Donor-Advised Fund Reform?

A November 21, 2011 op-ed in the New York Times by Boston College law professor Ray D. Madoff raises some good points.

We all know that donors receive federal tax deductions when they give to a 501(c)(3) public charity. That nonprofit can be a soup kitchen, or a symphony, or a major educational institution. We could argue (and I often do) that the gift to the soup kitchen should be worth more (from a tax policy standpoint) than a gift to a cultural or educational institution, no matter how worthy those other institutions are, because the gift to help hungry people more clearly meets the original intent of the charitable tax deduction – to lessen the burden of government. But let’s not get into that now.

So what’s a donor-advised fund, how does it fit in, and why does Professor Madoff raise concerns?

A donor-advised fund is a fund within a 501(c)(3) public charity. The donor retains the right to advise the nonprofit (historically, a community foundation, but in recent years, also “nonprofit” entities within a financial services company, like the Fidelity Charitable Gift Fund) as to where grants from the fund can be made. Professor Madoff points out that there’s no requirement that grants actually be distributed from donor-advised funds to charitable organizations. So the donors get a full tax deduction in the year of the gift, but the benefit to society doesn’t happen for years, if at all.

Madoff argues that the assets from donor-advised funds should be distributed within seven years. That seems extreme – but certainly there should be a generous minimum payout rate required of each fund. There are lots of problems in our society, and charitable dollars should be out there working on those problems – not sitting in an account in perpetuity.

Here’s a counterpoint: the National Philanthropic Trust recently released a report showing that overall donor-advised funds pay out 17.1% a year in charitable distributions. That’s far more than the 5% required of private foundations, an impressive number by any standards. But still – there’s no requirement at most donor-advised funds that they pay out anything at all. There should be. And if the average donor-advised fund is paying out 17.1% a year, then even the notion of paying it all down within seven years, as Professor Madoff suggests, might not be that big of a problem.

I know that when I worked in the community foundation world, I would have argued against this notion. I would have pointed out that giving donors the opportunity to create a significant and flexible fund is beneficial to society, and I wouldn’t have wanted to add restrictions and requirements – but I’m not so sure anymore.  I see need on the street and resources that might help stored up in donor-advised funds. What do you think?

Copyright Alan Cantor 2012. All rights reserved.

 

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2 thoughts on “Donor-Advised Fund Reform?”

  1. Finally, our own NH Bill Gates! I agree totally with your comments regarding endowment Alan. Our non-profit this year has used a 6% rate of distribution for budgeting. Wish the same could be said for our Community Foundation and others that are going in the opposite direction which not only impact grant making, but distributions from funds held exclusively for a specific non-profit.

  2. While I understand the desire to build a fund over time, thus enabling a donor to make a large contribution, I believe there should be a minimum required annual distribution to qualified organizations. While I do not know what the correct percentage should be, I would suggest that if the minimum annual distribution is not met, the distribution should go to organizations named in the documents that establish the fund or, by default, to the organization that is holding the funds.

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