Progress Without Profit: Donor Advised Funds hinder the nonprofit sector
The roller coaster of election ups and downs this week coupled with the looming end of the fall semester has made it difficult for anyone, myself included, to stay focused on any one task at hand. With so much else going on, my last column of the semester about (surprise!) nonprofits may feel out of place or random. However, nonprofits relate critically to the current political climate.
By reimagining and reforming structures, such as philanthropy and nonprofits, we have the potential to largely impact communities. I want to draw attention to practices that aren’t working or benefitting people as well as they should, which leads me to the problematic role Donor Advised Funds play in the nonprofit sector.
DAFs are becoming an increasingly popular way for Americans to set aside billions of dollars for supposedly charitable use. A person simply deposits cash, or an asset including stocks or real estate, in the brokerage account of a commercial national charity, such as Fidelity Charitable. This donation does not require a capital gains tax and the donor receives an immediate tax deduction equivalent to the amount donated. The commercial national charity then invests the asset and gives money to the charity of the donators’ choosing.
At face value, DAFs are an effective vehicle to get more money into charities. The catch? DAFs have no deadline or requirement to donate the money they receive, leading to the stagnation of billions of dollars in brokerage accounts.
Donors’ initial incentive to put their assets into a DAF is the avoidance of a capital gains tax and the immediate tax deduction they receive equal to the amount donated. After this initial financial incentive, however, there is no motivation for donors to ensure charities actually receive the assets. As a result, in 2017, assets to DAFs totaled $85.15 billion, with DAFs only donating $15.75 billion. A study by the Congressional Research office found that 25% of companies with DAFs made no charitable donations.
While initial donors ultimately decide when to donate their money to charity, there is incentive for commercial national charities like Fidelity Charitable to keep the money in DAFs as long as possible. Financial firms take management fees off of the amount of assets in DAFs. Therefore, the longer assets just sit in DAFs, the bigger the pay off for the firms.
The set up of DAFs provides tax loopholes for billionaires at the expense of nonprofits that desperately need funding. For example, the net worth of Nicholas Woodman, the CEO of GoPro, shot up to around $3 billion once his company’s stock went public in 2014. Immediately, Woodman put $500 million worth of GoPro stock (about $95 per share) into the Silicon Valley Community Foundation — saving him tens of millions of dollars. In 2018, GoPro’s stocks plummeted to less than $6 a share with no trace of the Woodman Foundation or the $500 million initially donated.
Knowing his tax bill would rise significantly in 2014, Woodman strategically donated to the Silicon Valley Community Foundation in order to take a tax deduction and avoid capital gains on stocks that eventually lost value. This move likely reduced his personal tax bill for years, with no benefits to the nonprofits the financial firm claims to help.
To remedy these issues, Congress should mandate that commercial national charities provide evidence in tax returns that measure its impact with donations to nonprofits. Additionally, the requirement to distribute donations within a fixed number of years would ensure money leaves DAFs and goes to nonprofits. Lastly, if management fees were capped, financial firms would lose incentive to keep money sitting in DAFs.
As a result of a flawed system, billions of dollars sit in DAFs for years at a time, directly helping the wealthy while keeping money from communities and charities that need it most. Outside of DAFs exist a multitude of issues in nonprofits and philanthropy that lack mainstream awareness and advocacy. The first step to change is identification of the problem. Hopefully, my column this semester has brought to light issues you hadn’t thought about before and shown that, with the right reforms, the nonprofit sector and philanthropy as a whole has the potential to do immense good.
Sophie Roppe is a junior writing about nonprofit organizations and social justice. Her column, “Progress Without Profit,” ran every other Monday.