THERE’S A NEW WAY TO DIRECT YOUR philanthropic dollar that lets you lock in your charitable tax deduction, guarantees you highly-regarded professional money management for your donations, and gives you the flexibility to direct gifts funded by your one-time donation for many years to come, with substantial influence over who receives those gifts and when. Sounds great, doesn’t it?
In fact, it sounds to some like the philanthropic way of the future — and therein lies a problem. The “charitable gift funds” that offer these services are sponsored by for-profit companies, and that makes some of the more traditional players in the philanthropic world a little nervous. The result is a three-front war (public relations, regulatory, and legislative) that could alter the shape of charitable giving in the years ahead.
Keeping My Options Open
Actually, the “charitable gift fund” is not entirely a new idea — the Fidelity Investments Charitable Gift Fund was launched in 1992, and based on the latest ranking is already taking in as much in private donations ($298 million per year) as all but the top eleven public charities in the United States. By 1997, the Fund was already as large ($1.1 billion) as all but the largest of the nation’s community foundations, and according to company figures, the Fund already has disbursed over $500 million to nearly 50,000 charities. Most other entrants in this market seem to regard Fidelity’s fund as the prototype, although each of them varies in some significant way from the Fidelity model.
The basics: If there is a key element that makes the Fidelity fund attractive to donors, it’s in allowing them to take their tax deductions now while keeping their charitable giving options open for the future. Donors to the Gift Fund (which is an independently-recognized, IRS-approved section 501(c)(3) public charity) make irrevocable donations (minimum start-up donation is $10,000 for individuals, $100,000 for businesses — minimum levels for subsequent donations are $1,000 and $4,000 respectively) and qualify for the charitable tax deduction. But the Gift Fund ensures that the donor’s money continues to grow (in one of four mutual fund pools managed by Fidelity Investments) until such time as the donor wants to recommend a grant to a qualified charity.
What this means in practice is that the donor retains significant influence over donations — and some influence over how funds are invested. The donor makes an initial decision as to how to allocate the gift among the four investment pools (donations can be split up any way the donor wants), but can also designate the pool from which a recommended gift is paid.
The issue of grant recommendations per se is where the process gets tricky. No donor to the Gift Fund is given an absolute guarantee that a grant recommendation will be followed. But the unspoken premise of Fidelity’s and other competing funds is that, as long as a minimum threshold is met (i.e., the proposed recipient is an IRS-approved charity), the donor’s recommendation will be accepted. After all, if donors cede control over who their gift ultimately benefits, much of the advantage of the Gift Fund vehicle is lost.
Yet no one seems willing to concede this basic point — at least not for the record. Of the three funds contacted for this article (the Fidelity fund, the Vanguard Charitable Endowment Program, and the National Philanthropic Trust launched by Pitcairn Trust Company), none agreed that donor recommendations automatically would be followed.
Dory Laskin, Treasurer for the Vanguard Charitable Endowment Program, cited that program’s internal grant guidelines, which include the requirement that the recipient be a domestic, approved 501(c)(3) organization. Anne Crowley with the Fidelity Gift Fund stressed that donors have no legal right to have their recommendations followed, and said the Fund had no statistics to report on how often such recommendations have been followed since the inception of the Fund. The National Philanthropic Trust is a bit different, since it emphasizes a higher level of donor services such as research on specific foundations. But the Trust had nothing to report on the frequency of approval of donor recommendations either.
Apples and apples?
The issue of routine approval of donor recommendations is important because retaining influence over grantmaking clearly is one of the key competitive advantages of charitable gift funds. It is also one of the key criticisms made by opponents of these funds, who argue that their donors are bypassing private foundation rules and retaining effective control over grants even after they have taken their full tax deduction.
One such critic is John Edie, senior vice president of the Council on Foundations. Edie and other foundation officials have met with Treasury Department and congressional staff to seek support for imposing restraints on charitable gift funds created under commercial sponsorship. Edie says that his group is undecided on what course to pursue and has not received any clear guidance from the IRS. Options include pressing for regulatory clarification and proposing legislation.
It is easy to understand the underlying concerns of Edie and his fellow critics — Fidelity’s fund has been growing faster than anyone predicted, and is inspiring new entrants into the market for charitable giving. These charitable gift funds may indeed be expanding the overall pool of giving, as they all contend is their basic mission, but there can be little doubt that they are luring donors away from other forms of giving, including private foundations and community foundations (community-based public charities that emphasize pooling charitable donations with special emphasis on local needs).
Do the new charitable gift funds really operate that differently from the way charities have traditionally operated? For instance, the idea of a donor making a one-time tax-deductible gift to a pooled fund, while retaining the right to recommend subsequent grants, is an older innovation used heavily by . . . community foundations! What Fidelity, Vanguard, Pitcairn, and others have done is streamline that idea, use their marketing skills and good name to attract donor interest, and offer what seems to be more bang for the buck (less paperwork and administrative overhead).
