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Donor-advised funds have become “wealth storage vehicles” that provide tax benefits to the rich without honoring their charitable mission, according to a prominent philanthropist.
In an interview with CNBC on Monday, billionaire philanthropist John Arnold said donor-advised funds accumulate more than $ 100 billion in charitable donations that should go to communities in need. He said the funds, which have exploded in size over the past decade and have become a dominant force in charitable giving, need government reform.
He said his goal was to “ensure that philanthropic donations with a federal tax advantage actually reach the community in a timely manner.”
The funds advised by donors serve as a sort of charitable savings account. Donors can contribute assets or funds to a donor advised fund and get an immediate tax deduction. But there is no timeline for the donation to be distributed to charities, so funds can accumulate over time – tax-free – without reaching a true charity.
“That money can sit there in a wealth storage vehicle forever,” said Arnold, who co-founded Arnold Ventures, a philanthropic organization, with his wife, Laura. “He received the tax benefit on day one, but that money must never go to the community.”
It is precisely because of the flexibility and tax advantages that donor-advised funds have gained popularity. The total assets of donor-advised funds have more than quadrupled over the past decade, to over $ 140 billion. About $ 1 out of $ 8 donated to charities in America now goes to a donor advised fund. Donors who want to give some of their wealth now, but want to wait to decide which charities they want to fund, prefer donor-advised funds over traditional charities or foundations.
Arnold, however, said that delaying charitable giving until the end of life, or leaving them to future generations, can lead to poor decision-making and ineffective giving. Together with Ray Madoff, a professor at Boston College Law School, Arnold lobbied Congress to pass legislation requiring donor-advised funds to provide more grants.
A bill sponsored by Sens. Angus King, I-Maine, and Chuck Grassley, R-Iowa, called the Accelerating Charitable Efforts Act, would give donors two choices. They could get initial tax deductions but would be required to distribute the funds within 15 years, or donors who want more time can opt for the “aligned benefit rule,” where they have up to 50 years to distribute the funds. but they can only get the tax deduction when distributing.
“Charitable dollars should do the good they were meant to be, not stagnate to provide tax benefits for some and management fees for others,” Grassley said.
The largest donor-advised fund sponsors are Fidelity Charitable, Schwab Charitable, and Vanguard Charitable. Fidelity Charitable says its donors recommended $ 2 million in grants in 2020, for a total of $ 9.1 billion, a 24% increase from 2019. Schwab Charitable said its grants totaled $ 3.7 billion dollars, up 35%.
Community foundations and other supporters of donor-advised funds often argue that the funds distribute 20% of total assets per year to charities – far more than the 5% required by foundations. But Arnold said the 20% number is misleading because not all funds make equal distributions.
“Last year, when the call for philanthropic resources was the greatest, 35% of accounts (funds advised by donors) did not make a single donation dollar,” he said. “In the past four years, 10% of accounts have not made a distribution.”
The timing and outlook for Bill ACE remains unclear, and it faces strong opposition from powerful community foundations like the Silicon Valley Community Foundation. Donor-advised fund sponsors prefer to see donations increase in funds without being distributed because the more assets under management, the higher the management fees.
“I think some of them (naysayers) are enamored with the AUM management fee,” Arnold said. “The more money there is in that investment account, the more management fees there are. There is this tension.”
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