Don't Expand DAFs Without a Payout Requirement!
At a time when charitable giving doesn't look like a priority topic in Washington, there is nonetheless a bill in Congress that would expand giving to donor-advised funds (DAFs), possibly displacing giving that would otherwise go directly to nonprofits.
Foundations and donor-advised fund sponsors are supporting the bill. It is high time for the nonprofit wing of the nonprofit sector to speak up to prevent a further diversion of charitable funds to the financial services industry.
So what is the bill?
Representatives Adrian Smith (R-NE) and Jimmy Panetta (D-CA) introduced the IRA Charitable Rollover Facilitation and Enhancement Act HR 2891 and it now sits in the House Ways and Means Committee and the Senate Finance Committee – both important gatekeepers. So far 40 members of Congress have signed on.
Individuals aged 70.5 and older can choose to assign some of their Required Minimum Distribution (RMD) from their IRA to a charitable organization, rather than receiving it as taxable income. Notably, the law currently does not allow either private foundations or donor-advised funds to be considered qualified for such distributions (Qualified Charitable Distributions) The bill removes DAFs from the exclusion, and some people will choose to rollover their RMDs into DAFs rather than into operating nonprofits.
Congress has not issued an official cost estimate, but we estimate the tax expenditure (cost in taxes lost) to be $5 billion - $15 billion over the next ten years.
Taking sides
Expectedly, institutional philanthropy has come out in support through the Council on Foundations, the National Philanthropic Trust, United Philanthropy Forum, and Philanthropy California. Supporters of the bill see it as offering yet another vehicle to prospective donors . . . and why not?
Our concern is that giving to DAFs is giving to a holding pen, not to a nonprofit acting in its community and participating in the economy. QCDs are an efficient and direct pipeline of water from individual donors to nonprofits. This bill in effect enables the creation of storage reservoirs between the donor and the useful public benefit—a subsidized reservoir that is likely to get fuller and fuller while less and less gets to address current public needs.
The real danger
It's unlikely that this bill would get through Congress as a stand-alone. The more likely danger is that it would be folded into the next Big Tax Bill, thereby giving philanthropy and the wealthiest in our society a "charitable" reason to support what is likely to be a harmful bill at a time when the American middle and lower classes are already seeing a shrinking future.
Nonprofits such as the Independent Sector, the National Council of Nonprofits, the United Way and others have long positioned themselves as policy leaders for nonprofits. We encourage them to speak up for requiring charitable funds to actively benefit the public, not the financial services industry. This is the perfect time to advocate for this provision, but ONLY if it includes a payout requirement such as 15% per year, per account.
And in case you are looking for a slogan, how about this one: "Don't Expand DAFs Without Payout Requirements!"
See also:
The Philanthropy Project is Not Anti-DAF, and Here's Why
Who is Blocking Philanthropic Reform?
A Bipartisan Plan to Increase Foundation Payout Rate
A Bipartisan Plan to Increase Foundation Payout Rate
BY CRAIG KENNEDY
For many years, the centerpiece of philanthropic reform was increasing the "payout" rate from its current 5% of foundation assets. Reform efforts have shifted to more focus on what expenses can be counted as payout (see When does 5% not equal 5%?), and the stockpiling of philanthropic assets in donor-advised funds. When the former head of the Joyce Foundation and the German Marshall Fund (and one of the savviest guys we know) speaks on this topic, we listen.
Thank you to the Giving Review and Craig Kennedy for permission to reprint his article. (See a few additional notes at the end.)
Private foundations are making a lot of money. The assets of U.S. philanthropies currently stand at nearly $1.7 trillion—up 15 percent from 2023. Despite a substantial dip during the pandemic, grant makers’ average investment return from 2013 to 2023 was 7.1 percent, according to a new study by CommonFund and the Council on Foundations.
Many of the largest foundations are faring even better. The 990 tax data for 18 foundations with more than $2 billion in assets shows that almost all increased their inflation-adjusted assets during that same period. (See table of private foundations below.)
Given this bounty, I believe it’s time to stop simply talking about raising the foundation payout rate and start taking steps to actually do it. I propose increasing the rate from 5 percent to 6 or 7 percent — a modest change that would significantly expand giving to the nonprofit sector at a time when government dollars are being slashed.
Some foundations, including MacArthur, McKnight, Hewlett, Freedom Together, and others, have voluntarily upped their giving. But most have not. That’s why Congress should pass a law requiring them to do so.
Advocates on the left have long demanded a payout increase as well as other reforms, such as excluding foundation salaries and expenses from the payout calculation and mandating distribution requirements for donor-advised funds.
