“Donated” but Not to Nonprofits

Just Money Advisors

A useful investment tool is being twisted beyond its original purpose, to the detriment of nonprofits and all the people and causes they serve.

A donor-advised fund (DAF) can be a handy tool for giving away money in a particular tax year but delaying the choice of which 501(c)(3) will receive the funds. A donor might want to use a DAF to take tax deductions during periods of high earnings but still be able to make gifts later in life when income is lower, for example, or to accumulate donations over several years to make a larger gift to an organization. JMA helps clients create donor-advised funds where the client can decide that the assets be invested in line with their values and make gifts from those DAFs, when directed.

The idea of a DAF is that the money would, without too much deferral, be put to work by a nonprofit.

However, DAFs now hold roughly $85 billion in wealth, according to a recent report by the Institute for Policy Studies*–$85 billion that is essentially removed from the public good because nonprofits cannot currently employ the resources, nor can public budgets employ the tax dollars that would have been paid on the assets had they not been “donated.”

And yet brokerage houses and money managers make money on the investment process and donors got the tax deductions. True, the donor no longer owns the money, but while it remains inside a DAF, the donor can control how it is invested and, crucially, retain much of the political and corporate power that accompanies enormous wealth.

Although some DAFs have developed policies to encourage donors to distribute gifts, there is no legal requirement for DAFs to ever pay out their funds to qualified charities, and money is flowing in far faster than it is flowing out, meaning more untaxed dollars are accumulating in DAFs. And of the gifts that are designated from DAFs, almost 5% are made not to active charities but to other DAFs—within the letter of the law but surely not within its spirit.

The Institute for Policy Studies is among the groups calling for reforms that would force paying out within a certain timeframe to active charities, for example, and adding restrictions to ensure transparency and accountability.

“There are significant risks to warehousing wealth in large financial institutions at a time of extreme wealth inequality and undisputed public need for the services charities provide,” report authors Chuck Collins and Helen Flannery wrote in a widely distributed op-ed piece. “It’s imperative to correct the rules regulating these charitable vehicles to ensure the public good is justly served.”

 

*Chuck Collins, Helen Flannery and Josh Hoxie, “Warehousing Wealth,” Institute for Policy Studies, July 2018.  Available free at https://ips-dc.org/report-warehousing-wealth/.