Billions of dollars worth of charitable assets are being held in private foundations and bank accounts. That money is supposed to help nonprofits and those in need, but law professor Ray Madoff says our current laws benefit donors and money managers, not the charitable sector.

Madoff recently co-founded the Forum on Philanthropy and the Public Good at Boston College Law School, where she teaches. The Forum is a think tank focusing on the rules governing charity and whether they sufficiently serve the public’s interests.

For instance, Madoff critiques the law that allows private foundations to spend 5 percent of their endowments each year. Madoff says the effect of that rule is that a huge proportion of private foundations spend exactly that: 5 percent and little more. “The problem is even worse,” she explains. “Somebody who sets up a small family foundation can hire their kids, take family trips to visit sites, and all of that can count toward their 5 percent. So it doesn’t necessarily even mean that all that money is going to charity.”

The tax scholar also criticizes donor-advised funds, which are accounts that hold charitable dollars. These funds have become the fastest growing vehicle for charitable giving. Madoff says they are sometimes run by community foundations, but are more commonly run by public charities like Fidelity Charitable, Vanguard Charitable and Schwab Charitable. Here is Fidelity’s video on donor-advised funds: 

When people contribute to these funds, they receive the same tax benefits as when they give to any nonprofit. But the difference is that the money doesn’t necessarily go to the nonprofit — it can sit in the account indefinitely. “I understand that people love the idea of passing on a big charitable stockpile of wealth to their children or grandchildren,” Madoff says. “But I don’t think the public is being very well served when an individual can pass on a big pile of wealth to their children or grandchildren to spend. That’s not in the public interest. That’s in the donor’s interest.”

Advocates of donor-advised funds say it’s an easy way for clients to manage their charitable giving. But Madoff wants to see the rules changed to increase payout. “There’s a natural reluctance for people to spend. What I’m concerned about is that when we have rules that give all the benefits for going halfway there — for letting the money sit there — you’re going to have these unintended consequences.”

Madoff opposes laws that allow charitable dollars to be kept in banks for long periods of time, and wants to see them paid out to nonprofits instead. (Credit: Matt Hunter/Flickr Creative Commons)

Madoff says today’s problems will be much worse tomorrow, so donor dollars must be used now to address them. “If you think about things like education, healthcare, art, museums, symphonies, social services, and you look at how they are financed, the government provides only a small amount. And most of these things, we depend on Americans to give their private donations to support these most important activities.”

What about you? Do you have a donor-advised fund and love it? Do you agree that we should do more to ensure that donor dollars are actually spent on the charitable sector? Please let us know why. Leave a comment below or email [email protected].

Additional Resources

Madoff in the New York Times: A Better Way to Encourage Charity

Madoff in the Chronicle of Philanthropy: 5 Myths About Payout Rules for Donor-Advised Funds Meet Ray Madoff, the woman saving the world from philanthropy

Brian Galle: Pay It Forward? Law and the Problem of Restricted-Spending Philanthropy

Manhattan Institute: Growing Giving – American Philanthropy and the Potential of Donor-Advised Funds

National Philanthropic Trust: 2015 Donor-Advised Fund Report

Boston Globe: Donor-advised funds: Where charity goes to wait

Wall Street Journal: Are Donor-Advised Funds Useful?

Nonprofit Times: The Great DAF Debate