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by Marc Gunther
In an effort to move money out of private foundations and donor-advised funds and into the hands of charities that can put the money to work right away, billionaire philanthropist John Arnold and Boston College law professor Ray Madoff have drafted a proposal calling for Congress to make sweeping changes to laws governing charitable giving.
“Charities are in a state of crisis,” Arnold and Madoff write in a draft of their proposal obtained by the Chronicle of Philanthropy. “Demands on their services are greater than ever.”
By contrast, philanthropic vehicles have enjoyed “exponential growth” and currently hold more than $1 trillion in assets. “But giving to working charities has lagged,” they say.
To remedy that, Arnold and Madoff are calling for tax-law changes that are designed to provide incentives — carrots as well as sticks — designed to spur private foundations and holders of donor-advised funds, commonly known as DAFs, to give away more money faster. DAFs are charitable accounts that provide immediate tax benefits but have no requirements that the money be distributed in a set time.
Their plan, called the Initiative to Accelerate Charitable Giving, is being circulated among trade groups and donors. Some elements will have broad appeal, while others will probably face stiff opposition.
It comes as other advocates, including the Minnesota Council of Nonprofits and the Institute for Policy Studies, are calling for changes in the way donor-advised funds and private foundations are regulated. The Minnesota Council is working with state attorneys general, asking them to require state-level reporting of transfers from private foundations to donor-advised funds. And the Institute for Policy Studies has lined up donors, most of them liberals, behind its call for an Emergency Charity Stimulus. In addition to the calls for regulation, several wealthy philanthropists are also urging their peers to give big voluntarily Among them is the Crisis Charitable Commitment, which has so far collected $208 million.
“There’s growing discontent with philanthropy from more than one side of the political spectrum,” says Jan Masaoka, executive director of the California Association of Nonprofits, which has tried unsuccessfully to get state lawmakers to enact legislation to study DAFs. “We’re seeing a lot of ideas popping up, and that’s all to the good.”
Community foundations, which depend on fees from managing donor-advised funds, will likely resist regulatory changes, along with sponsors of DAFs like the Fidelity Charitable Gift Fund and the Schwab Charitable Gift Fund.
Jeff Hamond, who leads the Community Foundation Public Awareness Initiative, a group of more than 120 community foundations, says they have “serious concerns” with the current draft and they will await a final proposal before saying more. Community foundations are a political force because they operate in many congressional districts across America.
Madoff, who has long criticized the fact that donor-advised funds are so lightly regulated, and Arnold, who, with his wife Laura, leads Arnold Ventures, declined to be interviewed for this article. They connected last year after Arnold called for tax-policy changes on Twitter and in an opinion article in the Chronicle.
About donor-advised funds, Arnold wrote in the Chronicle: Their “tax-free hoarding runs counter to the spirit of the rules governing charitable deductions, contributes to a harmful inefficiency that infects all too many foundations, and makes philanthropists vulnerable to some well-deserved criticism.
In recent months, Madoff and Arnold have been quietly trying to assemble a coalition of foundation executives, wealthy donors, and leaders of nonprofits to support their ideas. For donor-advised funds, they say:
- Congress should create a new category of DAFs under which a donor could elect to get an upfront income-tax deduction, including the avoidance of capital-gains taxes, , provided DAF funds are distributed within 15 years.
- Alternatively, donors who do not want to distribute their funds within 15 years, could receive the immediate capital-gains benefits of the donation but wait to take income-tax deductions for their contribution until donated funds are distributed to a working charity.
Their proposals for private foundations all revolve around payout requirements. Currently, foundations are required to distribute an average of 5 percent of the assets each year. Contributions to charities, transfers to donor-advised funds, and operating expenses all count. The draft from Arnold and Madoff says:
- Foundations would not have to pay an annual excise tax of 2 percent of their net investment income in any year when their payout tops 7 percent of assets. Newly created, time-limited private foundations with a life of 25 years or fewer would also be exempted from the excise tax. As Madoff noted in a New York Times opinion article, the excise tax is now so complicated, it doesn’t create the incentive for giving that it was originally designed to do.
- Private foundations would not be able to meet their payout obligations by making distributions to donor-advised funds. In a report published earlier this year, the Minnesota Council of Nonprofits said that $3 billion was transferred from more than 2,200 foundations to five large DAF sponsors from 2010 to 2018.
- Private foundations would not be able to meet their payout obligations by paying salaries or travel expenses of foundation family members.
This last provision could mean a large number of family foundations that employ relatives as staff or pay them as trustees would not be allowed to count those salaries toward their payout requirements.
A number of large foundations, including the Charles Stewart Mott and Conrad N. Hilton foundations, have for years paid family members on staff or as trustees or both.
Expanding Deductions for Everyday Donors
The Madoff-Arnold effort also aims to increase charitable giving by expanding the tax deduction available to the vast majority of individual donors who do not itemize deductions on their income-tax returns. Currently, the amount that can be deducted is capped at $300. This provision will be popular with a broad swath of charities.
It’s too soon to say, though, how philanthropy trade groups will respond to the Madoff-Arnold proposal. Two years ago, community foundations were joined by the Council on Foundations and Independent Sector in opposing an effort to increase DAF payouts that had been put forth by Madoff and Roger Colinvaux, a law professor and former counsel to the Joint Committee on Taxation of Congress. This time around, Madoff wants to build a broader coalition.