Yesterday, a high-powered coalition of institutional and individual philanthropists and analysts published a plan that seeks to reform donor-advised funds (DAFs), promote an increased payout from private foundations, and expand the charitable deduction.
The effort is called the Initiative to Accelerate Charitable Giving. Among the institutional signatories are Arnold Ventures, the Ford Foundation, the Hewlett Foundation, Wallace Global Fund, and the Kellogg Foundation. Among the individual supporters are Boston College’s Ray Madoff, who with John Arnold worked on developing the platform, and Stanford’s Rob Reich—both well-known advocates for philanthropic reform—and Jennifer and David Risher, who launched the #HalfMyDAF challenge earlier this year. The effort has gathered steam and supporters quickly, and we can expect that to continue as these influential coalition members reach out to engage others.
NPQ welcomes this development among philanthropists, who have for many decades taken a highly defensive stance when it comes to actually promoting rather than resisting regulations. Seeing a group like this put out public policy proposals that might not be received universally warmly by institutional peers is a promising change, and these particular proposals seem well chosen, promoting more rapid distributions of funds through nonpunitive incentives and a few strategies that would establish limits on the uses of money and transfers between foundations and donor-advised funds. Probably the most controversial of the proposals has to do with time limits for spending down donor-advised funds, and we see here that the group has moved to a less rigid proposal than those previously advanced by advocates.
A proactive agenda for regulation has long been missing within philanthropy. Leadership tends to be taken by advocating among peers. The fact that this had to happen outside of the usual industry groups for philanthropy may demonstrate something about how the infrastructure for nonprofits and philanthropy is shifting in a healthier, less self-protective direction. The Philanthropy Roundtable, made up of more conservatively minded funders, has issued their own statement of disagreement, which we leave for you to read. We are sure it will not be the last such objection from portions of the foundation and DAF communities, but we hope that philanthropic institutions will think very carefully before rejecting these—as they term them—common-sense proposals.
Below is the proposal in full. We welcome all comments from readers.
Private Foundation Reforms
With over $1 trillion in assets, private foundations are a tremendous resource to help address the immense needs arising from COVID-19 and racial inequality.
Although private foundations are subject to a five-percent payout rule enacted to ensure a regular flow of dollars to working charities, the purpose of this rule can be easily avoided. At a time when every dollar counts, Congress should ensure that existing rules are reformed to fulfill their purpose by stipulating that:
- Private foundations cannot meet their payout obligations by paying salaries or travel expenses of foundation family members.
- Private foundations cannot meet their payout obligations by making distributions to donor-advised funds.
- Donors cannot avoid private foundation status (with its attendant rules) by funding their entities through DAFs.
Congress should also enact incentives and reforms to ensure that private foundations continue to play a pivotal role in the charitable ecosystem by distributing more of their assets to operating charities, such as:
- Reduce to zero the private foundation excise tax for any year in which the private foundation’s payout is seven percent or more.
- Eliminate the excise tax for any newly created, time-limited private foundation with a life of 25 years or less.
Ensure that Donor-Advised Funds Fulfill Their Charitable Purpose
Donor-advised funds (DAFs) now have over $120 billion set aside for future charitable gifts. The problem is that current rules fail to provide any incentives or requirements for DAFs to ever distribute their money.
DAFs can and should continue to play an important role in charitable giving, but there need to be rules to ensure that funds donated to DAFs are made available to working charities within a reasonable period of time. Congress should enact reforms that ensure that payout occurs by allowing donors to choose one of two regimes for their DAF donations:
Congress should create a new form of DAFs under which a donor would get upfront tax benefits (as under current law), but only if DAF funds are distributed (or advisory privileges are released) no later than 15 years from the year of the donation to the DAF. To avoid overvaluations, the income tax deduction for complex assets—such as closely-held or restricted stock—would be the amount of cash made available in DAF accounts as a result of the sale of the asset (instead of the appraised value).
Aligned Benefit Rule
As an alternative, donors who want more than 15 years to distribute their DAF funds should be allowed to elect an “aligned benefit rule.” Under this rule a DAF donor would continue to receive capital gains and estate tax benefits upon donation but would not receive the income tax deduction until the donated funds are distributed to the charitable recipient. This rule would create an incentive for donors to get donations to charities sooner. Current law has no such incentive, thereby making it possible for funds to sit in DAFs indefinitely. All funds would be required to be distributed outright to charities no later than 10 years after the death of the donor.
To support the place-based, mission-driven model of America’s community foundations, the Initiative to Accelerate Charitable Giving is in ongoing talks with community foundation leaders about how charitable reform proposals can recognize their unique role and reinforce this important sector within philanthropy.
Strengthen and Expand the Non-Itemizer Deduction
While a majority of Americans donate to charity, almost 90 percent receive no tax benefit for their charitable giving. Congress took a step forward in the CARES Act by creating an above-the-line charitable deduction for non-itemizers for 2020.
Congress should build on this first step by considering options to expand and extend the new non-itemizer charitable deduction. Such an approach should strive to meet the following objectives:
- Increase both the amount of charitable giving and number of donors.
- Be cost-effective and minimize the potential for fraud, by incorporating a giving floor, perhaps set at one to two percent of adjusted gross income (AGI).
- Be administrable by the IRS, such as by enacting new enforcement and reporting requirements.
- Continue to exclude donations to DAFs and private foundations and maintain prohibition on non-cash gifts.