Sep 18, 2020, 17:38 PM
Aug 28, 2020, 08:59 AM
Threats to How You Give
1. Private Foundations
The structure, policies—and most of all, the membership—of a foundation’s board are critical to its success. Board members must bring to their work a combination of integrity, competence, humility, and honesty in order to fulfill their responsibilities as stewards of a foundation’s missions. Threats to good governance, then, are among the most serious threats to philanthropic freedom.
Such threats include proposed bans or limits on any compensation of private foundation trustees, such as that in the 2004 Senate Finance Committee White Paper: “Under the proposal, compensation to trustees of a nonoperating private foundation would not be permitted; or, in the alternative, would be permitted up to a statutorily prescribed de minimis amount.” A more recent proposal has suggested that any compensation or travel reimbursement paid to family members who serve as foundation staff or trustees be excluded from qualifying distributions.
There have also been calls to require “independent directors” (non-family members) on boards of family foundations. Private foundations have no restrictions on board composition, even allowing for an entire board to be members of one family. Family foundations are therefore vulnerable to government mandates that would increase the minimum number of board members beyond those that a small family can responsibly provide or impose specific demographic requirements.
In a wealth-tax white paper written in early 2019 for then-Democratic presidential candidate Elizabeth Warren, Emmanuel Saez and Gabriel Zucman recommended that the assets of private foundations be taxed “until the time such funds have been spent or moved fully out of the control of the donor.” A similar recommendation has been taken up by Chuck Collins of the Patriotic Millionaires group (discussed in greater detail below). Utilizing the “public money” argument, Collins has proposed ensuring “that tax write-offs for charity can only be claimed by donors when they relinquish dominion and control over the destination and management of donated funds”—a pointed attack on both donor intent and family foundations.
Proposals to increase mandatory payout for private foundations are not new but are attracting more supporters—and far more publicity—in 2020. Most notable, perhaps, are the so-called Patriotic Millionaires, a group of high-net-worth individuals and foundation leaders who have called on Congress to consider a “charity stimulus” measure that would double the mandated annual foundation payout over the next three years, from 5% to 10%. In a July 16 op-ed in The Chronicle of Philanthropy, The Philanthropy Roundtable rebutted this proposal:
- This radical rule change bypasses the foundation boards that are the rightful stewards of their endowments. Determinations about how much foundations give beyond the mandatory 5% should be left to those who understand their missions, are obligated to honor them, and have the authority to change direction as conditions warrant.
- While some donors are committed to giving while living or to sunsetting their foundations or donor-advised funds, others are committed to missions that demand long-term grantmaking. These include family foundations seeking multi-generational involvement, place-based funders in areas with limited philanthropic assets, and those focused on complex problems like global poverty or environmental sustainability.
- One-size-fits-all legislation that drastically increases spending in the here and now might well destroy philanthropy’s capacity to respond effectively to the next major crisis.
2. Donor-Advised Funds
The popularity of donor-advised funds (DAFs) has skyrocketed over the past several years, and a rapidly increasing number of donors are using them for their charitable giving. Unfortunately, this has also attracted the attention of philanthropy critics, who refer to DAFs as “warehouses of wealth” that serve primarily as tax-avoidance vehicles for the wealthy. Several threats to philanthropic freedom focus specifically on those DAF characteristics that donors find particularly attractive: simplicity in establishing them, flexibility around the timing of gifts, and the protection of donor privacy.
- Simplicity in establishing DAF accounts – Because the sponsoring organizations of DAFs are 501(c)3 organizations, a donor gets an immediate tax deduction for the irrevocable charitable gift made to establish his or her account. Despite the fact that the sponsoring organization is, in law, the owner of the funds in a DAF account, critics argue that a deduction should be taken only when a gift is made to a “working charity”—a proposal that creates confusion around tax law and adds a level of unnecessary complexity for donors and sponsoring organizations alike. They have also recommended that private foundation grants to DAFs not be counted toward the 5% payout requirement despite the many valuable ways private foundations utilize DAFs in their giving.
- Flexibility around the timing of gifts – Unlike private foundations, neither DAFs nor individual DAF accounts have a mandatory distribution requirement. Donors can choose the giving schedule that best works for their missions and charitable plans. Collectively, DAF hosts have reported payouts of nearly 20% annually, and have proven to be reliable sources of funding for nonprofits during periods of economic decline. This was true during the 2008 recession; a recent survey from the Community Foundation Public Awareness Initiative indicated that DAF grants from 64 community foundations surveyed grew by 58% in March/April 2020 compared to the same time frame in 2019. Moreover, because DAF money is irrevocably committed to charitable purposes, balances that do grow over time increase philanthropic giving in future years. Despite the fact that DAFs have proven to be both effective and responsive philanthropic vehicles, their critics continue to demand time limits and payout mandates, both of which will disrupt a donor’s long-range giving plans.
- Protection of donor privacy – Donor privacy is an especially important benefit of DAFs. Although the sponsoring organization is required by law to disclose its grants, that disclosure does not include the name of the DAF account from which the gift originated. The individual accountholder chooses whether the fund’s name and any contact information are disclosed to the receiving charity. Donor privacy ensures that donors may give even to controversial philanthropic causes without fear of harassment and reprisal. It also protects those who choose to give anonymously for a variety of good reasons, including deeply held moral or religious beliefs, a sense of humility, a wish to lead a more private life, and the desire to minimize solicitations from other organizations. Yet donor privacy in DAFs is under attack, most recently in a California bill that would create a new classification for donor-advised funds and sponsoring organizations and allow the attorney general to make rules implementing reporting requirements. A.B. 2936 was referred to the Senate Judiciary Committee after passing the California Assembly in June, but recent spikes in COVID cases statewide caused legislative delay and the bill will not be heard by the committee this year.
The Philanthropy Roundtable has been actively working against any proposals to change the rules around DAFs in ways that that would restrict how donors can utilize this convenient and effective vehicle for their charitable giving. In California, the Roundtable is working closely with colleagues, including the League of California Community Foundations and Southern California Grantmakers, to oppose any DAF legislation that would threaten donor privacy, and also is monitoring potential actions in other states as more legislatures attempt to implement similar policies.