Fundraisers can transform the power of giving

January 7, 2019

By Marlene Resnick Simons

There are a multitude of books, articles and “how to” videos on getting bigger gifts, getting more gifts, getting your organization listed in the wills and trusts of donors, developing the best on-line appeal and writing the perfect grant to get substantial support for a program or building important in your three-year plan.

All of these goals are important, but they pale in importance when you look closely at the overarching regulatory system within which philanthropic funds are flowing. They are flowing into the coffers of large commercial financial institutions that call themselves charities, such as Fidelity Charitable and Schwab Charitable. They are allowed to call themselves charities even though they do no charitable work. They exist as sponsor organizations of donor-advised funds.
The growth of such funds in these sponsor organizations is unprecedented. This might be something to cheer if the percentage of GDP allocated to philanthropy had increased. That is not the case. The percentage of GDP allocated to charitable giving has been consistent at 2% for decades. This means that a larger and larger share of charitable giving is not being delivered to the charitable purposes for which a generous tax deduction was received by the donor. The sponsor organizations have their for-profit parent organizations managing the funds, which provide fees for managing those funds and profits that go to shareholders.
This was not the intention of the tax deduction.

The following information tends to make people in foundations somewhat defensive. They exclaim that particularly community foundations, encourage donors to make regular gifts from donor-advised funds. That is great, but the legislation for donor-advised funds provides no legal requirement to insure that gifts be delivered to a charitable purpose within any time frame. As a result the size of funds accumulating in DAFs are growing at an unprecedented rate and allocations to the charitable organizations doing critical work in our country are seeing less of that 2%. That is the overarching structure within which we are operating.
And this is where the real leverage of increasing gift size and volume of gifts exists. If fundraisers and the tax-paying public were playing baseball against commercial financial institutions, then we might look at the situation through the following lens:
1. When a donor gives a gift, say $250,000, to a big commercial financial institution for deposit in a donor-advised fund that money can stay in that donor-advised fund for any length of time, 3 years, 10 years, 30 years, without being used for any charitable purpose. This is not the intent of the tax deduction.
Strike one
2. When a donor receives the tax exemption, it is intended that they relinquish control of that funding. The intent was for that money to move control to the nonprofit sector that actually does charitable work. DAFs allow donors to have advisory privileges in directing those funds until they are depleted. The full legal control of those funds rests with the sponsor organization. Again, not the intent of the tax deduction.
Strike two
3. Reporting by sponsor organizations of DAFs can be done in one financial report to the IRS, with no tracking of thousands of individual donor-advised funds. That may be the reason that only 30% of donor-advised grant funds can be tracked through the 990 system.
Strike three.

At last count $110 billion was sitting in DAFs. I predict that the figure is closer to $150 billion when end of the year data is available.
Given this reality, I predict that the profession of fund raising will continue to get harder and harder until there is an initiative and accompanying legislation to level the playing field. DAFs need to conform to the intended purpose for which charitable gifts are intended and for which donors are granted a generous tax deduction.

Without changes that would make the philanthropic sector reflect the values that the American system of charitable deductions intended, less and less money will go to the needs that charities address, and more and more of it will go to the shareholders of the for-profit entities that manage the commercial financial “charities”. This is the point of greatest leverage for fundraisers and donors, for legislators and for the nonprofit organizations that account for one in ten American workers and 5% of the U.S. economy. Without changes in legislation regarding DAFs and large commercial financial institutions, fundraisers are dancing on a carpet that is being slowly pulled from beneath their feet.

Fundraisers can transform the power of giving, but only if they are informed and willing to stand up with donors, who truly want their gifts to matter. This is not an easy issue to address, as billions of dollars are currently controlled by institutions most interested in holding on to those funds. However, the fate of our nonprofit service sector and the beneficiaries and purposes for which they work, hang in the balance.

Here are some legislative actions that would make a profound difference, any one of them would help to level the playing field.
The following recommendations were proposed in a July 25, 2018 paper titled Warehousing Wealth by Chuck Collins, Helen Flannery and Josh Hoxie at The Institute for Policy Studies.
1. Require distribution of DAF donations within three years.
2. Delay donor tax deductions until the funds are paid out to active charity.
3. Establish a specific payout rate.
4. Bar private foundation donations to DAFs and vice versa.
5. Increase scrutiny of rules around donations of non-cash appreciated assets to ensure public interest and taxpayers are protected.
6. Cap management fees for commercial advisors of DAFs.
7. Require that a donor’s DAF cannot be managed by the same organization that handles the donor’s personal assets.