Congress just voted to help people affected by the coronavirus and right the economy after this massive, unanticipated, sudden downturn with more than $2 trillion in federal aid.  This amount is more than four times the $427 billion Americans donated to charity in 2018, according to Giving USA. 

Meanwhile, billions of dollars donated for charitable purposes – and for which wealthy folks likely took tax deductions – are not getting to charities.  These assets are stuck in a donor-imposed—not a beneficiary-sought—pipeline through instruments known as foundations and donor-advised funds.  Since our current national emergency is thrusting millions out of their jobs, Congress should provide incentives or even mandate that these intermediaries immediately release more charitable dollars that are so desperately needed.

Even if times were less frightening, such changes should be considered for permanent implementation.  Americans – who are now giving tax deductions for parking money into such instruments – then would receive much more value from our charitable sector.

Anyone can place an unlimited amount of money into foundations and donor-advised funds.  Tax deductions are permitted for doing so because these instruments are, admirably, set up to dispense donations to 501c3 charities.  It is wonderful that so many Americans support so many charities with so many gifts.  Most donors, I believe after years working in nonprofit fundraising, give to make a difference, not for tax deductions. 

Donors make donations directly to charities all the time.  In that scenario, all funds intended for charities end up with charities.  In contrast, foundations and donor-advised funds—as well as entities like community foundations and even the United Way—siphon off dollars intended for charities.  Foundations require tax returns and sometimes staff.  Donor-advised funds – set up with financial institutions like Fidelity, Vanguard and Schwab—generate investment fees for money managers.  Community foundations often have several staff members.  These expenses are underwritten by tax-deductible sums meant for charities.                                                        

Note that foundations have little oversight.  Donors can—and do, in some cases—list children or loved ones as staff and pay them six-figure salaries—with charitable dollars.  One need look no further than the White House to see how foundations can be abused.  The Trump Foundation was shut down after an investigation showed charitable dollars were spent to benefit Trump himself and engage in political activity.

Moreover, foundations must give out only five percent of assets annually while donor-advised funds have no requirement to give anything.  Sequestering this money intended for charities only benefits people garnering revenue from these intermediaries’ unnecessary spending.  Of course, they will vociferously object to potential changes in this status quo criticized in studies like the Institute for Policy Studies’ report entitled “Warehousing Wealth” that attacked donor-advised funds for leaving charitable dollars in purgatory despite our society’s growing income inequality.

It is true that many of these intermediaries earnestly improve lives and effect positive changes for people and animals whom charities intend to support.  But even more people and animals would benefit without these superfluous entities lodged between donors and their favored charities.

Congress should consider legislation to unleash these funds now set aside in a holding pattern.  Foundations and donor-advised funds could be altered or even abolished without any harm to charities or those whom they serve.  In fact, they would become more vibrant through additional funds.  There is no reason to keep these intermediaries alive for years or even decades. 

Why not launch a progressive sliding scale of incentives for foundations to give far more than five percent of their assets, at least in 2020?  And how about the biggest incentive of all to dissolve the foundation altogether?  Then, why not do the same with donor-advised funds that now can linger for years without donating a cent to charities?

That’s the carrot approach; however, Congress could employ the stick.  Why not pass a law to force these entities to loosen up money now stuck in limbo?

Dollars intended for charity should not sit in non-charitable entities for decades and be redirected to cover avoidable expenses.  Contributions should go directly to charities offering programs that are the true targets of tax-deductible donations from donors who may be unaware of the impediments they’ve created.  Reforming this system in 2020 could greatly soften the blow of coronavirus on our health and economic well-being.

(1) comment

StephenKump

I’m working on a startup to solve this—takes the advantages of donor-advised funds but passes 100% of the money to charities. We believe overhead is an inefficiency. I’d love feedback: http://charityvest.org

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