FAQs Relevant to Philanthropic Reform

1.  Why are public policies governing philanthropy important now?

Hundreds of billion dollars in U.S. charitable giving is going through an extraordinary shift, with an increasing percentage of donations going to intermediaries, especially private foundations and donor-advised funds. Instead of individual donations going directly to active organizations, serving as immediate support delivering current social and cultural benefits, an increasing percentage of these funds are held in repositories with limited or no requirements to put them into public use. Relevant laws have not kept up to date with changes in financial structures, business practices and interpretations of tax law.

 

2.  What are examples of public policy changes that have made a difference to U.S. philanthropy?

Good question! Certainly, the signal elemental structural reform was the 1969 Tax Reform Act, which for the first time set out a distinction between private foundations and public charities, with separate IRS requirements, restrictions and reporting for each type of organization. Leading to the Act was Congressional concern in the 1960’s that private foundations had the potential to be a hidden force influencing the direction of the country – out of public sight, with risks to from elections to public policy to self-serving investments and family benefits.

Coming out of the 1969 Act were a series of transparency practices including annual IRS reporting requirements, particularly IRS forms 990 (for public charities ) and 990 PF (for private foundations), and a new payout requirement and excise tax for private foundations.

U.S. Supreme Court decisions have also served as a key contributor to defining how public policy affects charitable organizations and their search for revenue. Two central examples would be Schaumburg  and the Citizens United, which applied First Amendment principles to release nonprofits from legislated restrictions on their fundraising.

 

3.  What is the “5% payout” rule for private foundations? Do donor-advised funds (DAFs) have to abide by that rule, too?

The 5% payout is an annual distribution requirement for private foundations under the Internal Revenue Code. Congress adopted this requirement in 1969 so that a regular portion of private foundation assets would be distributed for charitable purposes, including

• Establishing rules for calculating the 5% of assets
• Which expenditures quality as payout
• Fines and penalties for non-compliance

What would surprise me about payout?

Although the term “payout” implies that 5% of assets means grants to nonprofits, foundations can count, many of their own expenses as “payout,” including:

• Foundation employee salaries
• Compensation to board members and trustees
• Foundation travel expenses
• Foundation rental of facilities
• Investment fees

Note: Individual DAF accounts are not required to meet the 5% (or any) payout requirement.

 

4.  What is a donor-advised fund?

A donor-advised fund, or DAF, is a designated charitable account held by a DAF sponsoring organization, in which the donor transfers funds to a sponsoring organization (such as Fidelity Charitable or a community foundation) and is allowed to provide advice to the sponsor as to the later distribution of the charitable funds to other charitable organizations. The DAF sponsor retains legal control over the funds, though in practice they generally defer to the wishes of the donor with “advisory privileges.” The handling of these tax-exempt charitable funds is governed by the Internal Revenue Code, and DAF sponsoring organizations are required to report the number of DAF accounts and their value on their annual IRS form 990, Schedule D.

Today, donor-advised funds have become the chief recipients of charitable donations. According to the National Philanthropic Trust, there are nearly 2 million donor-advised fund accounts holding a combined $251 billion. Fidelity Charitable – the DAF sponsor affiliated with Fidelity Investments – currently receives more tax-deductive charitable donations than any other nonprofit.

 

5.  Why do people give their money to a DAF instead of directly to a working nonprofit?

Different people have different reasons for doing so. Originally, DAFs were often created after an individual had a financial windfall – perhaps an inheritance, sale of a business, or an especially high earnings year. Such a person could want to get as many tax deductions as possible that year – including charitable deductions. But they might not want to use this entire amount for donations that year, putting some off for future years. A DAF allows a person to get 100% of the tax deduction in the year the funds are put into the DAF, while being subject to no requirement or incentive to move the funds by a particular date to an active nonprofit.

That seems like a good idea!

Yes, and it remains a good idea for people acting in good faith, especially at modest scales. For example, suppose I give $1,000 each year to my church. This year I inherited $3 million. To get a bigger deduction this year (with my income higher than usual), rather than make a larger gift to my church this year, I could place $10,000 into a DAF and get a full deduction for that, and then every year for ten years give the $1,000 to the church.

The hitch?

First, there are often inadvertent or intentional delays and prolonged storage of funds held in DAFs. With a direct donation, the nonprofit gets the funds the same year that the donor gets a tax deduction. But when the donation goes into a DAF, the money can sit for decades without benefit to the public. We believe the timing of the tax deduction needs to be aligned with the benefit to the public. With $229 BILLION in DAFs without any requirements for distribution to nonprofits, this delay is a significant disadvantage for the public benefit.

Second, the near complete lack of transparency of the sources and uses of DAFs makes it temptingly easy for wrongdoers to put money into DAFs, receive a full tax deduction, then use the funds for self-benefit, illegal electioneering, stock price manipulation, and money laundering.

 

6.  What institutions dominate the DAF field?

While any public charity can serve as a DAF sponsor, and hundreds do, over half of the $250 billion in US DAF assets in 2023 were held by four national/commercial organizations:

• Fidelity Charitable $56 billion
• Schwab Charitable $32 billion
• National Philanthropic Trust (NPT) $28 billion, and
• Vanguard Charitable $17 billion

The extraordinary success of Wall Street DAF sponsors derives from their ability to serve both customers’ private investments and charitable accounts, encouraging an overall portfolio approach and ease of handling. Community foundations represent an important 2nd tier of DAF sponsors, with the Silicon Valley Community Foundation ($10 billion) and Chicago Community Trust ($4.5 billion), being the two community foundations in the top 10 DAF sponsors by assets under management.

