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New IPS-DC Report: Donor-Advised Charity Funds Sequestering Billions in the Face of Growing Inequality
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New IPS-DC Report: Donor-Advised Charity Funds Sequestering Billions in the Face of Growing Inequality

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WASHINGTON DC – August 1, 2018

Charitable giving is beneficial to society and can provide solutions to market failures while helping causes and people in need. While most people in the U.S. contribute to charities — be it their private foundation or the local food bank — not all receive significant tax benefits for doing so. The wealthy are more likely to claim charitable deductions, and to receive the most tax benefits as a result. Because the taxpayers effectively subsidize the charitable giving deduction, there is a public interest in ensuring the effectiveness and efficacy of philanthropic giving as a whole.

At a time of staggering inequality, wealthy individuals are using donor-advised funds, or DAFs, to claim substantial tax benefits, while often failing to move funds in a timely manner to independent nonprofits addressing urgent social needs. Of particular concern are the growing number of DAFs founded by for-profit Wall Street financial corporations that provide incentives for the warehousing of wealth. A new report from the Institute for Policy Studies, “Warehousing Wealth: Donor-Advised Charity Funds Sequestering Billions in the Face of Growing Inequality”, documents the dramatic expansion of DAFs and the risks an unregulated DAF system poses to the independent charitable sector, taxpayers, and the public interest. The report also highlights how donor advised funds provide loopholes for both donors and private foundations to get around tax restrictions and significantly reduce transparency and accountability.

A donor-advised fund, or DAF, is a collection of financial assets, such as cash, stocks, and bonds, that is owned and managed by a charitable organization, and is used solely for the purpose of making grants to other charities. As with a private foundation, donors may take advantage of the charitable tax deduction upon transferring funds to a DAF, before those funds ever go to a public charity. What sets DAFs apart is that they have fewer accounting restrictions than a private foundation and greater tax benefits.

Last few years donor-advised funds are experiencing an explosive growth, the study says. In contrast, charitable giving by individual donors nationwide has grown minimally.

Unfortunately, the public interest has not been upheld by the regulations addressing DAFs. By and large, DAF donors likely have no malintent; but a broken incentive system has encouraged and enabled ultra-wealthy individuals to use DAFs as a tax avoidance strategy rather than for the greater good of serving charitable needs.

Donor-advised funds have existed since the 1930s, when they were first created by community foundations. Giving to DAFs did not ramp up in earnest until the 1990s, however, when commercial financial services companies, including major players such as Fidelity Investments and the Charles Schwab Corporation, created their own not-for profit DAF-sponsoring organizations.

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Since then, DAFs have exploded in popularity. As a sector, they are now the fastest growing recipients of charitable giving in the United States. According to the National Philanthropic Trust’s 2017 Donor-Advised Fund Report, annual donations to DAFs increased from just under $14 billion in 2012 to $23 billion in 2016 — growth of 66% over five years.

In contrast, according to the Giving USA Foundation, charitable giving by individual donors to all recipients nationwide grew by just 15 percent over the past five years — from about $244 billion in 2012 to just under $282 billion in 2016.  In other words, over the same five years for which there is data, giving to donor-advised funds grew more than four times faster than individual giving in the United States as a whole.

DAFs appear to be shifting giving away from active charities. The share of total U.S. individual charitable giving that is going to DAFs, rather than to direct charities, has nearly doubled over the past seven years — from 4.4 percent in 2010 to 8.3 percent in 2016.

In 2016, for the first time ever, a DAF — Fidelity Charitable — was the top single recipient of charitable giving in the U.S. In 2017, six of the top ten recipients of charitable giving were DAFs.

Fidelity Charitable grew from $1.7 billion in annual donations in 2011 to $6.8 billion in annual donations in 2017, for total growth of more than 400 percent over seven years. Fidelity Charitable held nearly $16

billion in assets in 2016 — more than half the total assets of all community foundations in the United States combined.

The average DAF donor is a member of the wealthiest one tenth of one percent of Americans, with annual income over $1 million. The primary attractions for the use of DAFs among the super-wealthy are the advantages related to the relief of capital gains tax burdens, and the easy donation of non-cash appreciated assets — an area of charitable giving rife with potential abuses.

