John Tyler, a board member at The Philanthropy Roundtable, has been involved in philanthropy for the better part of two decades. He sat down with Debi Ghate, vice president of strategy and innovation at the Roundtable, to talk family foundations, regulation of the philanthropic sector, and the truth about donor-advised funds. You can read Part One of their conversation, or watch the video below. (For Part Two, click here.)
Debi Ghate: Hi everyone, this is Debi Ghate from The Philanthropy Roundtable. I’m our vice president of strategy and innovation. Today I’m really honored to be speaking with one of our board members, John Tyler. Hi, John.
John Tyler: Hi, Debi. Hello, everyone.
Ghate: John, tell us a little bit about your role in philanthropy aside from being a board member at the Roundtable.
Tyler: I’ve been involved with Philanthropy Roundtable for—God, many, many years now. Really, back probably in the early aughts around the creation of Alliance for Charitable Reform and the Roundtable’s efforts in the philanthropy policy space. But my day job—my real work—is as the general counsel/secretary/chief ethics officer for the Ewing Marion Kauffman Foundation in Kansas City, Missouri. I also have created two courses and teach two courses for Columbia University’s Masters in Non-profit Management program.
Ghate: Excellent. I know you’re the expert that we need to talk to about these issues.
Tyler: I will offer what I can.
Ghate: Okay, thank you. What’s prompting this conversation today is there’s been some recent coverage within the philanthropic news sector around a new initiative that John Arnold and Ray Madoff have [brought forward]. They have proposed some changes in the structure and regulatory oversight of donor-advised bonds and private foundations, especially when it comes to family foundations. I wanted to talk with you about some of those proposals, not necessarily to get into the specifics of what they are proposing. But these are conversations that have been going on for a while in philanthropy. There’s pressure coming from various sectors to be more regulated with more oversight in various ways. So, it’s really that bigger question that’s prompting our conversation today. I thought we’d start with the family foundation side. What is a family foundation?
Tyler: A family foundation is generally described as a foundation that either is controlled by the family members or has significant involvement by family members. A lot of times it’s not necessarily the living donor who has set things up, but the living donor passes and then operations of the foundation continue with the philanthropy involvement of the family. So, it’s not to say living donors and their families aren’t involved, but the fact that there’s a living donor isn’t enough. It’s getting the family more involved in continuing that.
Ghate: Okay. I take it that some of the concerns with proposals like the recent one we’re looking at are whether or not family members are acting appropriately when they are involved with the foundation. This particular proposal calls for removing the salaries and expenses related to family members doing the hard work at a foundation when it comes to issues like payout—this kind of thing. Are there rules already in place that govern how family members interact with foundations whose money has come from their family?
Tyler: Yeah, there’re a couple of sets of rules that are in place. Really, these rules apply across the board to all foundations. The first set is what’s called “self-dealing.” The Internal Revenue Code. In 1969, Congress defined self-dealing very explicitly and very clearly. It’s not the normal sense of how we would use the term “self-dealing,” meaning conflicts of interest or ethical violations. It’s very discrete, very specific provisions that effectively prohibit funds from going—or prohibit foundations and disqualified persons to a foundation—from entering transactions. So, from leasing property to or from each other, it’s prohibited. Buying goods or products to or from each other, those things are prohibited by federal law.
Even compensation. Compensating disqualified persons is prohibited unless there’s an exception. The exceptions require that the compensation be reasonable and that the services be reasonably necessarily. The second aspect would be the expense side of things. Again, the term “reasonable” is going to come into play. Reasonable expenses in furtherance of the foundation’s work, the law allows those to be paid whether it’s a family member or non-family member who’s incurred those expenses, again with a reasonableness standard.
In going back 10 to 15 years ago, there was a lot of attention that was given to things like foundations—not family foundations, but foundations. There were allegations about flying first class and things like that. That was the norm and there was a lot of pushback against that, and I think rightfully so, when coach fares are reasonable and available. There are the self-dealing prohibitions but then also the reasonableness of compensation and reasonableness of the types of expenditures that already exist in federal law and then borrowed into many state laws as well.
Ghate: So, if we had these protections in place, why would there be a need to introduce new kinds of oversight mechanisms? Can you think of a good reason why we need something additional?
“Adding more laws doesn’t necessarily solve for the abuse that exists and needs to be dealt with.”
Tyler: Well, I don’t want to try to get into the minds of the people who are proposing these things. You know, one of the issues that we’ve got is we do have existing laws. One of the questions I have is, to what extent are the existing laws actually not solving for the problem? If existing laws can solve the problem, then it becomes a matter of enforcement. If enforcement isn’t helping solve the problem that can be solved using existing law, I’m not convinced that adding more laws will solve those problems, either.
So it’s a multi-layered process. I’m not going to say that every foundation complies fully and completely with the law. I am certain there are instances of abuse that are out there. I don’t like that abuse. I don’t want that abuse to happen. I think that the sector and foundations collectively suffer when there is that kind of abuse. But if the abuse is of existing law, adding more laws doesn’t necessarily solve for the abuse that exists and needs to be dealt with.
Ghate: Mm-hmm. So, it sounds like if there is a problem, enforcement of existing laws may be a mechanism to deal with it. It’s not an automatic jump that we require new laws and new oversight mechanisms. Is that fair?
Tyler: Correct, correct.
Ghate: Okay. That makes sense on that side of it. I have been wondering myself what problem we’re attempting to solve with these restrictions around family foundations, and expenses, and family member contributions. On the other side of it, there’s also a lot of talk around donor-advised funds. It seems that the motivation is we want to see these funds spent faster. We don’t want to see these funds be held for the long term. We want to see the money move. What is a donor-advised fund? Just at a very basic level, what is a donor advised fund?
Tyler: At a basic level, a donor-advised fund is a fund set up at a host. Very often those hosts are community foundations but there are also a couple of national organizations that host donor-advised funds. The donor puts the money into the donor-advised fund. That money becomes the legal property of the host, and the host makes the decisions about how the money is spent, where it goes, and when it goes, how much, and to whom with recommendations from the donor or successors to the donors the donor might lay out. But it’s with recommendations. There is a technical, legal ownership of the funds that rests with the host.
Ghate: Is the host also a nonprofit?
Tyler: Yes, yes. They are—not just nonprofits but public charities, because foundations are also nonprofits. These are public charities. We’ve got a hundred-plus year history of community foundations and their evolution over time as well. Community foundations normally have community boards, and there are other things that are happening within the community that the community foundations in hosting donor-advised funds engage with at different levels and in different ways.
Ghate: Okay. So, some of the calls have been that the money that is being held in donor-advised funds should be spent. That’s one argument that we’ve been hearing. Reading that, there’s about a 20 percent average payout rate annually on donor-advised funds. Does that sound right?
Tyler: That’s the information that I’ve heard. And averaging over time, all sorts of different foundations, that’s the average—20 or even more. Many of them are paying out more.