A coalition of billionaires, academics and large foundations say the U.S. could unlock far more money for charity just by tweaking a few tax rules.
Wealthy contributors get big tax breaks for donations even if the money then languishes in foundations or other vehicles for decades without reaching charities. The new Initiative to Accelerate Charitable Giving -- which includes wealthy donors John Arnold, Michael Novogratz and Baupost Group’s Seth Klarman, along with the Ford, Hewlett, Kresge and W.K. Kellogg foundations -- argues Congress should change the law to prod funders like them to get resources to nonprofits more quickly.
“There are design flaws in the tax laws impacting charitable giving that need to be fixed in order to increase and more efficiently get nonprofits the funds they need,” Klarman, Baupost’s chief executive officer, said in a statement.
More than $1 trillion is held by private foundations in the U.S., according to several estimates. The National Philanthropic Trust estimates another $121 billion is held in donor-advised funds, or DAFs, charitable accounts that are increasingly popular with contributors.
Both foundations and DAFs offer donors an upfront tax break of as much as 74 cents on every dollar given away. However, the law puts no deadline on when DAF money must be distributed to working nonprofits. Foundations must pay out 5% of their assets per year, but that 5% is often less than their investment returns. And the wealthy can legally use that payout in self-serving ways, including hiring family members and paying travel expenses for family get-togethers. A transfer to a DAF also qualifies toward a foundation’s 5% payout rule.
‘Little’ Asked
“When people get involved in this area, they’re often surprised by how little the rules ask of them,” Boston College law professor Ray Madoff, who helped develop the coalition’s policy proposals, said in an interview.
The reforms are designed to “get more money to working charities,” she said, while also increasing the legitimacy of the philanthropic sector “at this time when everyone is concerned about wealth inequality and the fairness of our tax system.”
Among the group’s proposed reforms are:
Limiting the sort of spending that counts under foundations’ 5% payout rule
Offering foundations an incentive to give more by waiving a federal excise tax for those that donate in excess of 7% of assets in any year
Letting all taxpayers deduct donations on their taxes, and not just those who itemize their returns
The coalition also argues DAFs need clearer rules.
“Human nature needs some kind of deadline to create action,” Arnold, a legendary trader who closed his hedge fund eight years ago at age 38 to pursue philanthropy, said in an interview. “We don’t want to do anything that discourages charitable giving. But it doesn’t help anyone for people to put assets in a donor-advised fund and have the assets sit there for time infinitum.”