When is Philanthropy not so Philanthropic?

March 4, 2019

By Marlene Resnick Simons, M.A.

Over the course of the last thirty years, large commercial, financial institutions such as Fidelity and Schwab have created charities, legally identified as sponsor organizations. They do no charitable work directly, but are the holders of a larger and larger share of charitable dollars. This is due, in large part, to the financial vehicle of donor-advised funds (DAF’s).

For the uninitiated, donor-advised funds can be established within a sponsor organization and can remain there without any timeframe for getting those funds to an actual charitable purpose. The donor receives an immediate and generous tax deduction. When talking to individuals and to groups, I often ask: Are you a philanthropist? Few people respond in the positive. My next question is: Are you a tax-payer? Most people respond in the affirmative. My response to that is: Then, in fact, you are a philanthropist! You are supporting those generous tax deductions provided to donors through donor-advised funds.

When Fidelity sponsored legislation in 1991 allowing commercial, for-profit entities to create nonprofit charities, it meant that they could provide the same service as community foundations. The amalgamation that has taken place between donor-advised funds and large commercial, financial organizations has been made possible through our tax and regulatory system.

For those not aware, Fidelity Charitable is now the largest charity in the United States, having far surpassed United Way, Red Cross and all others. The irony, of course, is that Fidelity Charitable does no charitable work. Their designation as a sponsor organization allows them to create DAF’s for their clients. This allows for exceptional benefits to donors, with a full and immediate tax deduction, as well as substantial benefits to the financial mangers charged with overseeing those funds, for a fee, while working for the for-profit Fidelity Corporation. They also earn fees from the placement of those funds in particular investments, creating profits for shareholders.

This may seem to be business as usual, which it is. The only problem is that the intended beneficiaries may never see those dollars. Transparency is murky, at best, as sponsor organizations have wide latitude in their method of reporting. One unified report may be offered to provide the data on hundreds of different funds. The trusted phrase ‘follow the money’ is not easily done.

There are a few powerful reasons that we have more than $110 billion dollars sitting in donor-advised funds. (I am betting that that figure is closer to $150 billion when 2018 tax data is available.) One of those reasons for that meteoric rise of funds held in DAF’s is that they deliver exceptional benefits to donors and to the sponsor organizations that can warehouse and profit from such funds for long periods of time. The intended beneficiaries may never see those funds, or may just see only a small portion of those funds delivered to an actual charitable purpose.

The issue of control of the charitable donation is another area where donor-advised funds clearly circumvent the intention of the law. When donors receive a tax benefit for their gifts, they should tender control of those funds to a tax-exempt charity that puts those funds to actual charitable work. If control rests with the donor or the sponsor organization, than these captive funds are “essentially an asset-accumulation strategy dressed up as charities”. Drummond Pike, (Founder and former CEO of the Tides Foundation) How I Helped Create the Donor-Advised Fund Monster – Inadvertently, The Chronicle of Philanthropy, August 22, 2018.

The broader issue of philanthropic dollars being warehoused is problematic for nonprofits because the percentage of dollars dedicated to philanthropy has been stable at 2% for about four decades. This means that a larger and larger share of dollars held in DAF’s are continuing to benefit the donors and the sponsor organizations. This also means that a smaller and smaller percentage of dollars, identified as charitable giving, is being delivered to the nonprofits doing the hard work of charity, on which our country depends and for which tax-payers must make up the difference.