Hilary Crosby's CPA firm, Crosby & Kaneda, has audited and helped countless nonprofits and foundations in California and beyond. She is also a volunteer for many important community causes. But at the beginning of her career, she owned a hot dog restaurant that was named "Best Hot Dog in Boston." As a nonprofit auditor (and former hot dog maven), here are some of her thoughts on donor-advised fund (DAF) donations:
One of my early jobs was working as a bookkeeper for the ACLU. There I saw people working hard and with so much smarts and big hearts to help people and seek justice. I realized that I couldn't do what they did, but I could support their work through bookkeeping. They also encouraged me to get my CPA, which I did. I hated to see nonprofits spend too much of their charitable dollars on audits. Throughout my career, I've been proud to support so many people and causes through affordable audits and by basing our work on the values we share with our clients.
So it makes me angry to see charitable dollars going to waste.
Philanthropy Project readers probably already know that the Internal Revenue Code Section 501(c) describes 24 different types of nonprofits such as Black Lung Benefit Trusts, Cemetery Companies and Homeowner Associations. But I just want to talk here about 501(c)(3) organizations that are religious, educational, charitable, scientific or literary organizations that do nice things for people. These organizations help people, often by doing the things the government should be doing, or doing things to alleviate harm caused by big business. Such organizations aren’t just exempt from income tax themselves, but their donors don’t have to pay income tax on the money they give to them.
That feature was added to the tax code during World War I to encourage people to donate to help each other out because at that time the government was spending a lot of money to fight a war to end all wars. (It didn’t turn out that way, but you already knew that.)
I'm not talking about the couple bucks you toss into a guitar case of a street musician, or the money you give through a Facebook request. That’s pretty standard behavior and is included in the “standard” deduction that most people take on the annual tax filing. In 2019, over 86% of tax filers just took the standard deduction.(1)
Only 14% of taxpayers can now use the charitable tax deduction
That means that only 14% of people were able to take the financial tax advantage of making donations to nonprofits. They can give regular money or appreciated stocks and other investment products to a favorite charity. (Obviously not folks living paycheck-to-paycheck or only on social security income.)
Donors with extra cash (and a desire for an immediate tax deduction) can establish a donor-advised fund (DAF) inside a DAF sponsor (often a community foundation or financial investment firm). There are usually minimums to establish such a fund, which can be $5,000 or more. (Obviously not folks who are using their “excess” cash to pay for braces or tires or home care for an infirm parent.)
If such a donor has a family foundation (think Uihlein or Coors), they can shield up to 50% of their adjusted gross income from income tax by giving to their private family foundation, where they maintain control of when and where it goes to nonprofits.
Donor Advised Funds Sitting around
Donor-advised funds sit around waiting for the donors to advise the other charities where to give them. Private foundations have to pay out 5% of their equity each year, but that payout can include the foundation's rent, salaries, family travel expenses and so forth. In both cases, funds can sit in investment accounts for decades with the donors maintaining control.
And when they do make grants, donor-advised funds do not have to report where they made those grants. (These grants from DAF funds end up listed undesignated in the midst of a lengthy 990 report of their DAF sponsor.) They might designate their grants to charities they believe are doing good. Or they can make them to a university their children are applying to. Or to think tanks that develop legal arguments to support the donor's family business or financial interests.
Should wealthy individuals and families be able to get immediate tax deductions, then still control those funds—including deciding to give none or less than 5% out?
If I could vote on this, I’d vote NO.
Two years ago, Candid (formerly the Foundation Center and GuideStar) closed down its ten-year initiative on making foundations more transparent. The initiative had a great name, "Glasspockets," referencing Carnegie Foundation board chair, Russell Leffingwell’s testimony before Congress during McCarthy-era hearings that the "Foundation should have glass pockets."
We never felt that Glasspockets got the attention it deserved and its closure got even less. We'd like to give both aspects some attention today, and give Candid a chance to talk about what they are doing today on transparency. We are fortunate that Janet Camarena — one of the project's creators and its ten-year director — was happy to reflect on the project with us.
Q: Janet, what is the single most interesting thing that came out of Glasspockets' work?
Janet: What probably surprises people the most is how few private foundations can be found online. When the initiative started, only 6% to 7% of foundations had websites. Now it's perhaps 10% to 12%, which is where it was hovering when Glasspockets wound down two years ago.
This means that foundations have very limited ways to learn about what other foundations are doing, what they’ve learned from their work . . . and nonprofits should realize how limited web information is on foundations.
10 - 12% of foundations have websites
Q: Even 10% or 12% seems shockingly low! But how valuable are foundation websites, really? Many of them seem to be more about public relations than talking about what they are doing in candid enough terms to be useful.
Janet: Well, having a website is a good start towards transparency. And of course we want to encourage foundations to improve the quality of the information on their sites, which was a big part of the Glasspockets effort to provide a roadmap to how to do that.
Q: Example?
Janet: In the grant descriptions published on their websites, too often we just see "general support." That isn't helpful to researchers studying where funding is going, for grantseekers trying to determine if a particular funder may be a good partner, or for other foundations to identify peers, possible collaborators, and more.