In short, the real problem here may be that traditional charities have come up with successful models, and the new commercially-affiliated funds have simply improved upon them. What could be more infuriating? When you’re comparing apples and apples, it’s critical to be the one with the better apple.
The Irksome Profit Motive
Critics of the new gift funds (like Edie) also argue that these are not legitimate charities because they have a “commercial purpose,” i.e., a motivation to make money. That may well be true of the sponsoring companies, although company representatives have been at pains to give the impression that the profits are not exactly flooding in. Anne Crowley of the Fidelity fund argues that if anything, Fidelity Investments loses money on its contract to provide administration and investment management services. Dory Laskin of the Vanguard Endowment points out that the fund is too new to tell whether The Vanguard Group would make money on its comparable arrangement, but stresses that the Endowment was created to expand charitable giving, not to make money.
But assume for the sake of argument that any (or all) of the initiating sponsors of these funds does turn a profit on its services contract; that they do so while providing reasonable service at a lower unit cost than donors usually are able to find; and that donors are pleased with the product. So what’s the problem?
If there is a problem it’s certainly not in the commingling of charitable motives with the profit motive. That has been a mainstay of charitable giving for decades, from business associates supporting each other’s causes to Mobil’s highly-publicized support for PBS programs like “Masterpiece Theater,” to cause-oriented earmarks from credit-card purchases. Profits facilitate charitable giving and promote charitable causes. Profits are what make philanthropy possible in the first place.
Rather, the problem seems to be the commercial tie-in without an express link to a specific cause or mission. Instead, the donor reigns, if not supreme, at least primus inter pares in the charitable gift foundation. This is “donor empowerment” indeed! Hence the somewhat pejorative term “charitable checkbook” often used to describe charitable gift funds.
But if the donor is in charge, what happens to the cause marketeers, the professional donor advisors, and the armies of other potentially redundant intermediaries who populate the philanthropic world? In fairness, the charitable gift funds are aimed at higher-end donors, who are more likely to have strong views about where to give anyway. But those are precisely the people other charities such as United Way have been trying to lure with various donor-friendly innovations. More efficient service to the donor does tend to imply lower administrative overhead — and that, potentially, means fewer jobs in the nonprofit world (assuming a zero-sum game, of course, which many of the older line charities do assume).
The Road Ahead
The way of the future is unclear, and burdened with potential legal and regulatory roadblocks. The Vanguard Charitable Endowment Program won its tax-exemption with a proposal that, unlike Fidelity, guarantees a 5 percent annual “payout” from the total asset pool (comparable to private foundations). Vanguard claims it simply structured its proposal to increase the chance of approval, but a recent article in The Wall Street Journal interpreted the move as a reaction to increased IRS concern about these funds.
That same article quoted Fidelity Gift Fund President Jamie Jaffee “anticipating an [IRS] audit,” but the Fund now denies Jaffee said that and asserts that no audit is anticipated. Meanwhile, the U.S. District Court for the District of Columbia last year denied a tax exemption for a would-be Fidelity competitor called The Fund for Anonymous Gifts. That court distinguished the Fidelity fund on the ground that it (Fidelity) did not allow continuing control over the investment of a donation, whereas the Anonymous Fund allowed donors to continue to direct the investment.
Clearly, a degree of legal and regulatory sorting out awaits the charitable gift funds, hence Fidelity and its competitors are being quite circumspect in public statements about their tax status, their long-term goals, and their role in the philanthropic world. For now they reflexively stress the overall mission of expanding charitable giving in America.
Jamie Jaffee clearly believes that funds like hers are adding to overall charitable giving, not simply profiting in a zero-sum game. Stressing the Fidelity Fund’s national reach (both in fund raising and grantmaking) Jaffee “strongly believes” that Fidelity, like community foundations, will “end up raising money for nonprofits that may not otherwise have been available.” She adds that “with our low minimum contribution, low fund raising expense ratio, and ease of entry for donors, we believe that we are reaching into a broader constituency that has historically been untapped by the community foundations.” No doubt they are also building goodwill — one point that is not in dispute is that Fidelity, Vanguard, Pitcairn, and others are providing a valuable service that donors appreciate.
There is a sort of neo-Olaskyan irony in the growth of charitable gift funds. Marvin Olasky has done great work promoting the idea of more personalized, local giving (coupled with personal knowledge and involvement with preferred causes). Greater service to donors, such as Fidelity offers, certainly facilitates more personal decision making on gifts, and assumes a higher level of donor knowledge and involvement. At the same time, these new service providers to some extent separate the donor from the local community, and make giving more like a commodity — more efficient, less personal. Deep down it is this latter effect that some of the community foundations and more traditional charities are concerned about. As the donor’s preferences grow in importance, there will be an ever-higher premium on having informed, responsible, and intelligent donors. Whoever can increase the supply of those donors, and secure their interest in causes, will dominate charitable giving in the decades to come.
George Pieler is a contributing editor to Philanthropy.