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This popular form of charity might just be a tax shelter for the 1%

Donor-advised funds–which let you get a tax break while your money remains invested and making money–seem to not actually be paying out to charity.

This popular form of charity might just be a tax shelter for the 1%
[Source Image: wacomka/iStock]

Some philanthropic donors may be promising to give a lot of money to charity in order to get a nice tax break–but ultimately not delivering on the cash. The trick is the use (or perhaps abuse) of donor-advised funds, a type of savings and investment haven that allows you to set aside money for charity in order to receive the immediate tax benefits of giving to charity, but then wait to distribute that money until later on.

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That’s the warning being raised by a new report from the Institute for Policy Studies, a nonprofit progressive think tank that looks at ways to ensure a more equitable, ecologically sustainable and peaceful society. In theory, the benefit of a DAF is that it allows people who want to take time to decide how best to donate their money, while also allowing the contributions to generate returns. In practice, IPS researchers have grown concerned that the money isn’t actually going to any causes; it’s just sitting there making more money, while the donors get a tax break for doing nothing. The report, entitled “Warehousing Wealth” notes that annual DAF contributions have risen to about $23 billion annually, an increase of 66% over the last five years. At the same time, only about 20% of that money is being spent on cause work.

[Source Image: wacomka/iStock]

That’s troubling for two reasons. Americans gave about $410 billion overall to charity last year, with 70% of that coming from individuals. So continued DAF use erodes how much immediate cash flows to nonprofits doing urgent work. And while saving to spend with a smart plan of action is ostensibly a good thing, the less urgent work goes addressed, the more some under-addressed societal problems could snowball.

IPS’s DAF-spending estimate comes from the National Philanthropic Trust, which has also reported that there are currently more than $85 billion of DAF-related assets under management. For IPS, the concern comes from who exactly is contributing the money: Most fall into a category it calls the “super-wealthy”: the .1% of Americans with annual incomes over $1 million. There are exceptions. For instance, Schwab Charitable, where the minimum DAF balance is $5,000 probably caters to a broader demographic; since the election, its donors have been giving heavily toward at-risk progressive causes. But the format is especially popular among the ultra-wealthy because it allows DAF holders to add non-cash assets, including public stock, private company shares, and real estate gains to their funds, which lets them avoid capital gains tax.

[Source Image: wacomka/iStock]

Estimates about how much of the cash sitting in DAFs has been actually paid out in recent years have ranged from 7% to 14% in various studies, including estimates by the Chronicle of Philanthropy. “There is no legal requirement for DAFs to pay out their funds to qualified charities—ever,” the report notes.

To change that, IPS has come up with several recommendations for DAF providers: First, that they require DAF distribution within three years. Second, that they delay the donor’s tax deduction until the payouts are actually made, and third, that every asset manager establishes a set payout rate so the cash flow can be predictably managed, among other things. That would solve another big problem in philanthropy: some massive donations don’t really aren’t as helpful as they could be if a group isn’t prepared for them. It takes a lot of planning to develop the capacity and strategy for using windfalls wisely.

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About the author

Ben Paynter is a senior writer at Fast Company covering social impact, the future of philanthropy, and innovative food companies. His work has appeared in Wired, Bloomberg Businessweek, and the New York Times, among other places.

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