madoff would have done better to call for a payout floor for DAFs and a higher private foundation payout rate.—Rick Cohen

  • george richmond

    I do not believe that Congress could create plans for payouts that make sense.Further, there are many more important things for Congress to do, of course, and they are not capable of doing any of them

  • Ray Madoff

    I agree that the 5% rule of private foundations is a bigger problem than DAFs and have written about this issue in an earlier op-ed in the NYT (here is the link-
    That is why I recommended that all funds in DAFs be paid out by the end of 7 years. DAFs need faster payout rules because they get all the tax advantages of public charities.

  • Betsy Rose

    Ms. Madoff: Both of your articles have misinformation. It is not true that “the charitable deduction enables people to donate as much of their assets as they like for charitable purposes without paying a tax.” Individuals can deduct only up to 30% of their AGI for securities and 50% for securities. Also, man donor advised funds have minimum granting requirments that say that donors must grant a specific amount by a certain period of time.

    Also… how can you say donating money to saving animals is not charitable? Humans destroy everything good there is in our environment.. we complete animal testing on dogs… we build oil pipelines and drill holes in protected lands. Why can’t one wealthy person decide to leave money to care for dogs? Who are you to judge?

  • rick cohen

    Dear Ray: Thanks for the link to your earlier piece on foundation payout. Here’s my question: After all the sturm und drang about the charitable deduction, do you think that there’s an appetite in Congress for movement on establishing a DAF payout (by payout level and/or time) and on increasing the still absurdly low foundation payout rate? Thanks for commenting on the newswire and for letting us comment on your fine work.