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?
Is the Tide Turning Against Billionaires and Their Unreasonable Power?
BY JAN MASAOKA
For a while, billionaires felt like our real-life superheroes — Batman and Iron Man with tech companies and PR agents.
In the comics, it tracks: Bruce Wayne (Batman's secret identity) and Tony Stark (Iron Man's) are both billionaires, complete with vast inheritances and high-tech toys, and they keep saving the world.
Back in the real world, figures like Bill Gates, Elon Musk, Mark Zuckerberg, and Donald Trump were often treated the same way: admired, celebrated, and held up as ideals for ambition and success. (Trump’s fortune was inherited; Gates, Musk, and Zuckerberg built theirs—though not without aggressive, and sometimes illegal or questionable corporate strategies.)
In 2001, Occupy Wall Street caught public attention with the phrase, “the 99% versus the 1%.” And over the following decade, "millionaire" stopped sounding outrageously rich. Even the reality show Who Wants to Marry a Millionaire? didn't seem to be offering enough money.
In fact, we have been seeing a gradual shift in the popular idea of extreme wealth—To be really rich, now you had to be a billionaire. And for the first time, there were enough billionaires to talk about them as a group.
Now we appear to be in the middle of a wider cultural—and possibly political—shift in how billionaires are viewed. Cultural shifts don't easily lend themselves to precise measurement, but several indicators are visible:
- The growing use of the term “billionaire class.” This isn’t about colorful individuals anymore; it frames billionaires as a group with shared economic interests.
- “Tax the Rich” has increasingly become “Tax the Billionaires.” The target has narrowed—and sharpened.
- Federal policy vocabulary: Just last year, the Biden administration proposed a Billionaire Minimum Tax—a 25% tax aimed at the wealthiest one-thousandth of one percent (0.001%).
- State policy vocabulary: In California, unions and advocates are gathering signatures for a proposed Billionaire’s Tax—a one-time 5% tax on the wealth (not the income) of roughly 200 California residents who have net worths of $1 billion or more.
- Pop culture: It’s risky to read too much into movies and TV, but it’s notable that the past two years have delivered a wave of billionaire villains—from Succession to Glass Onion: Knives Out, Jurassic World: Rebirth, and Alien: Earth. The billionaire-as-hero motif is increasingly supplanted by the billionaire supervillain.
A small number of billionaires themselves have acknowledged the distortions created by extreme wealth. Warren Buffett put it bluntly: “There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning.”
And let's not forget how hard it is to even picture a billion. Stack $1 bills and one million dollars reaches about 358 feet (31 stories). One billion dollars? About 68 miles high. That's sixty miles higher than where commercial airplanes fly!
So there is some good news. More people are recognizing that billionaires don’t just act solely as individuals—they often act in the interests of a billionaire class, with consequences for everyone else: for inequality, for democratic institutions, and for the planet itself.
Cultural and political moods can swing quickly, and not always in the same direction. For now, though, this shift is worth noticing and offering a ray of optimism. There's a problem with so few people having so much money and thereby control and influence. We should remember that billionaires exercise their power through multiple vehicles, including philanthropic entities. And they typically exercise this power to strengthen the financial and political interests of the billionaire class. Let's appreciate this small cultural shift and seek ways to build on it.
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.
“A Flag in the Wilderness”: Inside the Philanthropy Project’s Push for Reform
“A Flag in the Wilderness”: Inside the Philanthropy Project’s Push for Reform
The Philanthropy Project is creating space for nonprofit practitioners to speak out for reform
By Grace Chai
Thank you to Proximate Press – noted for their strong journalism about philanthropy – for this interview with one of our co-chairs, Jan Masaoka. Reprinted with permission.
Over the past decade, philanthropy reform has been a conversation led by academics and policy experts, and industry insiders. The Philanthropy Project, launched in December 2024 by longtime nonprofit leaders Jan Masaoka and Jon Pratt, was created to change the conversation – and who gets to participate in it.
Jan Masaoka, former CEO of the California Association of Nonprofits, co-founded the initiative with the goal of making space for nonprofit practitioners – not just policy experts – to voice frustrations and engage more directly in shaping the future of charitable giving. With a fast-growing subscriber base and an open call for contributions from the field, the Philanthropy Project has already struck a nerve.
In this Q&A, Masaoka shares the response the Philanthropy Project has garnered in its first six months. She also offers a frank assessment of how the political moment is impacting nonprofit workers’ willingness to speak publicly on reforming the system upon which their livelihoods depend.
Grace Chai: What inspired the Philanthropy Project, and what role do you hope to play in the philanthropy landscape?
Jan Masaoka: My co-chair, Jon Pratt, and I have long histories in nonprofit advocacy: I was the CEO of CalNonprofits for 12 years, John recently retired as the CEO of the Minnesota Council of Nonprofits after more than over 30 years.
Reforming philanthropy, especially donor advised funds (DAFs) was one of the most important issues for our members and also evoked a lot of emotions. Few issues made our members feel as anguished and angry.
Typically, dialogue around philanthropy reform has been held in avenues or language that aren’t very accessible to or engaged with nonprofit professionals, like development directors and executive directors. We didn’t want people to have to navigate academic language or be inundated with emails to participate in the conversation.
The Philanthropy Project is our way of waving a small flag in the wilderness to show the world that the nonprofit sector isn’t a monolithic united front supporting big philanthropy.
