Should Congress Curb Donor Advised Funds?

Buried deep in House Ways & Means Committee Chair Dave Camp’s tax reform plan is a proposal to require donor-advised funds to distribute contributions within five years. The proposal would be a major change for these charitable vehicles, where funds currently can sit indefinitely.

Donor-advised funds (DAFs) are an easy, low-cost way for people (who tend to be upper middle-class but not super-rich) to both shelter income and give to their favorite charities. And they have been booming. In 2012, according to the National Philanthropic Trust, these funds held more than $45 billion—nearly as much as the Gates and Ford foundations combined. Contributions were up by one-third over 2011. Think of them as mini private foundations for the merely wealthy, though middle-class people can certainly participate.

They work like this: You set up a fund with a broker or mutual fund company, or with a non-profit community foundation. Each year you can instruct the fund to distribute a portion of your contribution to your favorite charity. However, you can immediately deduct your contributions even before they are distributed.

As with other charitable gifts, you can avoid paying capital gains taxes by contributing appreciated stock or other property to the fund. And you get an extra benefit: You can transfer a single large piece of appreciated property (say, a rental house) to the DAF and then sell it and give the proceeds to many different charities without having to pay capital gains taxes.

Unlike private foundations, DAFs have no minimum distribution rules. Your contributions can sit with your broker or community foundation in perpetuity and never have to be distributed to charities. The managers of the funds collect annual fees for holding and distributing the money.

Camp would require funds to pay out contributions within five years of receipt. Undistributed assets would be hit with a stiff 20 percent excise tax.

Are these funds a tax shelter or an effective tool to encourage well-off (but not rich) Americans to contribute more to charity? The answer may be both.

Supporters note that annual payouts from DAFs average about 16 percent, more than three times the minimum 5 percent distributions required of private foundations (which tend to treat that target as a ceiling as well as a floor). They note that there are no set-up fees and that annual management fees are relatively low (1.1 percent for community foundations and about 0.6 percent or less for brokers—plus investment expenses).  Minimum contributions are usually about $5,000.

Their big argument is that these funds can democratize endowed giving by making a private foundation-like mechanism available to middle-income people. This allows them to smooth their giving by contributing relatively large amounts to their DAF in fat years and smaller amounts in thin ones, and in fact increases charitable contributions overall.

The Manhattan Institute’s Howard Husock made a nice case for the funds in a March 28 piece on “Donor-advised funds, because of their scale and potential for substantial growth, may provide a new model for addressing America’s social needs.”

But critics don’t buy it. Boston College law professor Ray Madoff calls DAFs “charitable checking accounts.” In a January article in the Journal of Philanthropy, she wrote, “…donors and the people who manage their money have been the primary recipients of benefits from the growth of donor-advised funds, while charities and the people they serve are being starved of resources.”

She argues that despite the growing popularity of DAFs, there has been no increase in charitable giving. In fact, she says the ability of people to shelter income by shifting assets to DAFs rather than giving directly to charities may even have reduced contributions to charities themselves.

While I have some sympathy for Husock’s argument, his democratization claim has limits. We don’t know much about the incomes of people who set up DAFs but we do know each fund holds an average of about $225,000.

Thus, DAFs do make it possible for many more people to set up charitable funds, but the biggest tax beneficiaries are still quite likely to be high-income households.

Some form of minimum payout rule seems to make sense though there is nothing magic about Camp’s five years. However, my Tax Policy Center colleague Gene Steuerle asks another question: If policymakers are so worried about sheltering, why impose a five-year distribution rule only on DAFs and not on private foundations as well? If the goal is to make sure funds end up the in hands of charities, why stop with DAFs?



Sales Tax Revenues, State Economies, Lotteries and Fairness

Congress is in recess and returns next week. The Daily Deduction comes to you today, and will resume its regular schedule on Monday, April 28. A penny for your roads in the Show Me State. Missouri may increase its sales tax by one cent to fund transportation projects. A constitutional amendment passed the Missouri House […]

A Flash Tax for the Flash Boys

Michael Lewis spotlights high-frequency traders with his new book, Flash Boys.  These traders use high-speed computers and fast connections to outrace investors, and other traders, to the market.  They now account for more than half of all U.S. stock trades.  And the flash boys spend billions to save milliseconds (by, for example, laying expensive fiber-optic […]

If Congress Lets Firms Expense Investments, It Should Take Away Their Interest Deduction

Egged on by business lobbyists, congressional tax writers seem increasingly interested in allowing firms to rapidly write off the cost of their capital investments. Especially in the House, lawmakers would allow small businesses to expense the full cost of their investments in the year they are acquired, and let larger firms heavily front-load tax depreciation […]

Congress Fiddles While Bridges Crumble

It isn’t news that congressional Democrats and Republicans have agreed to spend the time between now and the November elections messaging, rather than legislating. When it comes to domestic policy it has only two real issues on its must-do list: Deciding the fate of 50+ tax breaks that expired last December and figuring out what […]

Taxes, Pensions and Public Schools: A Balancing Act

Congress is in recess and returns in two weeks. The Daily Deduction will be back next Monday and resume its regular schedule on Monday, April 28. Until then: Don’t miss tomorrow’s TPC event on inequality; outside the Beltway, states and cities’ pension and education funding problems persist. Tomorrow: TPC Tax Day conversation with Thomas Piketty […]

Taxing Weekend Ahead

“Simple” is in the eye of the beholder: Maybe “fairness” has universal appeal. A new poll shows most people think filing tax returns is “easy” and TPC’s Howard Gleckman wonders if anybody really cares about a simple revenue code in his latest post. Few of us file by hand anymore so doing taxes feels simple, […]

Does Anyone Care About a Simple Tax Code?

One of the biggest  selling points for tax reform is the claim that a new and improved revenue code would be easier for taxpayers to manage. Along with economic growth and fairness, simplicity has been a watchword for reform for decades. But a striking new survey by the Associated Press-GfK  has me wondering whether anybody cares. […]

A New Tax Tool, Committees, Bonds and Climbs

Getting to know your 1040: TPC demystifies your tax forms. We dutifully enter numbers on our tax returns every year (or pay somebody do it for us). But what do each of those lines really mean? How do they contribute to the nation’s revenues? How many people report various sources of income? To find out, […]

What’s Behind That 1040? Check Out TPC’s Interactive Tax Forms

Federal income taxes are complicated. That’s why roughly 90 percent of us either hire someone to prepare our tax returns or use computer software to do the job on our own. Only a tenth of us actually sit down and fill out the forms by hand. But it’s still important to understand what goes onto […]