Institute for Policy Studies identifies the risks an unregulated donor-advised funds system poses to the public interest and the charitable sector.

There is no legal requirement for DAFs to pay out their funds to qualified charities — ever. According to one estimate, the average annual payout rate for DAFs in 2016 was 20 percent, although some DAFs give considerably less.

In addition to that, even as the amount of funds flowing to DAFs has increased, payout rates have been steadily going down.

As currently structured, DAFs encourage a wealth preservation mentality in donors, rather than incentives to move donations to qualified charities. This delays the public benefit from those donations, which has an opportunity cost for society.

Next, DAFs provide loopholes for both donors and private foundations to get around tax restrictions and significantly reduce transparency and accountability.

When it comes to national sponsors that have partnerships with commercial financial services companies, there is at least one more party that may be losing out with DAFs: the donors themselves.

According to U.S. Trust’s Study of High Net Worth Philanthropy, 24% of high-net worth donors consulted with at least one advisor before making their charitable gifts. One third of the time, that advice came from an accountant or a financial or wealth advisor.

Even though the DAFs set up by for-profit firms are technically separate entities, they are still associated with their parent companies in ways that can influence the behavior of staff in both organizations. The concern is that if a donor’s advisor works at a corporation that manages a donor-advised fund, the advisor’s own financial interests, or those of the corporation, may lead them to push the donor towards DAF giving over direct giving to charity.

And if the donor is genuinely giving out of a desire to effect change for the good — as a great many surely are — following their advisor’s advice could mean that their giving will have much less of an effect than they would like.

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There are two main reasons why donors may not be getting entirely unbiased advice when it comes to DAF giving.

First, financial advisors are often rewarded for steering their clients towards DAFs. In many corporations, staff members who refer their clients to the corporation’s DAF receive bonuses for doing so. At Fidelity Investments, for example, advisors whose clients set up a donor-advised fund at Fidelity Charitable get a bonus of a quarter of a percent of the amount of assets in a donor’s DAF each year.

In these cases, as Madoff and Cullman write, “When a client discusses charitable giving with his financial adviser, the adviser has every financial incentive to recommend that the client establish a DAF rather than make an outright gift to an operating charity.” Because of this, a philanthropically-inclined client may be convinced to set up a DAF without realizing that it may not be best for the charities they support, or for what they hope to accomplish with their giving.

Second, financial advisors, corporate fund managers, and DAF staff are rewarded for keeping money in DAFs once they are established. Once a fund is set up at a corporate-affiliated DAF, several parties have a vested interest in keeping those funds intact and growing.

As we saw above, a financial advisor who recommends a DAF to a client may receive continuing bonuses that are based on the amount of assets held in those funds.

The report is prepared by three co-authors: Chuck Collins, Helen Flannery and Josh Hoxie.

Chuck Collins directs the Program on Inequality and the Common Good at the Institute for Policy Studies, where he also co-edits Inequality.org. His most recent book is “Is Inequality in America Irreversible?” from Polity Press and in 2016 he published Born on Third Base. Collins cofounded the Patriotic Millionaires and United for a Fair Economy.

Helen Flannery is an Associate Fellow at the Institute for Policy Studies. She is a longtime researcher and data analysis professional working in the nonprofit sector and has written extensively on nonprofit industry trends, including trends in direct marketing fundraising, online giving, sustainer giving, and the macroeconomic factors affecting donor behavior.

Josh Hoxie directs the Project on Opportunity and Taxation at the Institute for Policy Studies and co-edits 

Inequality.org. He co-authored a number of reports on topics ranging from economic inequality, to the racial wealth divide, to philanthropy. His most recent report is Billionaire Bonanza 2017. He worked previously as a legislative aide for Bernie Sanders.

The  Institute for Policy Studies is a multi-issue research center that has been conducting path-breaking research on inequality for more than 20 years.

The IPS Program on Inequality and the Common Good was founded in 2006 to draw attention to the growing dangers of concentrated wealth and power, and to advocate policies and practices to reverse extreme inequalities in income, wealth, and opportunity. The program has been investigating the intersection of inequality and philanthropy, including the publication of the 2016 report entitled “Gilded Giving: Top Heavy Philanthropy in an Age of Extreme Inequality."

Author: USA Really