Plan to Enhance Donor Payout Faces Lengthy Odds in Congress, however Some Advocates Say the Timing Is Proper

A plan to rewrite federal rules governing how quickly money from foundation endowments and donor-advised funds must be given out to charity faces long odds in a new Congress that will be busy dealing with a lengthy list of other pressing issues, according to some nonprofit leaders.

Still, many philanthropy experts, even those who oppose some aspects of the proposal, believe the heft of the personalities backing it and shifting public attitudes about the role of accumulated wealth could help the Initiative to Accelerate Charitable Giving gain support from a wide swath of lawmakers in both parties.

The plan, which was developed by philanthropist John Arnold and Boston College law professor Ray Madoff, would allow donors to claim an immediate charitable deduction for contributions to their donor-advised-fund accounts only if the funds are distributed to charities within 15 years. The proposal also would prohibit private foundations from using grants to donor-advised funds to satisfy the federal requirement to pay out 5 percent of their assets each year, and it would provide a tax incentive for foundations to increase their annual payout or spend down all of their assets within 25 years.

Those items would be a tough sell for a Congress consumed with post-Trump shifts in foreign policy, climate change, health care, and other priorities. On top of those challenges, many lawmakers lack a deep understanding of nonprofit tax law, says Lawson Bader, CEO of DonorsTrust, which sponsors donor-advised-fund accounts. However, the involvement of Madoff and Arnold, two respected figures in philanthropy, and the fact that they have hired well-placed lobbying and public-relations firms to push the issue, could give the plan more “oomph” on Capitol Hill, Bader says.

A sense of crisis brought on by the Covid-19 pandemic has also fueled a desire for immediate change among nonprofits that fear a challenging economy could hurt their fundraising next year, says Bader, who opposes the plan.

“It is being taken seriously,” he says. “Even if you don’t understand tax law and the nuances of giving, there’s this urgency that I think could be a motivator.”

Cindy Lott, associate professor of practice at Columbia University and a senior fellow at the Urban Institute, says the rapid growth of donor-advised funds means that some kind of increased regulation and oversight is inevitable at some point, although it’s unclear whether 2021 is the year it might happen.

“Whenever you have this much money in the system, you’re going to have some kind of regulation or oversight at some point,” says Lott, who previously served as
executive director of Columbia Law School’s National State Attorneys General Program.

Lott declined to speculate on whether the Madoff-Arnold proposal will gain traction in Congress. However, she says its long and diverse list of prominent supporters could mark “a tear in the fabric of the philanthropic universe” that opens the way for major changes in the regulation and oversight of philanthropic institutions.

Deep Divisions

The proposal has yet to result in a bill before Congress, and it is already exposing divisions among different types of nonprofits, their advocacy organizations, and academics. While nonprofits have presented a united front over the past decade to advocate for maintaining and expanding the charitable deduction, the Madoff-Arnold plan has elicited a variety of responses.

The plan has a prominent list of supporters, including billionaire philanthropists John and Laura Arnold, Seth and Beth Klarman, and Kat Taylor, as well as the heads of the Ford, Hewlett, Kellogg, Kresge, and Wallace foundations.

Larry Kramer, president of the Hewlett Foundation, says the plan is preferable to more stringent legislation that lawmakers might consider.

“I think this proposal might well pick up some steam, especially in comparison to some of the other proposals that are likely to be floating around out there,” he said. “It’s a really thoughtful and sensible way to go about this, as opposed to mandating something that might or might not work for different foundations.” (The Hewlett Foundation is a financial supporter of the Chronicle.)

Scott Wallace, chairman of the Wallace Global Fund, also backs the plan. But he is calling on Congress to go even further by passing emergency legislation to double the annual foundation payout rates to 10 percent and institute a 10 percent payout minimum for donor-advised funds accounts for three years.

Opponents say that such requirements would discourage the wealthy from moving their money into foundations and donor-advised-fund accounts, which in turn would pinch the flow of funds to working charities.

Steve Taylor, vice president and counsel for public policy at the United Way Worldwide, said the effort is an overreaction to a limited number of “bad actors,” particularly donor-advised-fund sponsors created by commercial financial services firms like Fidelity Charitable, which generate fees for their affiliates.

The plan could have a chilling effect on fundraising for local United Ways and place an undue burden on the 30 or so local United Ways that manage donor-advised funds, Taylor says.