Q: Glasspockets invited foundations to publish their "transparency self-assessments" and to be a recognized participant in Glasspockets. Over the ten years, how many foundations signed up?
Janet: 112. I know it sounds like a small number! [There are about 103,000 private foundations in the U.S.] But many did use the criteria to prompt discussions about what transparency might mean in their foundation.
Q: What are some of the types of information that Glasspockets promoted as transparency priorities?
Janet: Of the 20+ indicators, many were straightforward, such as do you publish a list of your board members, do you have a whistleblower policy. [Editor's note: you can find the Glass Pockets Self Assessment Tool here.]
And at the time Glasspockets was founded, foundations were beginning to place greater emphasis on evaluation of grantee performance. When Glasspockets started, the focus for most sector conversations about transparency seemed to be about grantees but not about foundations. GlassPockets combined donor education, peer pressure, and incentives to make it more of a priority.
Q: What was the most common reason foundations gave you explaining their reluctance to be part of Glasspockets, or to be more transparent in general?
Janet: They were usually afraid that if they were more visible -- say, having a website -- they would be inundated by grant proposals. We were able to identify funder case studies that where having clear priorities and processes on their websites, the result was proposals that were good fits.
Q: Under the Trump Administration, many nonprofits have become worried about how transparent they are. We hear fears about language that could flag them as targets for the government or that foundations would be nervous about funding something that could make them a target. For example, I know one nonprofit that has the word "ethnic" in its name. They are thinking of changing that to "American" so as not to create a barrier for some funders.
Janet: Transparency is certainly changing! But it’s important to remember that there are risks to both transparency and opacity, and the risks of opacity are often overlooked. That’s why I’m glad you asked me to reflect on Glasspockets at this particular time because it’s a good reminder that during a period of crisis, when foundations found themselves spending most of the 1950's testifying before Congress, they learned the hard way that if you don’t tell your story, then others will tell it for you.
New option to suppress data
Q: What concrete steps is Candid taking on transparency/opacity in this new period?
If [foundations] are not willing to tell what they do to serve the public good, then as far as I am concerned, they ought to be closed down….The Foundation should have glass pockets.” — Russell Leffingwell, Chair, Carnegie Foundation, 1952Janet: We recognize that nonprofits need the space to evaluate risks regarding public-facing data. So, we have worked quickly over the past weeks to give nonprofits the option to suppress contributed data that might pose risks to their organizations or individual staff. New at Candid is that nonprofits can now suppress data that they are no longer comfortable sharing.
For example, if there are concerns due to language in their mission statements or program activities, they can suppress their contributed data without permanently deleting it. While the data is suppressed, it will not appear in Candid’s products or be shared with any third parties. Once they’re ready to do so, nonprofits can request that Candid restore suppressed information to their profile. Even when data is suppressed, it still exists in Candid’s data systems. During that time, data points may still be used anonymously for aggregate research and statistics about the sector to shed light on key trends and provide context to our collective work. (Editor's note: Forms 990 are still accessible through Candid.)
Q: Yes, transparency seems to be becoming weaponized.
Foundations do need to be thoughtful as well and there are some best practices to keep in mind in terms of grantee data. For example, often the list of published grants comes directly from their grants management system. You need to let your grantees know what will appear about their grant and give them the option not to make it public. They can easily add an opt-in in the grant agreement or award letter that says, "Here's where we typically share this data. If you would prefer not to have this information published, please let us know." (This blog post from Candid shares best practices in using grantee data responsibly.)
Q: How much of a difference would foundation transparency make, in the big picture? Suppose 75% of foundations had joined Glasspockets. What would be different today?
Janet: Endowed foundations have the power to be insular. They don’t need to do marketing to sell anything to contribute to their bottom line, they don’t need to campaign to get votes to stay in office, and they don’t need to fundraise to support their work. As a result, most don’t prioritize the kind of transparency that is a basic fact of life in most other industries.
So, if suddenly 75% of foundations had websites that they were actively working to improve, this kind of transparency would represent a big culture shift to give up some of the power of insularity. And remember that the culture of philanthropy moves slowly, so we need multiple approaches to improve sight lines in the field.
To this end, later this year Candid will be launching an improved search function, for the first time combining foundation grantmaking and nonprofit operations data to provide a full view of the work of the charitable sector.
Transparency and the Philanthropy Project?
Q: As you know, the Philanthropy Project is concerned with lack of transparency in foundations, in donor advised funds, in the business models behind donor advised funds, and more. Do you see an alignment there with the ideals of Glasspockets?
Janet: Yes, we believe transparency benefits all kinds of donors, and once donors understand those benefits, they are more likely to embrace an open approach.
Like endowed foundations, donor-advised funds are another giving vehicle available to donors and represent a fast-growing part of the field, but they don’t have the same disclosure requirements as private foundations. And, as we know, some donors believe it’s helpful to make anonymous gifts, and again, may not pause to consider the pitfalls of this approach.
