Lewis Cullman’s Call for Reform: Faster Payout from Foundations & DAFs

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September 25, 2014; New York Review of Books

Philanthropist Lewis Cullman, a young 95-year-old, has long hammered away on making philanthropy better. He does so again in a forthcoming issue of the New York Review of Books in an article titled, “Stop the Misuse of Philanthropy!” Cullman goes after what he calls one of the “little-known ploys in U.S. philanthropy that rob(s) our society of hundreds of millions of dollars earmarked for important charitable causes—leaving money stashed away in financial institutions and doing no good for anyone except money managers and other financial intermediaries.”

In the business world, Cullman is known as the investor behind the At-A-Glance® calendars and appointment books, but in philanthropy, he has been an educator (as the author of Can’t Take It With You—The Art of Making and Giving Money and How to Succeed in Fundraising by Really Trying) and a doer (as a generous donor to public charities such as the Enterprise foundation, the Metropolitan Museum of Art, Human Rights Watch, Planned Parenthood of New York City, and Chess in the Schools). When Cullman talks about what’s wrong with philanthropy, he does so not as an academic observer, but as a participant who lives what he believes in the world of giving.

In 2003, he wrote a piece for the New York Review taking apart “how private foundations were able to take unfair advantages of the charitable deduction,” particularly the requirement to make “qualified distributions” of five percent—as grants and related administrative costs—of their charitable assets, a payout floor that foundations all too often turn into a ceiling.

In this piece, Cullman expands his critique of “philanthropic gamesmanship” to include donor-advised funds (DAFs). “Donors get the same tax benefits when they give to a DAF that they would get by contributing to a museum, soup kitchen, university, or any other federally accepted charity,” Cullman writes. “But rather than having the gift made directly to a charity, the funds can simply sit in the account awaiting instructions from the donor.” Not only might the funds simply sit in the DAF accounts, he says, the fund manager, such as Fidelity Investments, Schwab, or Vanguard, could be “earning substantial fees.” Cullman also criticizes that because a DAF donor “must give up all legal control over his or her money when a transfer is made to a DAF,” a DAF administrator can do whatever it wants with the funds when a donor passes and is not required to follow the original instructions.

Why did Cullman write this new article now, given that community foundations have been managing donor-advised funds for many years and the big commercial DAF managers have in existence for more than two decades? Yesterday, Cullman told Nonprofit Quarterly that he had seen an article by Ray Madoff, a Boston College law professor who has been advocating for required and speedier DAF payouts—no payout is mandated at the moment. Madoff has convened a symposium titled, “Convention on Promotion of Meaningful Reform in Philanthropy,” where issues of DAF payout will be on the agenda. Thinking back to his concern about foundation payouts, Cullman guesses that there could be as much as $1 trillion sitting in philanthropic endowments, given the past couple of years of strong markets.

He has little concern for the typical foundation support for low payout rates supporting foundation perpetuity. Cullman clearly advocates for “spending down” strategies. “Whether it’s the Ford Foundation or Rockefeller or whatever, they have wonderful PR, but there’s so much money flowing in [to philanthropy], if they spent out you wouldn’t notice,” Cullman told us. Cullman’s approach is a systems framework, looking at the capital flows into philanthropy overall rather than focusing on the perpetuity of individual philanthropic institutions and their endowments. As he said to NPQ, he wants “a system to give to bona fide charities” rather than having philanthropic assets sit in accounts earning money for money managers rather than nonprofits on the ground. “I think there would be a lot of operating charities that are starting today that would need money that would have money” if foundation and DAF payout were speeded up, Cullman added.

In his upcoming participation at Ray Madoff’s convening (cosponsored by the Ford Foundation, the Barr Foundation, the Hewlett Foundation, the Rhode Island Foundation, and Cullman’s own foundation), Cullman is eager to hear and contribute to ideas for philanthropic reform at the Madoff gathering, with ideas for different, reduced tax benefits for donations to endowments that do not distribute funds quickly, for exploring outside timeframes for how long money should be able to sit in philanthropic endowments, and for restricting or eliminating the ability of board members to receive payments and fees for their board service.

