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Community Foundation Presidents Oppose DAF Forced-Payout Proposal

Letter to Senate Finance Committee criticizes suggestion to institute a 10-year spend-down requirement and disallow transfers from private foundations to donor-advised funds.

On September 6, presidents of The Columbus Foundation (on behalf of the Community Foundation Public Awareness Initiative), Council on Foundations, Independent Sector and The Philanthropy Roundtable (collectively, the presidents) wrote a letter to two members of the Senate Finance Committee in which they opposed tax-reform proposals that would, in the presidents’ opinion, negatively affect donor-advised funds (DAFs). The letter to Senator Orrin Hatch (R-Utah) and Senator Ron Wyden (D-Ore.) responds to proposals by Professor Roger Colinvaux (of The Catholic University of America, Columbus School of Law in Washington, D.C.) and Professor Ray D. Madoff (of Boston College Law School in Boston), calling for a maximum time period (citing 10 years as reasonable) for DAFs to pay out contributions and disallowing transfers from private foundations (PFs) to DAFs. The presidents argue that the proposals “are based on erroneous statistics and claims, would severely restrict philanthropy, and would reduce overall charitable giving in communities across the country.” In their letter, the presidents state that the requirements in the proposals would be “particularly harmful” to community foundations (CFs) that use DAFs to conduct philanthropic work in their communities. Moreover, claim the presidents, the proposals would add significant complexity to the work CFs do on behalf of their donors and the charities they support. 

Erroneous Statistics

The presidents first challenge the reliance on a statistic that overall charitable giving has remained at about 2 percent of gross domestic product (GDP), while contributions to DAFs have been increasing steadily. Colinvaux/Madoff also argue that high average payout rates from DAFs obscure high levels of inactivity. Both of these arguments are flawed, and the use of this statistic is misleading, according to the presidents.

The presidents note that GDP was $18.57 trillion in 2016, and in that year, all nine major charitable-giving categories experienced increases in giving for only the sixth time in 40 years. An increase from 1.9 percent to 2.1 percent of GDP represents a very significant change in dollars going to charity: about $37 billion, or a 10 percent increase in overall charitable giving. Moreover, the GDP statistic doesn’t account for how DAFs allow donors to increase their giving over time—giving that’s not accounted for in the 2016 GDP statistic.

Supposition vs. Reality

The presidents also challenge the argument that donors “may” indefinitely defer contributions from their DAFs, because the law doesn’t “require” annual payouts. But according to the presidents, donors aren’t “parking” their assets or not making grants. Rather, according to one survey, between 2014 and 2016, almost all respondents (DAFs at CFs) made grants from over 90 percent of their DAF accounts. For donors that didn’t make grants, there may have been legitimate reasons not to do so.

The presidents also take issue with Colinvaux/Madoff’s position that DAFs only provide public value when funds come out of the DAF sponsor and move into active charities. The presidents note that CFs are public charities and provide programs and services for community residents.

Reduced Giving

One consequence of the Colinvaux/Madoff proposal is that a required payout could increase DAF grant making over the short term, because DAFs must spend down their dollars. But over the long term, this wouldn’t be the case; thus, a forced 10-year payout won’t increase dollars going out of DAFs. Moreover, the proposal would discourage a donor looking to make a long-term commitment to a community that lacks private philanthropy, because it would be difficult to build an endowment to sustain support for such a community if the DAF must spend down its funds within 10 years.

The presidents emphasize that for many donors, a DAF is an attractive vehicle because it provides a way for donors to engage their children and grandchildren in giving. If there’s a required 10-year spend-down, the ability to instill in younger generations philanthropic values that will survive the original donor is diminished. “The real-world impact of a timed payout would be to make DAFs so restrictive that it would virtually eliminate them as a tool for building family philanthropy,” warn the presidents.

Furthermore, a forced 10-year payout will make it more difficult for a potential entrepreneur to make a gift at a point of liquidity. That is, a timed payout would make it less likely that a one-time liquidity event would be used to make a large charitable donation to meet community needs. The presidents posit that “ultimately, these donors will turn to alternate methods of ‘moment in time’ giving, as opposed to creating a vehicle allowing consistent and sustained giving over a period of time.”

Perception of “Big” Philanthropy

A forced payout gives the appearance to the public that only large, wealthy institutions can participate in charitable giving through endowments. However, this perception is contrary to what DAFs are really about: They are meant to be used by families with above-average assets (not necessarily “rich”) that want to sustain charitable giving into the future and involve their children in giving. In fact, rather than being an abusive tax practice, allowing families to advise charitable funds that grow over time is smart public policy. In support, the presidents offer to provide Senator Hatch and Senator Wyden with hundreds of examples of major accomplishments in communities, which wouldn’t have been possible had the DAFs been required to spend down each gift over a 10-year period. 

A Problem That Doesn’t Exist

The proposals imply that inactive DAFs are a pervasive problem. This isn’t the case, state the presidents. Rather, the majority of DAFs make grants regularly, with deep engagement and input from their advisors. Only a small percent of DAFs are inactive; most CFs ensure that DAFs remain active, based on certain criteria. In fact, through the National Standards for U.S. Community Foundations program, community foundations self-regulate to ensure fund activity.

Endowed DAFs

The forced spend-down for endowed DAFs would mean that CFs would have to use their charitable resources to go to court and unravel thousands of legal arrangements they made with donors. 

Logistical Nightmare

The proposals present the payout in simplistic terms: A donor has 10 years to grant out contributions, after which time any remainder is distributed to a preselected charity. However, the proposals fail to recognize that community foundations manage hundreds and sometimes thousands of accounts annually, and many donors contribute to their DAFs many times per year. A CF wouldn’t be able to keep track of each new 10-year time period every time a donor makes a contribution. Also, how would appreciation on initial contributions be handled?

Transfers From PFs to DAFs

The proposals also seek to halt the ability of PFs to make grants to DAFs and count the grants as qualifying distributions. The presidents claim that the ability of PFs to make grants to DAFs and count them as qualifying distributions furthers a genuine charitable objective and results in a more efficient and effective use of charitable resources than would have otherwise been possible. That is, PFs can use DAFs to provide stability to grantees during fluctuating market conditions, direct local giving, and temporarily suspend grant making when needed, but use DAFs to meet their minimum-distribution requirement.

CF Examples

The presidents’ letter provided three examples of how a PF might use a DAF at a local CF to pursue a genuine charitable objective. The presidents also share examples of donors that use DAFs to simplify and expand their PF’s grant making.

Bottom Line

The presidents note that the Colinvaux/Madoff proposals are primarily concerned that DAFs aren’t active or making regular grants into the community. Those who agree with the Colinvaux/Madoff proposals fear that donated funds will merely “sit” and that a taxpayer who benefited from a charitable contribution will keep the funds sheltered away from public needs.

These restrictive rules, argue the presidents, are based on conjecture, without asking for more data to inform Congressional action. If average DAF payouts are three times the PF payout rate, and the vast majority of DAF accounts are making grants regularly and/or have plans in place for future activity, “there doesn’t seem to be a public-policy problem requiring urgent action.” The presidents urge the Senate Finance Committee to set aside the “extreme proposals advanced by DAF critics and instead acknowledge the self-policing work of the sector by continuing to work with us and other practitioners to write legislation that reflects the realities of philanthropic work.”

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