We found that donor education is important to motivate donors with the benefits to them of working more openly. By understanding the connection between transparency and trust-based approaches, some donor-advised funds used Glasspockets to assess and improve their transparency, establish and improve their websites, and be public about their giving and strategies. Today, we are also working to profile more types of giving vehicles in our database, so they can be discoverable to grantseekers.
Q: Thank you, Janet! We look forward to seeing where transparency in philanthropy goes from here.
Janet Camarena
Janet Camarena serves as director of partnerships for Candid where she works to lead campaigns and coalitions aimed at shaping norms and practices related to the most pressing issues in our sector, such as transparency, equity, and impact. She previously served as the director of transparency initiatives for Foundation Center, and provided leadership for Glasspockets.org, which she helped to found and build in 2010.
Nonprofit voices are crucial to the dialog about philanthropic reform. Thank you Victoria Williams – a real life fundraiser! – for sharing your perspective:
Data shows that donor-advised funds (DAFs) have exploded in popularity, and, as a fundraiser for New York City-based nonprofits, I've felt that first-hand over the past decade. At first, this news sounds positive because more money to DAFs means more money to charitable causes, but that’s not been my experience.
Most DAF donations I’ve processed are from donors who already knew my organization. From what I could tell, having a DAF did not signal that they were more generous or thoughtful in their giving than a donor who did not.
Tax years and human nature
What I do know though, is that these donors, like most major donors, are taking into consideration what tax year their gift will be made in. After all, if a specific tax year isn’t an incentive, there’s little reason to go through the extra steps of creating and funding a DAF instead of simply using a credit card to make an online gift the moment you feel compelled to give. The tax benefit drives a sense of urgency for most donors to make a gift now (instead of delaying it indefinitely).
If DAFs become even more widespread among everyday donors, I’m concerned the urgency to give to a nonprofit in a certain year to receive a tax benefit will essentially disappear. Without that urgency, I see donations going down from individual donors to operating nonprofits like the children and youth organizations I’ve fundraised for. Not because DAF donors don’t want to be generous or are bad actors, it’s simply human nature to let the funds linger if you get busy or are undecided about what donation to make
And from the DAF sponsors' perspective, having funds sit there a little longer benefits them. That money can be invested, and they get a fee for doing so — typically a percentage of the assets under management. It’s a perfect setup for everyone. . . except operating nonprofits and the people and causes they serve. Without a mandatory pay-out rate or sunset date for DAFs, charitable assets are getting stuck for an indeterminate amount of time before ever making a positive impact.
Being on the inside of nonprofits with a range of mission areas from supporting youth in foster care to small businesses, I know first-hand that securing reliable funding is a continual challenge that’s only getting worse with the reduction of federal funding. It’s very frustrating as a fundraiser to know there are hundreds of billions of dollars in DAFs waiting to be directed to charitable causes. Those funds are not helping communities until they’re disbursed.
So what can we do about it? Lots!
I agree with the four public policy areas that the Philanthropy Project is focusing on. But I want to add a fifth one: I see an issue with financial institutions hosting DAFs through associated nonprofits. Logically, it sets a clear incentive for them to grow and maintain funds held in their coffers. To further emphasize this point, I saw a job posting recently from a bank-associated DAF for essentially a major gifts officer focused on new high-capacity donors. They didn’t have their own grantmaking fund to raise money for, they simply wanted more funds to manage in their DAFs because, clearly, it’s a revenue stream for the bank.
Until DAFs provide meaningful charitable advising that connects clients with organizations and, very importantly, incentives for actually distributing funds, the uptick in DAFs is akin to taking funding away from operating nonprofits that are urgently in need of resources today.
Ideally, DAFs bring more funding into the nonprofit sector but that’s only meaningful if the money actually goes to operating nonprofits in a timely manner. Funds sitting in a DAF account connected to a big bank and creating revenue for these banks isn’t cutting it. This chokehold on funding is hurting authentic, operating nonprofits – and thereby the people we serve – and we need change.
—
Victoria Shadle Williams is a career nonprofit fundraiser and has served as the chief fundraiser at two NYC-based nonprofits with budgets of approximately $4M. Her varied professional experience has included being a development associate at an arts nonprofit with a $3M budget and a development officer at a $100M+ education and social services nonprofit. In addition to her practical experience in the field, Victoria earned her Master’s in Nonprofit Management from Columbia University and has returned as an associate instructor since 2020. She was a founding board member of a grassroots nonprofit, NACHMO, and is currently the nonprofit liaison for Lancaster County Women for Good (a local giving circle) and an active Association of Fundraising Professionals member.
Alan Cantor is a quintessential muckraker -- a species we need more of. Here he brings a deeply personal take on Elon Musk and his relationship with the nonprofit/philanthropic sector.
Elon Musk, now seemingly everywhere as the head of DOGE, has shown no hesitancy in dramatically cutting federal agencies and programs. What can we expect from him in terms of nonprofits and the people and causes they serve?
A look at his track record with philanthropy gives us thunderous evidence.
In a nutshell, as with Musk's approach to business, social media, and now politics, his treatment of charitable giving has been self-serving and disrespectful of the norms and the rules.
