Foundation Presidents Defend Donor-Advised Funds—Is That the Best They Can Do?

September 11, 2017; WealthManagement.com

Earlier this month, a coalition of philanthropic trade associations—namely, the Council of Foundations, Independent Sector, The Philanthropy Roundtable, and the Columbus Foundation (on behalf of community foundations)—wrote a letter (which WealthManagement.com summarizes here) to the Senate Committee on Finance defending donor-advised funds.

This letter was written in response to a proposal outlined in a July letter by two law professors, Ray Madoff, director of the Forum on Philanthropy and the Public Good at Boston College, and Roger Colinvaux of Catholic University in Washington, D.C. The proposal argued for federal regulation of donor-advised funds, including a recommended 10-year limit on how long funds could remain in a donor-advised fund before they would be automatically disbursed to qualifying nonprofits.

So, what is behind this to-do?

As longtime readers of Nonprofit Quarterly will know, the donor-advised fund has become increasingly prominent in U.S. philanthropy. Last year, the National Philanthropic Trust’s 2016 Donor-Advised Fund Report reported that in 2015, donations to donor-advised funds totaled $22.26 billion, roughly 8.4 percent of total U.S. giving, with total assets in donor-advised funds reaching $78.64 billion. Assets in donor-advised funds have grown more than 10 percent a year every year since 2010, more than doubling over the past five years. As Nonprofit Quarterly reported last year, the longer-term trend is even more impressive: Among the top 400 charities, donations to donor-advised funds were only two percent of total giving in 1991. By 2015, that number had increased to 18 percent.

Why have donor-advised funds become so popular? Essentially, a donor-advised fund is kind of like a charitable savings account. As a donor, you deposit funds into a 501(c)(3) intermediary and, because the intermediary itself is a charity, you get to claim your tax deduction the year of your donation. This buys you time to make decisions about which nonprofits to support, rather than being rushed by the calendar at year-end. And, unlike a private foundation, you don’t have to manage the money yourself.

What’s not to like? Well, of course, there are some catches. Madoff and Colinvaux focus on the possibility of money just sitting in the charitable savings account. This may be fine with the people who donate to the donor-advised fund, but naturally, if the money sits in a bank account for too long, then the defensibility of the public subsidy that a tax deduction represents is greatly diminished.

Another possible catch: Once you donate the money, the money by law is not yours—otherwise, it wouldn’t be a bona fide donation. You advise the charitable fund, but, theoretically—and in rare cases, in reality—a charitable fund can refuse to forward your requested donation to the nonprofit you choose. For instance, donor Lisa Greer was “taken by surprise” when the Jewish Community Foundation of Los Angeles refused to honor her request to donate from her donor-advised fund to a Jewish group with politics that opposed Israel’s occupation of the West Bank in ways the foundation deemed “hostile” to the Jewish community.

Still, such examples are rare. A donor-advised fund is particularly useful, if, say, you sell stock (maybe because a long-appreciating stock is starting to fall in price) and are facing an unexpected capital gain tax bill. Instead, you could choose to donate the stock to your donor-advised fund, thereby “pre-funding” your charitable contributions and reducing your tax bill. It is therefore not surprising that investment firms like Fidelity (also Schwab and Vanguard), have developed nonprofit donor-advised fund holding companies, which they promote heavily, citing many of the benefits of donor-advised funds just mentioned above.

But investment firms are not the only players here. Community foundations also rely greatly on donor-advised funds to support their work. A 2009 Council of Foundation report noted that as of 2007 more than half of all community foundation giving came from donor-advised funds. A survey of community foundations conducted in 2011 gives a sense of how important donor-advised funds are. Many of the 31 community foundations surveyed reported that one third or more of their assets were held in donor-advised funds, including the Silicon Valley Community Foundation, the nation’s largest community foundation; the San Francisco Foundation; the Community Foundation for Greater Atlanta; the Boston Foundation; the Greater Cincinnati Foundation; the East Bay Community Foundation; Minnesota Philanthropy Partners; the New York Community Trust; the Community Foundation of North Texas; and the Seattle Foundation.

Given the billions of dollars at stake, it is not surprising that on September 6^th, the foundation leaders submitted a letter to the Senate that opposed limitations to donor-advised funds. In it, according to the summary on WealthManagement.com, they say most donors aren’t “parking” their assets. While one can argue the statistics a lot, it does seem that the foundation presidents are right and that the donor advisory payout exceeds standard foundation payouts. One sign of this is that, as cited above, community foundations reported in 2009 that more than half of their donations were from donor-advised funds, even though donor-advised fund assets were significantly less than half of total assets.

The foundation leaders’ other arguments are of varying persuasiveness. One of their stronger ones is that a required payout period, while increasing donor-advised fund grantmaking in the short term, might discourage donations in the long term. The foundations also contend that tracking the 10 years could prove cumbersome, as there are thousands of donor-advised funds, which often involve multiple contributions made at different times.

The bottom line is, while there are some abuses of donor-advised funds and surely some funds that don’t spend down in a timely manner—and really, given the number of dollars involved, how could there not be?—it is not particularly clear that the level of abuse merits congressional intervention or that setting a time limit on spend-down would actually improve public outcomes.

Still, a broader question might be—outside of donor-advised funds—what might be done to facilitate community-building investments or donations by people with more modest incomes? The donor-advised fund is reasonably flexible, with minimum account levels, depending on the firm, ranging from $5,000 to $25,000, but most American families do not have spare cash or stock of this level to invest.

There are alternatives. In Nova Scotia, for example, residents have gotten a tax break for investing their individual retirement account contributions in the provincial economy since 1993. The numbers are modest, but between 1999 and 2014, this program has generated $43 million in investment in local projects, benefitting 4,000 people, with tax revenue generated from community development from the investments fully covering the cost of the tax credits. The Nova Scotia program has also spurred imitators in three other Canadian provinces.

This example, of course, merely speaks to the tip of the iceberg of building accessible donation and investment vehicles that facilitate community-based investment and fundraising. In short, rather than simply defending existing vehicles, nonprofit leaders would do well to consider new ways to facilitate community self-empowerment. Efforts to support the growth of community capital have been bubbling up in the United States. Foundation leaders might consider rallying around these, rather than simply defending the existing structure of donor-advised funds.—Steve Dubb