There is a rising debate over “donor-advised funds,” the fastest growing category in charity.
Donor-advised funds are a way to put aside money now for charity, and claim the tax deduction now, but have the freedom to actually donate the money whenever the donor wants. They’ve been around for a long time, but their sharp rise came after the asset management firm Fidelity set up a philanthropic fund, Fidelity Charitable, to manage them.
Fidelity Charitable is the industry leader — it is now the second biggest charity in the country and catching up fast to number one, United Way — and other investment firms, including Goldman Sachs, Vanguard, and Charles Schwab also manage donor-advised funds.
Critics say charitable trusts give donors a way to just park their money and take the tax break — without any time frame for when they would actually donate the money.
Boston College Law professor Ray Madoff told the Boston Globe that that if the funds did not exist, “there is every reason to think that that money would be going directly to working charities.”
Madoff wants Congress to pass a law requiring donors to disburse funds in 7 years.
But supporters of donor advised funds point out that all the money being held in these funds is required to go to charity by law. They say it doesn’t matter when that happens, and argue that these funds may be attracting money that might not otherwise be donated.
The National Philanthropic Trust reports that American donor-advised funds handed out about 16% of their total holdings in 2012, which, Fidelity notes, is much higher than the 5% that most foundations pay out per year.
Critics say that may be true for the funds in aggregate, but we know nothing about individual funds — they want more transparency in donor advised funds.
ROBIN YOUNG, HOST:
It's HERE AND NOW.
And if you're on charity's mailing list, you're probably hearing from them because today is the last day this year to give and get a tax deduction. But increasingly donors are not giving directly to charities. They're giving to asset management firms like Fidelity. Fidelity Charitable is the philanthropic arm of Fidelity. It's the second biggest charity in the country. United Way is number one. Donors give to Fidelity, get their tax break, and then Fidelity or Schwab and Vanguard hold the money in special accounts, collect management fees, and keep the money from charities for a while. At least that's what critics say. Fidelity says it grows the money and ultimately gives out more than other foundations.
Stacy Palmer is editor of the Chronicle of Philanthropy. So Stacy, where do you stand? These donor-advised funds, what are they?
STACY PALMER: These funds are growing incredibly fast, and they're really just like charity checking accounts. Let's say I have $10,000 that I want to give away, but I'm not really sure where I want to give it to. So I plunk the money into the account. I take my tax deduction from my $10,000 and it sits there. And it can grow or I can decide to give it away, and I get to recommend what charities I want to give to over the year, over the next five years, over the next 10 years. And I can put more money in anytime I want and get a tax deduction. Yeah.
YOUNG: And these donor-advised funds were just a blip until the 1990s when Fidelity introduced this charitable gift fund. Other firms, as we said, are now doing it. How big do you think this category is?
PALMER: It's very big. We know that at least 45 billion in assets are held now and they keep growing. Some of the nonprofits that raise money this way, Schwab, Fidelity, their increasing by as much as 90 percent in some years. And that's phenomenal in these hard-pressed times. Most charities are struggling to raise 2 or 3 percent more than they did the year before. So these increases show just how powerful these funds have become.
YOUNG: Well - and what is the concern? Because as we said, Fidelity says that it will grow the money. Ultimately there might be more money to give out. But you have people like Boston College Law Professor Ray Madoff who says this money could otherwise go directly to a working charity, charities that desperately need it. What's the truth here?
PALMER: One of the things that bothers the critics is there's no requirement that you give money away from your fund. You really could keep it in until you die, and the money then would go to charity. Now, funds like Fidelity put a rule in so that every seven years you have to give some money away. And it's a minimal amount, just $250, but they still say that you do have to at least disperse something. And the fact that there's no requirement is part of what really bothers the critics.
The other part is that these funds aren't transparent. When you're something like the Gates Foundation or the Robert Wood Johnson Foundation, you file an informational tax form that anybody can see, that the IRS can check up on you. But if you're in a donor-advised fund, that money is locked up. It's private. And it's great if you're a donor who wants to stay anonymous, but it's not so good if you're a charity trying to get that money.