Musk’s charitable misdoings were brought to national attention in a March 2024 New York Times story by Pulitzer Prize-winning journalist David Fahrenthold and his colleague Ryan Mac. For those of us who have been writing and speaking about how some of the wealthiest Americans take unconscionable advantage of e charitable tax laws, it’s instructive when the single wealthiest person of all shows just how off the rails high-end philanthropy has become.
I admire so many philanthropists. I’ve written about MacKenzie Scott’s trusting approach to giving. and Ruth Gottesman’s billion-dollar gift to the Albert Einstein College of Medicine, which will make the school tuition-free for all students going forward. There is nothing admirable about Musk’s approach to philanthropy.
Allow me to sort Musk’s tactics as described in the Times article and add one more.
1. The Tax Benefits
According to Fahrenthold and Mac, since 2020 Musk has donated around $7 billion of stock to the Musk Foundation, in the process saving himself some $2 billion in tax payments. Two billion dollars is a lot of money not going to the common good through taxation.
2. The Self-Interest
Musk’s “philanthropy” in large part has gone to enterprises that technically qualify as charitable, but that also support his own business interests and even his family’s welfare.
One major beneficiary is Ad Astra, a nonprofit school founded by Elon Musk, a school his own children attend – along with the children of his top executives at SpaceX. As the Times story explained, “In its first year of operation out of [Musk’s] home in the Bel-Air neighborhood of Los Angeles, five of Ad Astra’s 14 students were his own children.”
Ad Astra continues to receive funding from the Musk Foundation, and it’s relocated to the campus of SpaceX in Texas and is situated behind security gates. Technically a public charity, it’s not available in any real way to the public.
The Musk Foundation granted $5 million to a United Nations program called Giga that helps rural nations connect to the internet, two of which (Rwanda and Kazakhstan) ended up as customers of the Starlink satellite service. Starlink is a subsidiary of SpaceX, owned and controlled by Elon Musk.
3. The Self-Aggrandizement
An interesting Musk moment occurred when he responded to a young activist in Flint, Michigan, by tweeting, “Please consider this a commitment that I will fund fixing the water in any house in Flint that has water contamination above FDA levels. No kidding.”
That would have been wonderful – but instead of responding to the city’s subsequent proposal for funding for new water infrastructure and wide-scale pipe replacements in homes, the Musk Foundation donated $1 million to Flint schools for water filters and laptops. A million dollars is not nothing, but it’s also not close to what he promised. I need to add that Musk sent a Tesla executive to Flint to give rides around the city hall parking lot in a self-driving car, so there’s that.
In short, Musk made a grand gesture winning him praise and attention . . . but didn't follow through on his promise.
4. The Underpayment
The federal government requires private foundations like the Musk Foundation to direct 5% of their assets each year to charitable purposes. The rules are loose around what counts as the 5%: Foundations can include many administrative costs, including salaries of staff, even those who are related to the founder/donor. All of which is to say that it’s not hard to meet this minimum distribution of 5%.
But in recent years the Musk Foundation has failed to hit that target. In 2021 the Musk Foundation fell $41 million short. It was even worse in 2022: The foundation missed the mark by $193 million, giving away only 2.25% of its $7 billion in assets. And, according to a December 12, 2024 New York Times piece by Farenthold and Teddy Schleifer, the Musk Foundation’s shortfall in charitable distributions in 2023 was no less than $421 million. Not exactly a minor accounting error.
5. The Lack of Accountability
The consequences for Musk’s disregard of the regulations are negligible, at least in terms of what matters to Musk.
When a foundation under-distributes to charity, the IRS can assess a penalty equal to 30% of the shortfall. If the feds indeed assess this fee, it is the Musk Foundation that would owe the money, not Elon Musk himself. Given that he clearly doesn’t care about charity, and given that this penalty would only mean that his foundation would have a bit less to distribute in the future, I’m guessing that the penalty wouldn’t bother Musk in the slightest.
Now, if, on the other hand, the IRS were to say, “Clearly, this guy is taking us for a ride. Let’s claw back that $2 billion tax deduction from when he contributed stock to the foundation!” – well then, Musk might take notice. But that’s not the way it works, and Musk knows that. His tax break, essentially, is forever, especially for a guy with the money, power, and reach of Elon Musk. So why should he break a sweat to distribute grants?
6. The Lack of Transparency
The Musk Foundation provides no contact information. In fact, it has no website, unless you consider this a website. Somehow, I think that one of the leading technologists in the world would have the wherewithal to put up a website. Unless he doesn’t give a damn. Which leads me to…
7. The Disregard
Musk’s attitude reminds me of the Donald J. Trump Foundation, which was shut down by the State of New York in 2019. (Yes, this was many, many Trump scandals, lawsuits, and criminal cases ago.) The court found that Trump had used his foundation as a personal checkbook for causes that feathered his own nest, paid for his personal obligations, or furthered his public image.
