by Rhode Warrior, Mark Noll
In the past ten years or so, charitable giving has seen the rise of a “middle man” who disguises himself as a charitable vehicle when he is, in fact, nothing more than self-serving money monger. This person goes under the nom de guerre of a “Donor Advised Fund.” This euphemism is a capitalist’s incursion into the world of charitable giving.
Just the fact that two of the biggest donor advised funds are run by Charles Schwab and Fidelity should say something about their true intent. Though these investment firms operate under the idea that donor advised funds are a way of connecting their services to an investor while offering a vehicle for charitable giving, it begs the question of why then are they permitted to hold on to these “donations” for extended periods of time?
The fact that these goliath investment firms can manipulate what is supposed to be a charitable vehicle makes one wonder why the government is not doing anything to prevent such. And as I write this blog, more and more monies are being channeled into this black hole of charitable giving. In 2014, Charles Schwab and Fidelity received $2.2 billion in donor advised funds from clients located in California’s Silicon Valley. This amount represents a 946 percent increase from 2005, according to The Giving Code, a 2016 report about philanthropy in high tech metropolis.
One cannot blame a person for taking advantage of such a convenient vehicle for claiming a charitable deduction when all other options are muddled with rules and regulations. What is disturbing is the fact that there is nothing that requires “contributions” to these investment firms to ever be allocated to a needy charity. Unlike private foundations which carry a 5% disbursement of their assets each year, donor advised funds have no such requirement. This does not mean that the donors are not making contributions to needy charities; it simply means they do not have to do so. Which in turn begs the question, “then how is this charitable?”
In some cases, it’s not. That is unless you consider the charitable axe write-off to the investor. Who wouldn’t undertake the opportunity to stash money away, take a charitable write-off, and then keep the money? It’s a win/win for the investor. The loser: Those in need. Welcome to the largess loophole.
As more and more money finds its way into the hoppers of these donor advised funds, the less money is out there serving charitable needs. A glut of funds are choked in the pipeline of donor advised funds and there is little movement on behalf of the government to free up much needed funds for the community good.
If this wasn’t bad enough for charitable causes, the waters are now becoming murkier. The Chronicle of Philanthropy reported that during the FY2014 to FY2016 period, the five largest national donor advised fund sponsors received more than $737 million in distributions from a foundation, while 557 foundations made at least one grant to a donor advised fund. What is all the more ironic is the fact that this transfer of funds from a Foundation to a donor advised fund is applicable to a Foundation’s 5% distribution requirement. Simply put, this is a charitable distribution from, and to, oneself. And to add to the irony of it all, funds that were once accountable in a Foundation have now found their way to the vast dark world of charitable donations.
We like to think of Americans as philanthropic, however, donor advised funds distort that image by fogging up the scenery of intent. Is charitable giving at the heart of these donations or is it solely about a tax write-off? There are many who have altruistic motives behind giving to a donor advised fund while others are simply trying to avoid taxes. For those who use donor advised funds only to avoid taxes we need to ask ourselves, “how long will this charade be allowed to continue?” Though if anyone is taking bets here, I would put my money on the fact that it will be some time before any significant changes will be made.
And the storm clouds continue to gather.
In 2017, more than 70% of the total contributions to Schwab Charitable donor advised funds were highly-appreciated, non-cash assets (including bitcoin). The investment firm then liquidated these assets for the donor when possible or brought in a third party when more expertise was needed (yet another limitation not available to a charity). And the dynamic shift is just the beginning. As time progresses, one can expect a rise in contributions of complex assets, such as privately held securities, LLCs, partnerships, real estate, private equity and hedge fund interests. Donor advised funds are becoming the 21st century version of burying a treasure chest on a deserted island.
Sadly, you cannot blame one for taking advantage of a gracious opportunity. Where else can one contribute appreciated property such as securities and face no capital gains tax on the appreciation in value? It remains untaxed forever. Moreover, contributions to a donor advised fund aren’t subject to estate tax or the probate process, and the amounts contributed to the fund are invested and can grow without any tax erosion. Want to talk about transparency? While foundations have boards, file 990 tax forms and perform audits, donor advised funds are not subject to any such stringent requirements.
The bottom line is very simple: why would anyone in the future opt to establish a charitable Foundation when a donor advised fund has no distribution, filing, or accountability requirements? Donor advised funds are simple, give immediate tax benefits, and do not require a distribution of sorts. There are very few things in life that you can give away and still retain it in the end. A Donor Advised Fund is one of them.
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