Grace Chai: How did your Working Group come together?
Jan Masaoka: We noticed the places we get information on this topic are few and not always accessible. For example, not everybody reads the Nonprofit Law Professor's Blog!
We didn’t want people to have to read a book or receive an overwhelming amount of emails for people to participate in the conversation. The Working Group has become a space of early-stage collaboration—people sharing what they’re working on, connecting dots, brainstorming. And I think that's the best we could ever hope for.
Grace Chai: How’s the response been in the first six months? Has anything surprised you?
Jan Masaoka: Very strong response. Our newsletter’s grown to over 1,000 subscribers with a nearly 40% open rate. We publish quality articles that are well researched and intentionally use more plain language. In a most recent issue, we featured a CPA’s perspective and an interview with Pete Manzo talking about why United Ways of California supports philanthropic reform.
We've gotten many messages from nonprofit staff expressing relief that they weren’t alone in their frustrations with the state of DAFs and philanthropy reform. It’s illuminated how those leading this conversation from within philanthropy, academia, or think tanks are disconnected from the opinions of typical nonprofit staff.
Grace Chai: What philanthropic reforms are at the top of your list?
Jan Masaoka: If DAF donors are going to lock away their money for fifty-plus years before distributing it, we simply argue you shouldn’t be able to take the tax deduction upfront. We also oppose private foundations getting to count transfers to DAFs as part of their 5% annual payout requirement. Tax policy is an extremely complicated and confusing way to influence behavior, but it’s already lost a lot of its use as an incentive for giving because only the top 10% benefit from charitable deductions.
Another area is transparency in foundations and DAFs. We’re now seeing DAFs open fiscal sponsorship services, and vice versa. FinTech is entering the field and combining these functions that are both designed to obscure financial flows. It’s causing a double-black-box effect in which it’s increasingly opaque. DAFs are also now being marketed to smaller donors as essentially a savings account. That’s where we’re seeing the field get worse.
Grace Chai: Let’s get into some hot topics. What do you make about Gates Foundation’s announcement that they are sunsetting early? Would you agree that it seems foundations have been more willing to question operating in perpetuity?
Jan Masaoka: I’m skeptical. There’s a gigantic gap between what people are saying and what they do. There have been a number of foundations, like the Goldman Fund, that announced they were spending down, but then did so by transferring assets to other family foundations and funds. I don't consider that spending down. The Giving Pledge received a lot of attention, but only a small fraction of those pledges have been realized. So I’ll believe it when I see it.
I’m also disturbed by how quickly and zealously the Gates Foundation has stripped equity and racial justice language from its programs. I think it shows how the ultra-wealthy use philanthropy for their own aims, not for legacy or redistribution.
Grace Chai:The United States is pretty unique in how we use federal tax policy as the main mechanism for incentivizing and regulating charitable activity. Do you think that’s the right vehicle to do so?
Jan Masaoka: Theoretically, there might be better options. But in practice, we’re better off with the IRS regulating nonprofits than elected officials. That would be a disaster. The IRS is not a perfectly impartial, apolitical body, but it is somewhat shielded from the whims of politicians.
Given that only the top 10% get tax benefits from charitable deductions, tax policy has already lost a lot of its use as an incentive for giving. And tax policy is an extremely complicated and confusing way to influence behavior. If DAF donors are going to lock away their money for fifty-plus years before distributing it, we simply argue you shouldn’t be able to take the tax deduction upfront.
Grace Chai: Do you see an organizing possibility in this moment? How do you think the crises the nonprofit sector is facing on multiple fronts are impacting its organizing capacity?
Jan Masaoka: I think capacity of all sorts is diminished significantly. The nonprofit sector is very preoccupied: many of their clients are in crisis, and a lot of organizations are experiencing deep funding cuts.
I’m certainly sympathetic to people’s fear of speaking out. But philanthropy reform is a long-term project that requires base building. It's important for people to see there's a place where they can head out to (our “flag in the wilderness”) to connect and organize around these issues. We’ve received a lot of messages of support and appreciation for cultivating this kind of space.
Grace Chai: How do you see the Philanthropy Project evolving in the coming months or years?
Jan Masaoka: We aim to be a hub for nonprofit workers who care about philanthropy reform, beyond just DAFs. We hope that more nonprofits want to speak out more about these issues, whether individually or collectively, through coalitions and associations. We really welcome and encourage nonprofit staff to write about their perspective for us or be profiled by us.
There have been a couple of efforts for legislation in Congress, and we expect to see more of those in the future. A bill is a very good organizing mechanism and stimulus. We can be more effective as a sector if we unite our efforts.
One of our board members at CalNonprofits, Sarah Pillsbury, used to say, “If we're trying to accomplish something that we can do in our lifetimes, we're thinking too small.” That often serves as an inspiration for me.
The nonprofit sector is very preoccupied: many of their clients are in crisis, and a lot of organizations are experiencing deep funding cuts.
People have always been fearful of even whispering complaints about foundations, and fear about all kinds of speaking out have increased. Still, there may not be a more important time to unlock the trillions of dollars in DAFs and endowments to be used for the public good. Early in COVID, many foundations really stepped up to increase funding towards vulnerable populations. We haven't really seen that during this particular crisis, and that’s disappointing.