YOUNG: Let's take this one step at a time. Who would that benefit, to have no payout? I mean certainly not the donor because once they give the money, it's not theirs. That doesn't benefit the donor, right?
PALMER: It doesn't, but some people just don't know where they want to give and aren't really thinking about it. You're right. There's no incentive for the donor to hold onto it. But it's one of those out-of-sight, out-of-mind things. And especially in this bad economy, when many nonprofits need money right now to be able to pay their bills, it is upsetting people that some of this money is just staying in these funds for years and years.
YOUNG: Other critics say there is some incentive for the banks. Managers have to be paid to manage this money. The longer it stays at Fidelity, the more money they make off it.
PALMER: Absolutely. And that's one of the reasons that the funds don't really have a huge incentive to tell you to take it out. Now, they know from public policy reasons they need to talk about helping you give. And Fidelity has really stepped up over the years some of the advice it gives to donors so that they will give the money way. But certainly they have a financial incentive to keep the money growing. And there have been some concerns that that's what's happening at other funds around the country.
One thing that's important to realize, it's the donor's decision about how much to give. And you might have a really good reason for not wanting to give the money away in the first year. It might be that you know that the group you support is about to start a capital campaign. And you want to start accumulating that money now and letting it grow. And three years from now you'll make a commitment to that capital campaign for a building or a research project or something you really care about.
YOUNG: What does Fidelity say?
PALMER: Fidelity says that, you know, it is encouraging people to give money away and that it does have this rule that every seven years you have to give some money away. And if you don't give that money away, it reverts into Fidelity's charitable coffers. So it will give the money away for you. So that's a pretty powerful incentive. So they do take some steps to deal with this.
They also point out that at least 17 percent of the money is given out every year. And that's a lot more than private foundations are giving away. Private foundations are required to give at least 5 percent of their assets every year. So that's a foundation like the Bill and Melinda Gates Foundation. That's all they're required to give. So 17 percent is a whole lot more than that 5 percent requirement.
YOUNG: So we want to underscore that, that Fidelity points out that it does - or it claims that it gives out more money than it might be required to. But, again, we mentioned Boston College law professor Ray Madoff. She's calling for some sort of regulation. What is the sense there?
PALMER: A lot of the critics would like donors to be required to give this money away. The feeling is that you're getting a tax benefit immediately, so why shouldn't you be expected to give the money away so that it benefits society right away? And because the assets are growing so fast, at some point, Congress probably will pay attention to it, and there would be some kind of a federal requirement. Probably it would be that 5 percent requirement just like the foundations are required to do. I would never expect them to do much more than that.
YOUNG: Yeah. Well, meanwhile, your organization, again, the Chronicle of Philanthropy, writes about what else is going on here, a new culture clash or cultural divide, if you will, a stark difference in the fundraising results of United Way, which helps the needy by distributing to social service groups and raises it's money for mostly middle class, maybe blue-collar people, and Fidelity, which is, you know, become a charity for the more affluent.
PALMER: Yes. We've seen a real change in the way people give, and United Way is not as popular as it used to be. It's one of the oldest charities in the country. But many people don't like the way it decides to give money away and the fact that it makes the decisions. They'd rather make the decisions themselves. So something like Fidelity is appealing to people in a - particularly to people who already have financial investments at a place like Fidelity. So many of its customers are the people who put the money away, and those tend to be more affluent people.
You know, United Way is struggling for lots of reasons in part because people are just frustrated with the way it solicits money. So part of it is a blue-collar, white-collar thing. But some of it is about the way United Way itself operates. And a lot of the old-fashioned charities are struggling to gain market share these days. People are looking for new ways to give money and thinking about things in different ways.
YOUNG: Stacy Palmer, editor of the Chronicle of Philanthropy, with some things for people to chew over on this the last day of the year, the last day in which some people make their charitable donations. Stacy, thanks so much.
PALMER: Thank you for having me.
YOUNG: And we can't say enough. Today is the last day. Think of a group that you love. It's the last day to make that charitable donation for 2013. By the way, we hear from Australia, Japan, China, 2014 is going swimmingly. You're listening to HERE AND NOW. Transcript provided by NPR, Copyright NPR.