Wealth disparity and donor-advised funds

The United States faces down, arguably, the greatest income and wealth disparity since before the Great Depression.

The American people are growing increasingly aware of this disparity, as they see the power of corporations and the wealthy bend our political and financial systems to their will.

Many believe our institutions are simply tools to endow and protect wealth and consolidate power for the very few. Unsurprisingly, those truly happy with the current system are likely the ones who have leveraged and manipulated it to benefit themselves. Inversely, the average American likely has no idea what a Donor-Advised Fund (DAF) is, yet they are inherently related to our country’s backward outlook on economic and social justice.

In short, DAFs provide a concrete subsidy to mostly very wealthy donors in exchange for an uncertain public benefit.

As a holder of several DAFs, let me fill you in.

DAFs are the fastest growing vehicle in the charitable world, and one of the most controversial for good reason. They hold over $120 billion in assets, and are growing fast. DAFs accounts are administered by a charitable sponsor, where the donor suggests who gets money from the DAF.

The donor puts in assets that receive an immediate and significant tax break, then recommends that money from this tax-deferred account goes to specific charities. Unlike other vehicles, DAFs have no requirement that charitable giving actually occurs, ever. DAFs can pass from generation to generation preserving money and influence, and without giving a dime to charity.

In short, DAFs provide a concrete subsidy to mostly very wealthy donors in exchange for an uncertain public benefit. In 1991 the laws changed when the IRS misguidedly approved the creation of the first commercial gift fund by allowing the financial juggernaut Fidelity tax-exempt status. Fidelity Charitable is now one of the largest charities in the U.S. This is also something that most American’s probably don’t know.

Many DAFs do provide money to charities. However, when DAFs are used as tax shelters that hold onto billions of untaxed dollars that would otherwise be spent for the public good, the system is being abused.

The rise of commercial DAF sponsorship is highly troublesome. Commercial interests serving as DAF sponsors have self-serving fee structures that generate a financial conflict of interest. Why would sponsors like Fidelity want to give these assets to charity if it depletes from their bottom line? Yes, commercials boast “dormant account” policies and above average aggregate payout rates, but the numbers are easily gamed.

Efforts in California, my home state, may hopefully set a national trend on more public minded, accountable treatment of charitable assets.

On top of that, the commercial’s fee structures are concocted to get donors in the door with low fees that undercut competition from local, socially-conscious actors like Community Foundations, and then convert these donors into investors to boost their bottom line once again.

Why should Americans be outraged by DAFs? One reason: they disproportionately help the one percent hide money to the detriment of everyone else who could stand to benefit from those funds flowing through the economy. Those allowing DAFs to remain devoid of any real transparency are perpetuating a framework that for centuries has left so many behind while catering to the powerful few. Tangible benefit to society is what is most important in philanthropy, not increasing profits or providing the rich an unaccountable tool to hoard money and cultivate public goodwill.

It is unacceptable to forgive unsatisfactory charitable efforts that starve government coffers and weaken impactful social programs in the name of Philanthropy. Our charitable system should not be so easily susceptible as a way to game the tax structure.

Efforts in California, my home state, may hopefully set a national trend on more public minded, accountable treatment of charitable assets. Much is at stake in getting this right. Not just the preservation of good philanthropy but the restoration of government tax proceeds for essential building blocks of a just society; public education, infrastructure, and climate change mitigation. These tax deductions must be scrutinized more carefully and given only if they truly advance the public interest. Reforms should be based on robust data, but there are currently no legal requirements that DAF sponsors report on individual DAF accounts.

In coalition with like-minded parties who acknowledge this lack of basic reporting as a real barrier to good public policy, we embarked on a legislative effort in California to require account-level reporting by larger DAF-sponsoring institutions so society can mold regulations maximizing public benefit. We should not operate in the dark anymore regarding a growing loss of government resources with unclear benefits to society. We need to shine a bright light on philanthropy if it is to truly reflect its original Greek meaning of “love of mankind.”
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Editor’s Note: Kat Taylor is founder and CEO of Beneficial State Bank. Drummond Pike is the founder and former CEO of the Tides Foundation.