Essentially, Musk – like Trump – thinks the rules don’t apply to him. Whatever he does (or doesn't do) with his foundation, he maintains power and control. The potential grants from his foundation give him power. People cozy up to him in the hope that some money will eventually flow their way, if they only play their cards right.
Musk isn't stupid. This all works for him.
8. The Redirect -- donor-advised funds
The Times article fails to mention a long-time tactic of Musk’s: Instead of making outright gifts to charity, the Musk Foundation dumps money into donor-advised funds that Musk controls. This is an old story: Back in 2016, three-quarters of the Musk Foundation’s grants went to a donor-advised fund at Vanguard Charitable. That was back when Musk bothered to care about meeting the 5% distribution requirement described above. (Grants to donor-advised funds count toward the required charitable distribution, because DAFs are sponsored by public charities. I know. These grants shouldn’t count. But they do.)
Apparently, Musk still likes the tactic, because according to the Musk Foundation’s 990 return, in 2022 over $36 million went to a donor-advised fund at Fidelity Charitable.
This is a way for Musk to look as though he’s giving money away, while he’s really only shifting funds from the Musk Foundation into another charitable pocket he controls. It’s also a way to avoid transparency, because any grants that come out of Musk’s Fidelity donor-advised fund (if, in fact, any grants do come out from it) are not attributed to him or his fund.
Why Does This Matter?
We can look at Elon Musk’s charitable record and say to ourselves, “Well, isn’t he a jerk?!” And we’d be right. But the problem goes way beyond one rich guy flouting the rules.
Congress introduced the charitable income tax deduction in 1917 to encourage wealthy individuals to give to charitable causes. The United States had established the income tax a few years before, and the government did not want the nation’s leading philanthropists, facing this new tax, to fold their tents and let critical charitable services wither. The solution was the charitable deduction. Essentially, Uncle Sam said: I’ll tax you less the more you give to charity.
That arrangement – whereby the government gave up tax-generated income when the taxpayers gave to charities of their choice – has long been ripe for abuse. But we’re now facing a perfect storm of factors driving charitable misdealing into hyperdrive.
An increasingly activist, conservative Congress has consistently underfunded the IRS, the agency that both regulates charities and enforces tax compliance, and has bullied the IRS into ignoring rogue charities – particularly if the entity in question is controlled by the world’s richest man, who also happens to be the president’s consigliere;
Given Musk’s outsized role in the Trump Administration, he is helping set the tone for government’s approach to the nonprofit sector for the next four years.
Big philanthropy has long catered at least as much to the desires of the wealthy as to the needs of society, and people are taking notice. And I fear that, without real change, Elon Musk won’t be the outlier among philanthropists, but the role model.
Alan Cantor is principal of Alan Cantor Consulting LLC, a firm that helps nonprofit organizations in development, governance, and strategy. He lives in New Hampshire and is a member of the Working Group of The Philanthropy Project.
Schwab Charitable is one of the big three Wall Street investment firms that have donor-advised fund arms (along with Fidelity and Vanguard) – now with 90,000 accounts/DAFs and more than $26 billion in stored assets. Something to wonder about: why change their well established signature Schwab identity to DAFgiving360? Perhaps they believe that "DAF" is now the marketing power word and brand of the future; perhaps they've also been influenced by the cool influencer names of new DAF sponsors from the fintech world, including Daffy, Classy, DAFDay and DAFPay? The Charles Schwab Investing Community channel at Reddit has not warmed to the name, feeling the new name sounds "small" and “introduces a real risk of undermining initial donor consideration and donor confidence.”
"Trump and Musk Created a Crisis — Donor-Advised Funds Must Act”
“Billions in charitable donations sit idle as women and children suffer the consequences"
Another sign of increasing prominence and hopes/expectations for resources held by DAFs appeared in a February opinion piece by Amy Marks Dornbusch, posted at Katie Couric Media.
Dornbusch is a trustee of the Marks Family Foundations, and argues that the urgent moment for action has arrived for people sitting on hundreds of millions of dollars in these funds, while “ the financial institutions who host these funds are incentivized to keep the assets on their balance sheet.”
What would Trump do with university endowment funds?
Conservatives have frequently criticized universities for being "woke," but the Stanford Times recently reminded us of the Trump promise to create an "American Academy" using monies from endowments. His campaign pledged to “take the billions and billions of dollars that we will collect by taxing, fining, and suing excessively large private university endowments” to create the American Academy."
University endowments are an area of concern in the arena of philanthropic reform. Although the median university endowment is the millions, some are much larger:
Harvard: $52 billion
Yale: $41 billion
Stanford: $38 billion
Like private foundations and donor-advised funds, university endowments can be important and positive ways of supporting higher education and other causes. But they can also become repositories where tax-advantaged dollars flourish in accounts while universities raise tuition, cut jobs, and reduce research.
As for what the American Academy will do?
Its mission will be to make a truly world-class education available to every American, free of charge, and do it without adding a single dime to the federal debt. This institution will gather an entire universe of the highest quality educational content, covering the full spectrum of human knowledge and skills, and make that material available to every American citizen online for free.
