On October 1, the philanthropy world was treated to the following headline: “Philanthropist Urges Congress to Force More Giving From Donor-Advised-Funds and Foundations.” The article announced a major new push by billionaire activist John Arnold and law professor/policy advocate Ray Madoff to radically impact philanthropic freedom through mandates enforced via tax law. The bottom line: the proposal calls for private foundations and DAFs to spend their money faster or face punitive measures. It even weighs in on how all of that should be calculated.
Why be worried if you’re in philanthropy? After all, aren’t we here to spend this money on charitable causes anyway? Haven’t there been calls for this by many groups over the years, including from the so-called Patriotic Millionaires and others? While we’re at it, hasn’t there always been criticism of anyone with significant wealth, regardless of what they do with it (witness the attacks on Bill Gates regarding his efforts through philanthropy to help us stop a pandemic)?
Until now, Congress has largely ignored activists’ calls to dictate to all types of philanthropists the who, what, when, where, and how of their giving. I wish I could say they’ve been motivated by protecting the Constitutionally enshrined rights to property (which includes the right to acquire and dispose of wealth) and the right to free association (choosing who to partner with and the conditions of that partnership). The reality is the reward of weighing in legislatively hasn’t been worth the risk of alienating wealth creators.
But now change is possibly afoot.
When a billionaire philanthropist who isn’t regarded as an “out-there progressive” makes these calls and puts the weight of his lobbying, communications, and political influence behind it, it’s a different story. With the unknowns surrounding this year’s election thrown into the mix, it’s time to pay attention.
So what exactly is the Arnold and Madoff team calling for? To be fair, not every provision in their initiative is troublesome. The proposal includes zeroing out excise taxes for foundations that voluntarily increase their payouts to 7% (as well as for new foundations that choose to limit their life to 25 years). But from there, it goes downhill. Here are some examples of what the pair would like Congress to do through legislative action:
- Mandate that DAFs comply with one of two new structures:
- The first structure put strings on donors’ upfront tax benefits. Funds must be distributed either within 15 years of the donation or when DAF assets are sold. The result? A forced 7% payout rate. Arnold and Madoff would also disincentivize donors who fund their DAFs with real estate or stock (which would only reap the tax benefit once they are sold).
- The second structure limits DAFs to a 15-year life, punishing donors who want more time than that to distribute their DAF funds. These donors would only realize income-tax deductibility when the donated funds are distributed to charity, and their DAFs would be required to disburse all funds within 10 years of the donor’s death. The result? Confusion. DAFs themselves are charities, so we are now deciding which charities benefit from tax incentives and which don’t. And so much for investing in the long-term future of a community or cause.
- Disallow family members’ time and expertise from payout calculations. The result? The message here is that if you are somehow related to the wealth creator who made the philanthropy possible, you are less capable or less qualified to engage in the important and rewarding work of philanthropy. Even more basic than that though, is that targeting family members in this way is unnecessary, given “self-dealing” and “reasonable and necessary” rules already in place.
- Prohibit counting distributions from private foundations to DAFs toward the payout requirements. The result? A huge loss of flexibility. DAFs are often used for off-mission grants and to train the next generation prior to board memberships. DAFs also protect the safety of private foundation staff, family members, and grantees who are targets of violence here and abroad. For example, we know of an East Coast family foundation that gives to a DAF to support anti-terrorist organizations, some of which have had fatwas issued against them. Giving through a DAF protects this family foundation from that violence.
- Prohibit private foundations from funding entities through DAFs. The result? Serious legal and donor-privacy concerns. First, the DAF is legally controlled by a public charity, not the donor-advisor. And second, this proposition could include “looking through” a DAF sponsor to the original donor when determining public support.
In other words, if someone has a long-term vision for how to maximize their wealth and at the same time support worthy causes needing long-term help and funding, they will have fewer options for how to implement their vision if the Arnold-Madoff plan succeeds. And I wouldn’t blame would-be philanthropists if they shrugged and decided not to bother figuring out whether it was worth it. We risk seeing fewer dollars entering the philanthropic space at all.
Here’s the thing. DAFs already have an average 20% payout rate when left to make their own choices. Foundations want to spend down. (Witness the Ford Foundation’s recent announcement that it would even be borrowing in order to spend more.) So what problem are Arnold and Madoff actually trying to solve?
At the end of the day, this amounts to one small group attempting to dictate the rules and terms for an entire industry in a sphere that is voluntary and well-intentioned to begin with. The article’s title got it right: This is about force, plain and simple.