Opponents of a larger mandatory payout argue that the 5 percent rate allows foundations to do good while maintaining the inflation-adjusted value of their endowments for as long as they continue to operate. In truth, despite overall gains for the sector, the 990 tax data shows that over the past decade some foundations have struggled to maintain the real value of their assets after inflation, including the Knight, Ford, Mellon, and Packard foundations. Others have seen minimal growth in earnings. Kellogg even saw an earnings decline between 2013 and 2023 because its primary asset is stock in the struggling Kellogg company. (The Ford Foundation is a financial supporter of the Chronicle of Philanthropy.)
But this mixed result isn’t a reason to continue supporting a 5 percent payout rate. Instead, as critics of foundation asset management have noted, they should do a better job of investing.
Misplaced priorities
The priority of public policy shouldn’t be to ensure the perpetuity of foundations, but to increase giving. That goal can be accomplished by both raising the distribution requirement by a modest 1 or 2 percent and capping how much foundation program expenses can be applied to that payout. In 2024, foundations gave away about $109 billion. Given that most funders stick close to the minimum 5 percent payout rate, upping the rate to 6 percent could increase giving by almost $11 billion, enough to hire 181,000 employees based on a 2022 average salary of $68,394 for nonprofit employees. A 7 percent requirement could generate more than 360,000 new jobs.
The philanthropic trade associations generally oppose any changes to the status quo and will almost certainly come out in force against this idea. To support their argument, they will likely point out that recent efforts in Congress to increase taxes on private foundations failed because politicians understand that these institutions provide significant benefits to the public.
In reality, for many conservatives the goal of the proposed tax increase was to punish foundations that fund progressive causes. Support for anti-Israel groups on college campuses and the use of tax-exempt money for election-adjacent activities and lobbying for issues favored by the left made some Republicans question the value of foundations.
The bill’s sponsors, however, failed to take into account the number of philanthropies in red states that provide valued services to local residents and would have been harmed by the legislation. By contrast, a proposal to increase the amount of money those donors give to mainstream causes could have real political appeal if combined with some restrictions on how foundation money is used.
Requiring foundations to give away more would not be opposed by conservatives if that money flowed to food banks, childcare, disaster relief, and other less controversial projects. This is exactly the work the Council on Foundations cited as at risk during the debate on the foundation excise tax increase.
A common-ground approach
The left and right need to find common ground. That’s possible, but only if progressives are willing to accept a definition of charitable giving that does not include politically charged activities.
More than 50 years ago, a similar constellation of liberals who wanted foundations to give more money and conservatives who sought to curb the partisan activities of the Ford Foundation and other liberal donors produced the Tax Reform Act of 1969. It has served since then as the basic framework for the charitable sector.
It shouldn’t be too difficult to develop an acceptable plan for raising the required distribution rate and limiting the application of foundation expenses to meeting that requirement. There would also likely be broad agreement on addressing the abuses of donor-advised funds by mandating a giving requirement.
The tricky part is coming up with rules that would limit the ability of foundations to fund political and lobbying activities of nonprofits. A complicating factor is the Trump administration’s tacit support of challenges to the Johnson Amendment, which prohibits nonprofits from endorsing candidates. In June, the Internal Revenue Service said it would not enforce a legal settlement that prohibited churches from engaging in such activities.
Despite this challenge, smart lawyers and legislators should be able to find ways for drawing a sharper line between politics and charity. The promise of a substantial increase in giving from foundations and possibly DAFs, combined with stronger constraints on election-adjacent and lobbying activities, should motivate Congress and advocates from the left and right to find solutions that will last another 50 years.
If this prospect comes to fruition, it will also be a test for groups that have undertaken political activities with charitable money. There will no doubt be consternation and protests over the unwillingness of conservatives to simply up the flow of dollars without restriction. I hope that the value of a healthier and wealthier nonprofit sector overrides these potential partisan concerns.
Note from the Philanthropy Project
In a separate short Giving Review article, Craig predicted that in 2026, "Bipartisan voices will demand payout policy reform." He foresees a deal: liberal foundations agree to a higher payout rate in exchange for conservative foundations agreeing to stricter regulations keeping foundations and nonprofits out of "election-adjacent" activities. "Voices on the right and left want change. A few smart senators, such as Republican Charles Grassley of Iowa and Democrat Elizabeth Warren of Massachusetts, who have both criticized foundations for not spending enough, could make the difference if they are willing to reach across political lines and work to pass a policy that will benefit the charitable community."
We worry that there is no table where anyone is even proposing deals. Craig: how can we make this happen?
Craig Kennedy is a Fellow at the Giving Review, to which he brings his impressive and varied background in philanthropy and public policy. He was president of the German Marshall Fund and of the Joyce Foundation (where he started as a program officer), and he has advised many U.S. and international governments as a consultant and policy advisor.
Trump Bill divide: Conservatives split on taxing private foundations
The battle over tax provisions in Trump’s “Big Beautiful Bill” has split conservatives on whether increasing taxes on private foundations is in the public interest.
The final reconciliation package passed by the House on July 3rd adopted the Senate position, and did not include any changes to the private foundation excise tax, a victory for large foundations.