An obscure American sub-genre is that of products that proclaim to be useful in a certain way, but nobody – I mean nobody – uses it for that. Example: Q-tips. Their ads show women gently stroking their cheeks with Q-tips, but everyone buys them to clean out their ears. But Q-tips can’t say that.
Another example is vibrators – according to ads, used to relax arm and back muscles. At least that’s how I use mine! Sexual use goes unmentioned by either the seller or the buyer.
These are wink-wink products. The ads wink at the buyers, who wink knowingly back. The unspoken business driver hides behind a wink.
What are the wink-winks in the nonprofit community?
The most obvious: donor-advised funds (DAFs). Advertised and promoted as a way for people to make donations to nonprofits conveniently and “strategically,” but behind the wink is their real purpose, performing as a tax avoidance mechanism.
On paper, the person gives the money to a financial institution such as a Wall Street investment firm or a community foundation, which then assumes legal control of the funds – immediately making the transfer a tax-deductible contribution. Technically the donor – now a donor-advised fund account holder – “recommends grants from the DAF sponsor to chosen nonprofits.” But the business model relies on a wink – the investment firm will follow the account holder’s instructions. Only in a rare set of circumstances (when the recipient is not an eligible tax-exempt organization) does the sponsor exercise real control and decline the disbursement.
In fact, donor-advised funds are increasingly discussed – and used – just like any other financial asset. Individuals feel that they have a house, a checking account, an investment account and a DAF in their overall portfolio. They are encouraged to leave their DAF to their children – technically naming the children as "successor advisors," but in reality deeding control as part of their generational wealth game plan. Wink wink.
For wealthy individuals, donor-advised funds come up first as a tax strategy. A former development officer for a large community foundation told me that in every single instance, they were approached first by a wealth advisor exploring tax benefits, who would then raise the idea with their clients.
A nice side benefit: with large donor-advised fund accounts, the individuals' wealth advisor or wealth manager can continue to "recommend" the buying and selling of investments. The wink? The DAF sponsor is the legal wealth manager, but they accept the direction of the donor's wealth manager, who often continues to earn fees based on the asset size of the DAF.
The business incentive for DAF sponsors and wealth advisors is to keep DAF monies in the DAF. "We're a smart way to give" is the pitch. Wink wink.
There are other wink wink nonprofit endeavors, including Type III Supporting Organizations, neutral voter registration, non-cash donations, and others. Some wink wink efforts slide right into fraud. As with DAFs, there are honest people doing honest things with wink winks, but the business model relies on a very big wink.
2024 update of Gilded Giving (GG 2024), 44 pages, entitled Saving Philanthropy from Wall Street, observes: "the transfer of wealth out of private hands, ostensibly to non-profit organizations working for public benefit, is being captured by Wall Street’s wealth defense industry."
This report, the fourth installment in the Institute for Policy Studies Gilded Giving series since 2016, highlights the way wealth management firms have tightened their hold on funds that have received charitable deductions—a grip which is seemingly permanent. That is because wealth managers are using a range of techniques, cultivating beliefs and attitudes, and continually developing technical systems—all of which are designed to retain philanthropic wealth within their purview as ongoing "assets under management" (AUM).
Further, GG 2024 demonstrates how ultra-high net worth individuals access cash from their pools of wealth tax-free by borrowing to avoid earning taxable income, noting that "their philanthropic practices mirror their tactics to accrue, preserve, and defend their wealth." By including philanthropy management in their array of services, wealth managers can earn fees, increase clients' holdings of charitable funds, and generate tax benefits for those clients, notwithstanding the fact that these funds have been deducted from the donor's taxable wealth via tax deductions.
The developments spotlighted in GG 2024 illustrate the blurring of the line between charity and investment. Indeed, donors, with the help of professionals, are pioneering the use of financialized instruments such as LLCs, impact investing and recoverable grants. These techniques preserve the charitable funds under their control. The statistics are staggering. For example, the number of wealthy donors engaging in impact investing doubled over the past three years and 40 percent were using impact investing in place of some or all of their charitable giving.
There are additional, abundant efforts afoot to generate fees and otherwise profit from the charitable tax-exempt funds donors are holding. GG 2024 points out that these choices have made our working charities "fragile, over-dependent on fewer donors, and vulnerable to profit-seeking from emerging technology and investment trends. This is dangerous for our society and for nonprofits, who increasingly must accommodate the priorities and behaviors of wealthy donors."
GG 2024's key findings include:
The share of giving to intermediaries keeps expanding. In fact, donor-advised funds (DAFs) and foundations together receive 35 percent of all individual giving in the US; by 2028, they will take half of all individual giving. Moreover, every year, an additional two cents of each dollar donated by individuals is channeled into intermediaries.
Tech and finance companies are seeking opportunities to profit from charitable giving, reducing the amount that reaches working charities. More tech companies promote DAF-related platforms, apps and other means to ensure that charitable funds remain AUM.
Four DAF sponsors closely linked to the tech sector grew by 237 percent between 2020 and 2022.