“The idea that government regulation will generate more dollars to charities is a little absurd to me,” he said.

Similarly, Elise Westhoff, president of the Philanthropy Roundtable, a network of conservative donors and grant makers, issued a statement saying it would “stifle charitable giving when it is most needed.”

Most organizations that sponsor donor-advised-fund accounts also oppose any payout minimums. In a statement, Fidelity Charitable’s president, Pam Norley, said that while Fidelity welcomed the policy discussion, it already enforced “active” giving and that its donors pay out 20 to 24 percent of their assets each year.

Madoff contends that donor-advised-fund sponsors like Fidelity Charitable that are affiliated with commercial financial services firms overstate their payout rate by about 56 percent by improperly calculating their charitable distributions and counting transfers among different donor-advised-fund sponsors as grants to charity.

Community-Foundation Concerns

Community foundations, which originated the idea of donor-advised funds, are actively pressing to alter the proposal, arguing they operate differently than organizations like Fidelity Charitable, Schwab Charitable, and Vanguard Charitable, which generate revenue for the for-profit companies that created them. Community foundations argue that their regional focus makes funds they manage an indispensable tool for donors who want to improve their cities and localities.

Jeff Hamond, who leads the Community Foundation Public Awareness Initiative, an advocacy group that supports about 130 U.S. community foundations nationwide, says Madoff and members of her group have made a “good faith” effort to quell the concerns of regional grant makers.

Hamond declined to comment on what tweaks could be made to the plan to gain support. He said he expects to see a detailed plan in January.

Hamond, who previously served as Democratic Sen. Charles Schumer’s economic policy director, says the overall proposal could gain traction in Congress. If so, he says, community foundations can tell lawmakers a compelling story about how they’ve responded to the needs of their communities, particularly during the pandemic.

Previous Efforts Stall

Any move to accelerate giving through changes in the tax code will inevitably lead to a contentious debate, says Harold Hancock, who served as tax counsel at the House Ways and Means Committee for six years ending in 2017.

In 2014, Republican Rep. Dave Camp, who was then chair of Ways and Means, released draft legislation that would have imposed new rules on donor-advised funds. Unlike the current effort, which provides an incentive for a faster payout, Camp would have required donor-advised-fund account holders to distribute money in their accounts to charity within five years of making a donation.

Hancock remembers getting an earful from charities with different points of view on the matter; ultimately, the legislation went nowhere.

“No sector is a monolith, whether it’s the car industry, whether it’s banks or utilities,” he says. “It’s rare that you do something and everybody in the sector is on board.”

Debate over charitable regulations and tax policy has a tendency to get even more impassioned, he says, because the goal is to encourage citizen involvement and get people to share their wealth.

“There is a moral aspect to it that doesn’t otherwise exist for state or corporate tax,” he says. “That’s why people get so intense on this issue.”

Since Camp took a stab at it, the biggest attempt to push donor-advised funds to distribute more of their cash to charities didn’t even have a payout requirement. A bill that saw committee action in the California General Assembly earlier this year would have simply allowed the state to track the flow of money in and out of the accounts.

The state’s community foundations and national donor-advised-fund sponsors took a dim view of the bill. They said it would be a hassle and an added expense to track funds at the individual account level.

While still in committee, the bill attracted tens of thousands of dollars in lobbying activity from the state’s nonprofits, community foundations, and national commercial funds, and eventually it was killed.

Kat Taylor, a philanthropist who helped lead the California effort and who has signed on to the current one, says the push for the California bill lacked a “galvanized” coalition of nonprofits making their case for lawmakers. The new federal proposal has a number of advantages that should give it traction in Congress, she says. In addition to seeking community foundation sign-on, the new proposal also includes a big sweetener with widespread support in philanthropy: creating a “universal deduction” that would allow all taxpayers to write off charitable giving regardless of whether they itemize.

Taylor says that philanthropy is being slammed by critics who say foundations and individual donors are hoarding wealth in foundation endowments and donor-advised funds. Philanthropy should “read the writing on the wall” and back legislative changes or be prepared to weather further damage to its reputation.

“All of these measures would improve the accountability and impact of philanthropy,” she says. “The last thing you want to do is for charity or philanthropy to lose its credibility.”

Dan Parks contributed to this article.