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On this GivingTuesday, an ominous trend is taking over charitable donations: According to new research, within three years, half of all individual charitable giving will be in part to Wall Street-backed charity funds that deliver massive tax breaks to the ultrawealthy while never requiring donations to reach working charities. Rock the boat.
It’s Dark Money-Giving Tuesday
By Helen Santoro
[View in browser] A group of Wall Street-backed charity funds fueling the dark-money takeover of American politics is set to help collect half of all individual charitable donations within the next three years. These funds, the largest of which are managed by the country’s top financial firms, bestow the ultrawealthy with massive charitable tax breaks even if their donations never reach working charities. So-called donor-advised funds not only operate under a cloak of donor anonymity and bankroll anti-government and hate groups at more than three times the rate of other charitable sources, but there is also no requirement that the money is ever distributed to charities. This means wealthy individuals can get a charity-based tax break without actually participating in charitable giving. The number of people putting money into charitable intermediaries like donor-advised funds is rapidly growing: According to a study published today by the Institute for Policy Studies, a progressive think tank, donor-advised funds and private charitable foundations currently receive 35 percent of all individual giving in the United States. If the trend continues, donor-advised funds and private foundations are expected to collect half of all individual donations by 2028. That means the working charities being celebrated today as part of GivingTuesday may soon be overshadowed by the financial instruments that the country’s rich and powerful are using to protect their wealth and secretly support extremist causes.
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“When Congress passed the laws that shape our philanthropic sector, I don’t think this is what they had in mind,” said study co-author Bella DeVaan, associate director of the Charity Reform Initiative at the Institute for Policy Studies. “Finance and tech profit-seeking shouldn’t have a place in the process of getting money into the hands of working charities, but there are troubling signs that this may become the new normal.” The authors of the study note that investment advisers at financial giants like Vanguard, Fidelity Investments, and Charles Schwab may be incentivized to encourage their wealthy clients to donate to the firms’ affiliated donor-advised funds, rather than directly to private foundations, because the advisers are often paid based on the assets in the funds. Unlike private foundations, such as the Bill and Melinda Gates Foundation, which must donate 5 percent of their assets annually, money in donor-advised funds never has to be disbursed, all while accruing interest. “This means that the wealth parked in [donor-advised funds] — which we have subsidized with charitable tax deductions — doesn’t ever have to reach working charities,” the study authors wrote. According to the most recent report by the National Philanthropic Trust, one of the largest grantmaking institutions in the U.S., the average payout rate from donor-advised funds to charities from 2018 to 2023 was around 24 percent. But experts say this number varies significantly based on the fund. More than half of all donor-advised funds in Michigan, for example, paid out less than 5 percent of their assets in 2020, and more than a third of those funds didn’t make a single grant to charity. When money does leave donor-advised funds, it often ends up in the hands of extremist groups. According to the civil rights organization Southern Poverty Law Center, donor-advised funds have donated hundreds of millions of dollars to organizations designated as hate groups. Since 2020, donor-advised funds have donated at least $18 million to the Heritage Foundation, the archconservative think tank behind the Project 2025 initiative to reshape the federal government and implement policies like gutting abortion access, instituting mass deportations, and limiting voter access. While donor-advised funds can streamline and accelerate giving, “the way some bad actors can anonymously deploy donor-advised funds poses a democratic threat — as does the way donor-advised funds can stagnant wealth or generate profit for money managers,” said DeVaan. Tax Cuts For The Wealthy Originally launched in the 1930s, donor-advised funds have skyrocketed in popularity over the last 30 years. As of 2023, these funds held just under $252 billion in assets — a growth of 69 percent since 2019. Of that money, just $55 billion was donated to charities through grants. Over the next two years, the assets held in donor-advised funds and by private foundations, a type of nonprofit organization made to support charitable activities, are expected to balloon to more than $2 trillion, according to the new Institute for Policy Studies study. The tech sector is also trying to get a piece of the pie: A growing number of startups are promoting platforms and apps that provide easier ways for people to donate to donor-advised funds, all while charging a fee for their services. A major selling point for donor-advised funds is that donors get an immediate tax deduction for all of their contributions — even though the money can remain in the fund, collecting interest indefinitely, rather than ever going to a working charity. “If I have $10 million to give away and give it to a nonprofit, I would get a $10 million tax deduction, and [the charity] would get $10 million,” said Jan Masaoka from the Philanthropy Project, an organization dedicated to making charitable funds more beneficial for the public. However, “if I put in that $10 million into a donor-advised fund, I get the $10 million tax deduction, and the money doesn’t have to be put to use.”
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Donor-advised funds appear uniquely designed to take advantage of the U.S. tax code’s income deduction for charitable giving. Introduced in 1917, the tax cut was specifically designed to benefit high-income Americans with expendable income, according to a 2019 paper by University of Southern California Professor Nicolas Duquette. “The contribution deduction was created to protect voluntary giving to public goods by rich industrialists who had made their fortunes in business,” Duquette wrote. There’s another tax benefit for those who put money in donor-advised funds rather than give directly to a charity: Donors can put in investment assets like stocks, bonds, and real estate without paying capital gains tax. By doing so, donors also score an extra tax deduction equal to the full value of the assets at the time of the gift — even if the asset’s value has risen significantly from what it was initially worth, inflating the investment. Finally, donor-advised funds are attractive to donors looking to support various causes without impacting their reputation. By law, private foundations are required to disclose their donations and recipients, while donor-advised funds can keep donor names hidden from the public. Donor-advised funds can’t contribute directly to political campaigns. However, they can donate to dark-money networks that can then use 501(c)(4) “social welfare” organizations to spend unlimited amounts to influence elections. Consequently, donor-advised funds are contributing to the rise of dark money, which allows unlimited, untraceable funds from an elite few to flood the electoral system and shape U.S. democracy. “This doesn’t mean everyone uses [donor-advised funds] for ill,” said Masaoka. “But it’s a deeply attractive magnet if you are a person that wants to use [these funds] for self-benefit or dark money.” “Takeover Of The Charitable Sector” Efforts to better regulate donor-advised funds have been met with significant lobbying pushback from the financial sector. From 2018 to early 2023, 21 organizations including Vanguard Charitable Endowment Program and Charles Schwab Corp spent an estimated $11 million lobbying on donor-advised funds and other matters, including on efforts to reform the funds’ payout requirements, according to past research by the Institute for Policy Studies. The institute estimated that roughly $3 million of that money went to help defeat the bipartisan Accelerating Charitable Efforts Act, which sought to ensure assets held in donor-advised funds were distributed to charities in a timely manner. The bill would have introduced penalties for donor-advised funds if assets were not distributed within 15 years of the original donation.
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In November 2023, the Internal Revenue Service agency proposed new donor-advised fund regulations, including taxing the fees personal investment advisers receive from such funds. The financial industry pushed back on the limited reforms, arguing that they would cause “immense operational and logistical problems” and are “beyond the regulatory authority delegated to the Treasury.” These tax regulations are still under review, and Brian Mittendorf, an Ohio State University accounting professor who researches donor-advised funds, isn’t necessarily hopeful there will be regulatory strides in the near future. “In many ways, I think [donor-advised funds] are the most quiet tsunami takeover of the charitable sector,” said Mittendorf. “It happened very quietly. It’s not on the top of peoples’ minds, despite the fact that these organizations have gotten enormous.”
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