Critics eye charitable money loopholes
Wealthy philanthropists have long enjoyed an advantageous way to give to charity: Using something called a donor-advised fund, they’ve been able to enjoy tax deductions and investment gains on their donations long before they give the money away.
These so-called DAFs set no deadlines for when the donations must reach charities; the donors themselves decide when and where the money goes.
Critics complain that because DAFs provide no financial incentive to quickly donate the money, much of it ends up sitting indefinitely in the accounts rather than being distributed to needy charities.
That criticism has helped drive a Senate bill that would tighten the rules for DAFs and aim to speed donations to charities. The bill, introduced by Sens. Angus King, a Maine Independent, and Chuck Grassley, an Iowa Republican, appears to be gaining bipartisan support in Congress.
The bill would make numerous reforms to DAFs by, among other things, creating new categories of accounts.
One type of account would give donors an immediate income tax deduction for money they agree to give to a charity within 15 years.
The second type would let them delay the distribution of their money for 50 years. These donors would get no income tax deduction until then. But they would still get to enjoy capital gains and estate tax savings for donating stocks or gifts into a DAF.
Community foundationsponsored DAFs with less than $1 million would be exempt from the requirement. But donors with more than $1 million in such accounts would qualify for upfront tax benefits only if they distributed at least 5 percent of their assets annually or gave their money to a charity within 15 years. Under current law, assets can remain in a DAF indefinitely, tax-free.
“This is about as common sense a bill as I’ve ever seen,” said King, who caucuses with Democrats.
“The idea of getting a tax deduction today for money that may not be paid out for 50 years makes no sense,” the senator added. “…(I)t’s got to go out within a reasonable period of time. Otherwise, it’s an abuse of the tax code.”
The proposed reforms have opened a rift in philanthropy circles among billionaire donors, community foundations and trade associations and have sparked intense lobbying efforts both for and against the legislation.
The debate was ignited when John Arnold, a Texas-based billionaire who made his fortune in hedge funds and now co-chairs Arnold Ventures, joined with scholars and philanthropies to propose a set of reforms under a coalition they called The Initiative to Accelerate Charitable Giving. Members of the group met with lawmakers to advocate for the reforms, which have largely been incorporated into the Senate bill.
What sparked Arnold’s interest, he said, was seeing rich people with philanthropic intent funneling money into DAFs yet distributing very little of it to charities.