Donor-advised funds have become “wealth-warehousing vehicles” that give tax benefits to the wealthy without honoring their charitable mission, according to a leading philanthropist.
In an interview Monday with CNBC, billionaire philanthropist John Arnold said donor-advised funds are hoarding more than $100 billion in charitable gifts that should be going to communities in need. He said the funds, which have exploded in size over the past decade and become a dominant force in charitable giving, need government reform.
He said his goal is to “insure that philanthropic donations that receive a federal tax benefit actually make it to the community in a timely manner.”
Donor-advised funds serve as a kind of charitable savings account. Donors can contribute assets or funds to a donor-advised fund and get an immediate tax deduction. But there is no timeline for the gift to be distributed to charities, so the funds can accumulate over time — tax free — without getting to an actual charity.
“That money can sit there in a wealth-warehousing vehicle forever,” said Arnold, who co-founded Arnold Ventures, a philanthropy, with his wife, Laura. “It’s received the tax benefit on day one, but that money never has to go to the community.”
It is precisely because of the flexibility and tax advantages that donor-advised funds have soared in popularity. Total assets in donor-advised funds have more than quadrupled over the past decade, to more than $140 billion. Roughly $1 of every $8 given to charity in America now goes to a donor-advised fund. Donors who want to give away a portion of their wealth now, but want to wait to decide on the charities they want to fund, favor donor-advised funds over traditional charities or foundations.
Arnold, however, said delaying charitable gifts until late in life, or leaving them to future generations, can lead to poor decision-making and inefficient giving. Working with Boston College Law School professor Ray Madoff, Arnold has been lobbying Congress to pass legislation requiring donor-advised funds to make more grants.
A bill sponsored by Sens. Angus King, I-Maine, and Chuck Grassley, R-Iowa, called the Accelerating Charitable Efforts Act, would give donors two choices. They could get upfront tax deductions but would be required to distribute the funds within 15 years, or donors who want more time can opt for the “aligned benefit rule,” where they have up to 50 years to distribute the funds but they can only get the tax deduction upon distribution.
“Charitable dollars ought to be doing the good they were intended for, not sitting stagnant to provide tax advantages for some and management fees for others,” Grassley said.
The largest donor-advised fund sponsors include Fidelity Charitable, Schwab Charitable and Vanguard Charitable. Fidelity Charitable says its donors recommended 2 million grants in 2020 totaling $9.1 billion — a 24% increase over 2019. Schwab Charitable said its grants totaled $3.7 billion, up 35%.
Community Foundations and other proponents of donor-advised funds often argue that the funds distribute 20% of total assets a year to charity — far more than the 5% required by foundations. But Arnold said the 20% number is misleading, since not all funds make equal distributions.
“Last year, when the call on philanthropic resources was greatest, 35% of (donor-advised fund) accounts didn’t make a single dollar in distributions,” he said. “In the past four years, 10% of accounts didn’t make a distribution.”
The timeline and prospects for the ACE bill remain unclear and it faces strong opposition from powerful community foundations like the Silicon Valley Community Foundation. Sponsors of donor-advised funds prefer to see the donations grow in the funds without getting distributed because the more assets under management, the greater the management fees.
“I think some of them (opponents) get seduced by the management fees from AUM,” Arnold said. “The more money that sits in that investment account, the more management fees. There is that tension.”