Earlier in the process, as reported in the Washington Times, the conservative Philanthropy Roundtable – which often disagrees with mainstream foundation groups – has unexpectedly shown up in sync with the Council of Foundations and other "philanthropy support organizations" (PSOs).
The Washington Times reports that the Roundtable sent a letter to Senate leaders saying that the proposed increased tax on foundation assets "contradicts" conservative goals and the goal shared with the Trump administration of reducing government.
According to the conservative paper, “Tax writers on the House Ways and Means Committee said the tax increase was designed not just as a revenue raiser to offset other tax cuts in the bill, but also to encourage foundations to spend more of their money.”
At the same time, Oklahoma Republican Congressman Kevin Hern supported the increase in taxes on foundations. Echoing themes from the Philanthropy Project, Hern argued , “If you’re going to hold onto the money, why shouldn’t you be taxed like other companies that make money? “I’m sure there are people that don’t like it, but our deal is: Deploy the money.”
Another advocate for increased foundation giving is Arizona Republican Congressman David Schweikert: “If it’s a charitable foundation, maybe the money should be being spent on charitable [causes] instead of the foundation acting like a hedge fund . . . They’re participating in the markets like they’re a hedge fund since they don’t have the tax exposure.”
While some House members see low foundation activity as a problem, their version provides little incentive to increase payout, and leaves transfers to DAFs an easy workaround.
When it comes to philanthropic reform, neither Republicans nor Democrats have lined up along party lines, nor along conventional conservative/liberal lines. For the most part Congress has shown little interest in changing current arrangements for regulation of philanthropy, perhaps until now. Regrettably the changes in this bill make no sense. Our tag line for the Philanthropy Project – Charitable funds should benefit the public – should be something that unites people across these divides, but this legislation does none of that.
Countering DOGE Overreach — DC AG urged to secure charitable assets of Institute for Peace Endowment
Peaceful Cherry Blossom Festival walk soured by security guards’ No Trespassing edict
On April 2 I was glad to be in DC for a nonprofit meeting, and my spouse Deb and I were on our way back from the Cherry Blossom Festival. After the Lincoln Memorial we wanted to see the former home of the United States Institute for Peace (USIP). (We knew that the Institute’s building had been closed by a presidential executive order, and that Elon musk’s DOGE team had shown up on March 17 with FBI agents, and for some reason the DC police, who picked the locks and evicted the staff.)
As we walked in front of the impressive domed Institute building, Deb and I could see a sign on the entrance doors to the left. There was no other indication of what was going on. When we got closer it said, NO TRESPASSING, a security guard popped out and firmly told us we had to leave immediately — this was private property! Deb and I were both taken aback because this seemed odd and out of character for most interactions in the capital Mall area. We had a brief conversation, said why we were interested, but no, the guard couldn’t say anything about who owns the building or what it was for, and we had to leave right away.
The Institute of Peace is/was a Congressionally chartered entity under legislation signed by Pres. Ronald Reagan, funded by Congress, with its Board of Directors appointed by the president along with secretaries of State, Defense, and president of the National Defense University. President Trump used this authority to terminate the board, and fire its 300 staff. USIP leadership is actively contesting the legality of these moves in federal court, citing the agency's independent structure, but facing a slow process. (Link to USIP leadership lawsuit: https://storage.courtlistener.com/recap/gov.uscourts.dcd.279421/gov.uscourts.dcd.279421.1.0.pdf)
As I stated in my complaint with the AG’s office (case number 00074146) for the charitable nonprofit USIP Endowment, this action does not automatically authorize transfer of the Endowment’s assets to the control of DOGE. DC Law § 44–1635. Release or modification of restrictions on management, investment, or purpose (based on the Uniform Prudent Management of Institutional Funds Act (UPMIFA) of 2007) requires “notify(ing) the Attorney General for the District of Columbia of the application, and the Attorney General for the District of Columbia shall be given an opportunity to be heard.” UMIFA and common law give the attorney general standing to protect the public’s charitable assets, and to advocate for their preservation for their proper charitable purposes.
While the administration and Congress exercise broad authority over federal agencies (and now are exercising that power to the max), there also exists a broad array of parallel charitable campaigns and contributions for U.S. parks, arts and culture, children’s services, scientific research, religious activity and more, over which government should not seize control or ownership. The donors to these causes (including the USIP Endowment), should be able to count on their lawful voluntary contributions being used for what the donors intended.
A healthy democracy benefits from an independent nonprofit sector, not under the foot of government, where people can choose which organizations they want to support, and can trust that their donations won’t be seized when out of favor. We count on each of the state attorney’s general, and an independent judiciary, as well as a properly limited executive branch, to make that true. Allowing plain citizens to pool their resources is an essential element of freedom of association, our right to join together, and defending that is worth the eternal vigilance required.