 

7.  Some of our donors give through their DAFs. Are you trying to abolish DAFs?

Glad to hear it – donors should be encouraged and thanked when they make contributions through their DAFs. No, we’re not trying to abolish DAFs; they can be a handy and efficient mechanism for charitable giving. However, we are very concerned about the inadvertent diversion and prolonged storage of tax-preferred funds before they have had any opportunity to deliver a public benefit. We believe tax deductions for DAF donors should occur when the funds reach your organization, not before.

 

8.  I heard about the ACE Act. What was that and what happened to it?

On June 9, 2021, Senators Angus King and Charles Grassley proposed legislation called the Accelerating Charitable Efforts Act (the “ACE Act”) to speed up the distribution of charitable dollars held in DAFs and private foundations to working charities, and end select practices seen as delaying or diverting public benefit uses of these funds.  Companion legislation was introduced in the House by Congresswoman Pingree (D-ME) and Congressman Reed (R-NY) in February 2022. The ACE Act did not receive a hearing or progress beyond bill introduction.

The ACE Act was drafted as a multi-part reform plan that involved substantial changes to Internal Revenue Code provisions governing charitable tax deductions, the administration of private foundations and the rules for Donor Advised Funds:

• The ACE Act would have created two types of DAFs, under which a donor would get different levels of tax benefits based on the number of years for the DAFs existence:
  • 15-year DAFs would be required to distribute their funds no later than 15 years from the year of the donation to the DAF, and would qualify for an immediate tax deduction for contributions to the DAF.
  • 50-Year DAFs would qualify a DAF donor to receive capital gains and estate tax benefits upon donation, but would not receive the income tax deduction until the donated funds are distributed to a charitable recipient
• The legislation also limited the expenditures that would qualify to meet the private foundation  5% payout requirement by:
  • Disallowing transfers to donor-advised funds from counting as payout, and
  • Disallowing salaries or travel expenses of a donor’s family members to count as payout
• Finally, the legislation sought to encourage increased charitable payouts from private foundations by:
  • • Eliminating the private foundation 1-2% excise tax in a given year if a private foundation paid out seven% in charitable grants and allocations
  • • Eliminating the private foundation excise tax permanently for any private foundation that, at its inception and throughout its life, had a duration of 25 years or less

The ACE Act was supported by a number of nonprofits including he Leukemia and Lymphoma Society, Rehabilitation Through the Arts, WorldReader, CalNonprofits, and the Minnesota Council of Nonprofits, but was the subject of intense opposition lobbying by large DAF sponsoring organizations, financial services and foundation industry associations.  The ACE Act was not reintroduced in 2023.

 

9.  Why haven’t these issues moved lately?

Another good question!  They say that success has a thousand parents, but when you don’t have success it is frequently an argument about why. We could point to multiple causes, including a Congress that is difficult to move, and organized lobby opposing change, or the fact that many of the issues we are raising are not well known, and nonprofits themselves don’t feel an urgency or maybe a connection to how these policy changes could improve their ability to serve their communities.  The ACE Act (described in the FAQs), was a creative initiative introduced into Congress in 2022 that broke new ground but all received limited support, and was the focus of active opposition from foundations and DAF sponsors.

There continue to be efforts for national legislation related to donor-advised funds, private foundations, and endowments, sometimes bringing together unlikely allies. The Philanthropy Project intends to keep nonprofits informed.

 

10.  What is happening at the level of individual states in oversight of philanthropy?

In most states the state Attorney General (AG) has oversight responsibility for charitable fundraising, charities registration, professional fundraisers and assets held in charitable trusts. In most cases the office of the AG designates specific staff numbers to oversee the charitable function, and maintain a registry of charities online. There is a wide variation in resources and attention that offices can devote to philanthropy oversight, with California and New York in the lead.

Given the climate in Washington, there may be more opportunity for state leadership in philanthropic reform.

11.  What is the role of wealth advisors and wealth managers in donor-advised funds?

Wealth advisors are individuals or firms contracted to provide services for a fee to people with personal investment or retirement accounts, to provide advice for making investment decisions. Wealth managers are typically authorized to manage such accounts directly. More recently, with the proliferation of DAF accounts, wealth advisors are also taking on the role of helping set up DAF accounts and providing advice about investments and perhaps charitable transfers from these funds. Most DAF sponsors allow large account holders to have their own wealth managers supervise the investments of the funds in the DAFs.

DAF sponsors and wealth managers have a strong financial interest in keeping the funds in accounts and not being disbursed to nonprofits.

 

12.  What are some useful sources of information on donor advised funds and their sponsors?

The National Philanthropic Trust (NPT) has been publishing in the annual report on the donor-advised fund industry since 2007. Their 2024 report covers DAF sponsor activity occurring in fiscal year 2023, covering 73 national charities, 723 community foundations and 344 “single issue” charities.

The Institute for Policy Studies recently released an insightful critique of the quality of these reports.

13.  What information is publicly available on individual DAF accounts and/or DAF sponsors?

Limited information is available about donor advised funds and the role of DAF sponsors.

DAF sponsors are public charities that are required to disclose on their IRS form 990, schedule D, the number of DAF accounts, the amount of funds at the beginning of the year and at the end of the year, and how much was granted out of these funds. (This requirement is prompted by the organization’s response to part IV, Checklist of Required Schedules, question six: Did the organization maintain any donor-advised funds or any similar funds or accounts for which donors have the right to provide advice on the distribution or investment of amounts in such funds or accounts? If “Yes,” complete Schedule D, Part I.

Schedule D start does not report the names of the funds, the names of the donors, the purposes of the funds, will or report a balance of individual funds. This reporting gives useful overview of the total amount of activity of the DAF sponsor, but is not useful to individual fundraisers seeking potential supporters for their community organizations.

DAF Sponsors do not publish the names of the DAF accounts they manage, and generally do not offer to make connections with DAF account donors.

Coming soon: more about private foundations and endowments