The invitation-only program convened by Madoff has a diversity of political and philanthropic perspectives included within its participants, challenging the program’s ability to converge on a specific set of recommendations on payout and some other issues. Moreover, even if there are issues around which the participants might agree conceptually, there are likely to be differences as to whether they should be pursued voluntarily or through regulatory or legislative mandate.

Nonetheless, Cullman thinks that this is time for a solid review of the structure and system for charitable and philanthropic donations. He has a vision for what could happen—perhaps not immediately, but in short order.

“Before I hit one hundred, I’d like to see all money designated as ‘charitable’—which the American government and its people underwrite through tax deductions—get into the hands of those who really need it. There should be a simple, uncomplicated bill relating to foundations and DAFs, fair and easy to understand, requiring that donated money not come under the control of profit-making financial managers. I urge all those who believe that charitable donations can make a difference in this world to make sure that tax-deductible gifts be given to operating charities in a timely fashion.”

If you know Lewis Cullman, you know he is a force to be reckoned with and unlikely to be deterred in his campaign for charitable funds to reach operating charities directly and fast.—Rick Cohen

  • Russ Cohen

    THANKS, NPQ, for publishing this piece. I strongly agree with Mr. Cullman and Ms. Madoff.

    I agree that one potential downside of donor-advised funds (DAF) to charities is what can be a substantial time gap between when the funds are parked at the DAF-managing entity (the Fidelity Charitable Gift Fund, e.g.) and the
    time at which the funds are distributed to charitable organizations.

    As the DAF-managing entities benefit from having a large pool of funds (to invest, cover their management expenses, etc.), there is little if any incentive for them to encourage donors to DAFs to direct payments to charities.

    As I see it, though, there is another major shortcoming to charities that an increasing % of charitable dollars are going into corporate-managed DAFs: their lack of transparency (e.g., it is hard for grant seekers to know which donors might be willing to support their worthy missions and activities, and how to contact such donors). Whereas foundations are required (in 990 tax reporting forms) to disclose how they may be contacted, what assets they hold, and a record of which charitable cause(s) they support, along with the dollar amounts, DAFs (as far as I know) do not make a similar disclosure.

    Although I have heard the reason more people are turning to companies like Fidelity to manage their charitable giving is because the donor wants anonymity and/or a barrier between them and charities seeking funds, I do not think that is true. I really haven’t seen [in the charitable gift fund marketing materials] much evidence that they are playing up the “our system insulates you from charities knowing who you are and which causes you like to give to” angle.

    I think many donors are being merely seduced by the corporate donor-advised fund managers’ marketing pitch that turning over your charitable giving management to them is easier than setting up your own private foundation mechanism or other means to do it, plus the appeal of locking in the charitable deduction now and deciding who to give the money to later.

    But regardless of the motivation, the way I see it, as an increasing % of philanthropic giving seems to be taking place via the donor-advised fund mechanism, as long as that giving isn’t transparent, it’s going to be increasingly difficult for charitable organizations to get a good feel for who (i.e. potential donors) might be receptive to learning about the good works of, and an opportunity to support, that particular charity.

    I look forward to the day when charitable giving via corporate-managed, donor-advised funds is more transparent, and there are limits on how long $ can be parked in a DAF before passing along to charities, and it is easier for a charitable organization to find out which potential donor-advised funds and the people directing giving from those funds might be particularly receptive to learn about and financially support that charity’s mission and programs, as well as knowing how and in what fashion that charity would best reach out to those potential donors.

    I was glad to see that a top person from the Fidelity Charitable Gift Fund will be participating in the ‘Convention on Promotion of Meaningful Reform in Philanthropy’ gathering in Boston later this month. I hope that executive will agree to Fidelity making public which DAFs give which amounts to which charitable causes, in a similar manner to 990 tax reporting forms, so that charities know who is most likely to be interested in supporting their missions and programs.