The financial industry is taking an array of measures to help lessen the distinction between investment and philanthropy, encouraging a "seamless continuum" between the two. Recoverable grants are becoming more popular and DAFs are being promoted as part of the donor's estate planning.
18 percent of the 107,000 private foundations that filed annual tax returns electronically in 2022 paid compensation to at least one trustee that was a bank, a trust company, or a wealth management company.
One way of ensuring that these developments continue to grow robustly without challenge or question is to prevent the enactment of common-sense reforms to the regulation of philanthropic activities. And defenders of the current weak regulatory structure are doing just that—lobbying against any change, no matter how sensible or necessary, that would protect the integrity of the U.S. system of tax-exempt charitable giving.
GG 2024 concludes, "[O]ur system effectively classifies pools of capital under management as charities — which both increases inequality and shortchanges groups on the ground doing actual charity work. When Congress formed the laws that govern our charities over 50 years ago, they didn’t intend for things to look this way."
Gilded Giving harkens back to the inequality, business dominance and conspicuous consumption of the 1870’s (with a tip of the hat to Mark Twain’s 1873 novel The Gilded Age: A Tale of Today, which itself lent its name to that earlier era).
It depends. Experimental formula spotlights foundation costs and the funds that remain for grantmaking.
There is no single number for how much it should cost a foundation to decide and send grant funds to support public benefit activities, but whatever the number is, it is consequential since these expenses directly reduce the funds that remain.
There are many necessary expenses for a private foundation, including:
Investment fees
Research
Staff time and often trustee compensation
Facilities and other overhead expenses
Other factors driving costs up include:
Making smaller grants
Covering a wide geography
There can be perfectly ordinary and necessary reasons for a private foundation’s non-grant expenditures, including investment fees, research, conducting site visits, facilities, website, executive compensation, accounting, etc. Other factors of higher costs can include making smaller grants, covering a wide geography, funding individuals, etc. Foundations are sometimes seen as peculiar institutions, escaping budget discipline by dint of their generally reliable income, but they also have to make spending decisions every day.
To shine a light on the spending variations among foundations, we picked 10 foundations of different sizes from around the U.S., using a simple formula of three lines from the IRS Form 990PF:
Total Expenses (line 26a)
Contributions, gifts, and grants paid (line 25a)
Taxes (line 18a)
The table shown below calculates the cost of making a $10K grant as equaling line 26 less lines 25 and 18 ÷ (grants/10,000), and shows grants as a percentage of non-tax expenditures.
Ten examples:
The result is a huge range for the cost of making a $10,000 grant, from $172 to $8,000. How do we explain this?
Like all nonprofits, each foundation has a unique story to tell about how they serve the public, and how their finances support their mission.
The Philanthropy Project is committed to following the money, making the case that, as much as possible, charitable funds should be used to benefit the public. We are watching the net funds available — and yes, while efficiency isn't the only thing — it is a thing we care about, and benefits from transparency, accountability, and budget discipline.
Does this chart use the right 990PF numbers to tell this story, or is there another approach that would work better? We’d like to hear what you think!
Tania Ibañez recently retired from the California Attorney General’s office where she served as the Senior Assistant Attorney General of the Charitable Trust Division. In short, she was the top state official on nonprofits and foundations.
During her tenure, Tania’s office worked on landmark registration regulating fundraising platforms such as PayPal and GoFundMe. Her office was called upon to comment on bills addressing donor-advised fund transparency, conversion of nonprofit universities to for-profit status, how non-cash donations (such as pharmaceuticals) are valued on Form 990, and many other high-impact, urgent issues related to nonprofits, philanthropy and endowments.
Now that she’s presumably sitting under beach umbrellas sipping colorful beverages (not!), we took the opportunity to chat with her. In addition to the information, we hope you gain an appreciation for Tania’s toughness and straightforwardness. This interview includes information she presented in a webinar held by the California Association of Nonprofits (CalNonprofits), and has been lightly edited for length and clarity.
Q: Your office conducted a “mandatory” study of large donor-advised fund sponsors – to my knowledge the only such data collection ever done by a government agency. What kinds of DAF sponsors were required to return the survey?
We identified 74 sponsors of two types for the project:
California-based DAF sponsors with over $10 million in assets
National DAF sponsors with over $200 million in assets and registered as doing business in California
We asked for information per year for three years.
Q: What types of DAF sponsors did you find?
Of our sample, 51% were community foundations, 30% were “mission-based,” and 19% were commercial sponsors.
Q: Let me ask a little more about “mission-based,” which I think is similar to the “single purpose” term used by the National Philanthropic Trust in its research reports. I understand that many university DAF programs have requirements where, for instance, 30% of the DAF amount has to go to university programs, but the donor can send the other 70% anywhere. Yet these are still called “mission-based” and “single purpose”?
Well, yes, terminology is a problem!
Q: What surprised you the most in the survey findings?
Comparative payout rates. Community foundations had lower DAF payout rates than the commercial funds when most people expected the opposite.
Q: That is a big headline. What else?
