Billionaire John Arnold says reform of donor-advised funds wanted

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Donor-advised funds have become “wealth warehousing vehicles” that give tax breaks to the rich without serving their charitable mission, according to a leading philanthropist.

In an interview with CNBC on Monday, billionaire philanthropist John Arnold said that donor-recommended funds hoard more than $ 100 billion in charitable gifts that should go to communities in need. He said the funds, which have skyrocketed in size in the past decade and become a dominant force in charitable giving, need government reform.

He said his goal was “to ensure that philanthropic donations that receive a federal tax break actually get to the community on time.”

Appeals for donations serve as a kind of charitable savings account. Donors can bring assets or funds into a donor-advised fund and receive an instant tax deduction. However, there is no schedule for the gift to be distributed to charities, so the funds can accumulate over time – tax-free – without getting to an actual charity.

“This money can stay in an asset store forever,” said Arnold, who founded a philanthropy company with his wife Laura Arnold Ventures. “It got the tax break on the first day, but that money never has to go to the community.”

Donor advisory funds are particularly popular because of their flexibility and tax advantages. The total assets of the donor-advised funds have more than quadrupled over the past decade to more than $ 140 billion. Approximately one in eight dollars donated to charity in America now goes to a donor-recommended fund. Donors who want to give away some of their wealth now but wait to decide which charities they want to fund may prefer donor-advised funds over traditional charities or foundations.

However, Arnold said that putting off donating to charity into old age or leaving it to future generations can lead to poor decision-making and inefficient giving. Working with Ray Madoff, a professor at Boston College Law School, Arnold has lobbied Congress to pass laws requiring donor-recommended funding for additional grants.

A bill sponsored by Sen. Angus King, I-Maine and Chuck Grassley, R-Iowa, called the Accelerating Charitable Efforts (ACE) Act, would give donors two options. You could get tax deductions upfront but would have to distribute the funds within 15 years, or donors who want more time can opt for the “concerted benefits rule,” which gives them up to 50 years to spend Distribute funds, but can only receive the tax deduction on the distribution.

“Charitable dollars should do the good they are meant to do, not stagnate, to provide some tax breaks and other administrative fees,” said Senator Grassley.

The largest donor-advised fund sponsors include Fidelity Charitable, Schwab Charitable and Vanguard Charitable. Fidelity Charitable says its donors recommended 2 million grants totaling $ 9.1 billion in 2020 – a 24% increase from 2019. Schwab Charitable said its grants totaled $ 3.7 billion Dollars, up 35%.

Community foundations and other proponents of fundraising funds often argue that the funds donate 20% of total assets to charity annually – far more than the 5% required by foundations. However, Arnold said the 20% figure was misleading as not all funds make equal distributions.

“Last year when the demand for philanthropic resources was greatest, 35% of accounts (donor-recommended funds) didn’t make a single dollar in distributions,” he said. “In the past four years, 10% of the accounts have made no distributions.”

The timeline and outlook for the ACE bill remains unclear and has met strong opposition from powerful community foundations such as the Silicon Valley Community Foundation. Sponsors of donor advisory funds prefer to see donations in the fund grow without being distributed because the more assets under management, the higher the management fees.

“I think some of them (opponents) are being seduced by AUM’s management fees,” said Arnold. “The more money there is in this investment account, the more management fees. There’s this tension.”