The Undermining of American Charity
In one case, aDAF sponsor went bankrupt and the donated funds were seized to pay its creditors. In another case, the DAF sponsor used donated funds to pay its employees large salaries, hold a celebrity golf tournament, and reimburse the cost of litigation when a dissatisfied donor sued. In both cases, courts ruled against the donors and upheld the rights of the fund sponsor to exert full legal control over DAF funds.5
.. For example, the for-profit Fidelity Management provides all management services for Fidelity Charitable. This type of arrangement also conveniently enables commercial sponsors of DAFs to avoid federal disclosure rules that otherwise require charities to disclose the salaries of their top-paid employees.6
.. Finally, commercial DAFs also provide financial benefits to individual financial advisers who can continue to receive fees for investing their clients’ charitable donations. When a client discusses charitable giving with his financial adviser, the adviser has every financial incentive to recommend that the client establish a DAFrather than make an outright gift to an operating charity.
.. DAFs allow donors to maximize tax savings by making large charitable contributions to DAFs in years when they owe high taxes (maximizing the tax benefit), and then using the funds to make distributions to charities in later years.
.. while a gift of $100 cash by a high-income taxpayer can save that taxpayer nearly $40, a gift of $100 of property can save the taxpayer close to $60 in combined income and capital gains taxes.
.. For example, if a donor invested $100,000 in a hedge fund, and it grew to be worth $2 million, the donor would get only a $100,000 deduction if it were given to a private foundation, but would get a $2 million deduction if it were given to aDAF. This ability to provide a larger deduction for donations of complex assets has fostered the growth of DAFs. One proponent of DAFs has referred to this ability to exploit these previously untapped resources as an opportunity for “philanthropic fracking.”
.. Additional tax benefits from charitable giving might be good for individual donors, but from the perspective of the public, they are an additional cost. This cost might be worthwhile if it resulted in more overall charitable giving. However, this is not the case. Charitable giving has been monitored for the past forty years and, though subject to minor fluctuations, has remained remarkably constant at 2 percent of disposable net income.7
.. Instead of the donor thinking of this transfer as a charitable gift that has been made (the way one would feel about an outright transfer to a museum, for example), the donor now thinks of the DAF as a charitable asset in which he has a continuing interest. To the extent that donors think of DAFs this way, they are less likely to spend DAFfunds. Behavioral economists refer to this desire to keep property in which one feels one has ownership interest as the “endowment effect.”10
.. Donors are also encouraged to pass these accounts on to their children and grandchildren, creating a “charitable legacy.” The combined effect is to subtly encourage donors to hoard, rather than distribute, their DAF funds. Of course, this approach benefits the financial companies representing the DAF as well; the longer the property is held in the DAF, the greater the management fees.
.. the median annual payout rate from all DAFs was 7.2 percent, while nearly 22 percent of all DAF sponsors reported no grants at all.11
.. Congress should enact a rule requiring that donor-advised funds be distributed to operating charities within a reasonable period of time in order to assure a regular flow of money to working charities.