I was disappointed that surveyed entities did not say they stepped up spending in response to COVID. When we asked, “What did you do about COVID?” we got answers like, “We let our employees work from home.” I was hoping to see more people encouraging their donors to be more generous – maybe give at least 20% per year.
Q: One area of concern is how much money going into donor-advised funds is not “new contributions” but comes from transfers from private foundations and other DAFs. What did you learn in the survey about this?
These transfers are substantial. In the third year reported, the sponsors in the sample received $1.7 billion from private foundations. And California DAF sponsors had higher percentages from private foundations (8% of receipts) than national DAF sponsors (4%).
Q: Are DAFs being used to avoid private foundations’ mandatory expenditure requirements?
It certainly looks like it. There have been several high-profile public examples such as transfers from Larry Page’s private foundation and Elon Musk’s foundation.
Q: The proposed ACE Act in Congress last year would have meant that private foundation transfers to DAFs would not count towards the 5% payout requirement unless the funds come out of the DAF by the end of the year following the contribution. What is your reaction to that idea?
Sounds good to me!
Q: You mentioned that community foundation DAFs had lower payout rates than commercial ones. Can you say more about that?
Well, first, grant ratios were all over the map. Most of the sponsors fell easily into two categories: they either gave less than 5% or gave out more than 50%. Three things we found:
Mission-based sponsors almost entirely had grant ratios of more than 50%.
Commercial sponsors were in the “less than 5%” and “more than 50%” categories about evenly split.
Community foundations had a greater share of grant ratios less than 5% than greater than 50%.
Q: Where can I find the findings that you published from the survey?
Q: At recent conferences of state attorney generals and charity officials there has been a lot of talk about the role of state officials (compared to federal) in philanthropic regulation. States can’t change the IRS Tax Code. So what can state officials do?
States need to start asking different questions. How does philanthropy and charitable deductions impact the state budget? How much taxes are not being paid due to the charitable deduction on funds not in active use? How much in charitable funds are just parked and not benefiting the residents of the state? Clarity: what is their rate of distribution?
Can AGs do more to find out if transfers to DAFs from foundations are complying with donor restrictions? For example, if a donor gives money to a foundation specifying it go to scholarships, and the foundation transfers funds to a DAF, how can the AG find out if that DAF then gave out that money in scholarships?
State officials can require responses to requests for detailed information. How can people write off donations but the donation isn’t really supporting any charity?
Part of me thinks we don't want to discourage donations. But is there a comparable benefit to the public If you're not actually giving it to a charity that's on the ground?
Q: So why isn’t more being done about this?
Well, lots of people are making money from this situation and no one wants to anger the big commercial funds like Fidelity or Schwab. The people that run those institutions are also big donors to political candidates of both parties.
The AG in any state — IF he's interested — could easily go through the regulatory process and develop a form that would ask these questions. Have to go through a public comment period. Don't need a legislative change. A lot of AGs feel that charities are already under enough scrutiny and legislation. Think tanks and foundations like to wine and dine elected officials, invite them to their events. That's the reality. Nobody wants to make things more difficult for charities.
Charities that get money from DAFs are often good friends with the DAF sponsors . Elon Musk and other people want to conceal who they support. At the end of the day it's what are the tax benefits worth? How much in taxes does the individual save, and how much did the USA benefit from those tax savings?
The Pension Protection Act of 2006 (P.L. 109-280) bans donor-advised funds from making grants to designated individuals. That was low-hanging fruit. How many times does the IRS audit who a foundation gave a scholarship to?
Q What about endowed DAFs which are being increasingly promoted by DAF sponsors?
Hasn't hit my radar screen. Right now at least nothing is stopping you from giving out more.
Q: What are your thoughts about institutions now providing both DAFs and fiscal sponsorship?
Terrible. You're opening the can of self-dealing.That's going to blow up one of these days.
Q: What advice do you have for us on DAF reform?
You need to see if there's an appetite for it in the Attorney General's office or the Franchise Tax Board.
What is 2.9% of $250 billion? The pro forma dream of the DAF-adjacent industry
Over the last 10 years, the eye-popping 450% growth of donor-advised account assets has drawn close attention from every corner of the nonprofit and philanthropic sectors.
This interest group now includes a booming list of intermediaries, wealth advisors, fundraising platforms and ambitious DAF sponsoring entities locating themselves somewhere between the DAF donation and the account’s eventual charitable destination. As you will see below, each firm is aiming for a slice of the action, such as DAFpay’s 2.9%, though obviously none of these are the intended beneficiaries of charitable dollars.
Among nonprofit fundraisers, the unapproachability and opacity of the $250 billion held in DAF accounts is well known. That inaccessibility is motivating a fertile market of frustrated (and sometimes desperate) development directors to forgo a portion of contributed funds to receive DAF funds – which they believe their organization otherwise could not access. Even highly visible, respected charities are convinced that these channels will somehow increase their competitiveness, attracting an impressive list of sign-ups. Read more
Alan Cantor is principal of Alan Cantor Consulting LLC, a firm that helps nonprofit organizations in development, governance, and strategy. He lives in New Hampshire and is a member of the Working Group of The Philanthropy Project. 
