
Donor Advised Funds get big tax breaks but little oversight - jaboutboul
https://www.theatlantic.com/technology/archive/2018/05/silicon-valley-community-foundation-philanthropy/560216/?single_page=true
======
NelsonMinar
I set up a DAF when Google went public in 2004. I've spent 25-50% of it in the
intervening 13 years, despite best intentions. I sure took that full tax break
in 2004 though and have compounded the value of that annually. So in my case
the DAF has not worked as a great way to funnel money to actual charities. It
just sits idle, compounding. The tax break I got seems to outweigh the public
benefit.

The psychology of having the DAF is funny. I sort of feel the virtue of having
donated to charity every single year, just looking at the balance. When I do
make a grant from the DAF I don't really feel like I'm doing anything more
worthwhile. Also it's a bit impersonal because you have to recommend the grant
then wait several days for the DAF to actually allocate. OTOH it's nice having
a pile of money I've already "spent" that I can use to give to things at a
whim.

I think the solution is to require DAFs spend some large portion of their
balance every single year. Charitable foundations are required to distribute
something like 5%, but I think 10% or more makes more sense for an
individual's DAF. There's also a strong argument that charitable donations
shouldn't be tax deductible at all, remove this whole tax gimmick and economic
distortion. I'm not sure I fully buy it (and the transition would be brutal)
but it is worth reading:
[https://www.economist.com/briefing/2012/06/09/sweetened-
char...](https://www.economist.com/briefing/2012/06/09/sweetened-charity)

~~~
cbhl
I really wish non-profits could have for-profit endowment components in them,
instead of having to ask for money every year.

Rather than giving now or giving later, we could be giving forever by only
spending the interest on the capital.

~~~
namibj
Germany has/had some old institutions [0] that work(ed) that way. The keyword
is Stiftung [1]. There seems to be nothing comparable in the US though, and
you don't get a tax break for the donation, even though any business it
conducts in the states is treated like a 501(c), provided it would be
classified a 501(c) if it were a US based institution.

[0]:
[https://en.wikipedia.org/wiki/B%C3%BCrgerspital_zum_Heiligen...](https://en.wikipedia.org/wiki/B%C3%BCrgerspital_zum_Heiligen_Geist)
[1]:
[https://en.wikipedia.org/wiki/Stiftung](https://en.wikipedia.org/wiki/Stiftung)

~~~
slededit
A number of funded charities are setup that way. Carnegie made many of them.
Bill Gates is actually a bit unusual in terms of the ultra rich setting up
foundations - most wanted their institutions to carry on indefinitely. However
BillG is adament the money is spent completely shortly after his death as he
doesn't feel the dead should control the future.

[https://en.wikipedia.org/wiki/Carnegie_Endowment_for_Interna...](https://en.wikipedia.org/wiki/Carnegie_Endowment_for_International_Peace)

[http://carnegieendowment.org/about/pdfs/carnegie_trusts.pdf](http://carnegieendowment.org/about/pdfs/carnegie_trusts.pdf)

------
jefftk
This is a weird article. It strongly implies that donor advised funds (DAFs)
are storing money indefinitely and not distributing it, but the average
disbursement for DAFs is about 15% per year. In general, people committing the
money to charity now even if they haven't decided what they want to fund is
something I strongly support, because it means they can't later change their
minds and keep the money.

The article also seems to evaluate DAFs primarily on how much they spend in
the Bay Area:

    
    
        And even when it did give out money, the
        Silicon Valley Community Foundation often
        spent it outside of California. Last year,
        it gave out $436 million in grants to the
        nine-county Bay Area, which was just 34
        percent of the $1.3 billion in grants it
        dispersed.
    

The Bay Area is one of the richest regions of one of the richest states of one
of the richest countries. There are definitely people in the Bay Area who need
help, but overall I think it's really good that donors are becoming more
interested in figuring out where their money can do the most good as opposed
to only donating to organizations targeting the region they happen to live in.

~~~
jonahhorowitz
Except the region they happen to live in is dealing with endemic homelessness,
and they're directly contributing to it. Maybe they could try and mitigate
some of their impacts.

~~~
pembrook
First, they aren't _directly_ contributing to it. They are indirectly.

Also, depending on charity from global corporations to solve local community
issues is not a great strategy.

The big tech companies _do_ contribute tax dollars to public organizations
whose _job it is_ to solve matters of local public health and safety (i.e.
homelessness). They're called state and local governments. Could they be the
ones dropping the ball here?

~~~
jonahhorowitz
I'm not depending on global corporations to solve local community issues. I'm
suggesting that the billionaire investors and owners of local corporations to
solve issues in the communities where they are based. The big tech companies
actively employ tax strategies to avoid paying as much of their taxes as
possible.

Yes, it's mostly a state, local, and federal, and international tax policy
issue, but that doesn't change my point that it would be awfully nice if they
tried to mitigate their impacts on their local communities.

------
millstone
DAFs are great for giving.

The 2018 tax law changes increased the standard deduction and limited itemized
deductions. This is certain to depress charitable giving, and DAFs are one
thing that will help protect it.

The reason is they allow donors to separately time the tax benefit from fund
disbursement. Say you wish to donate $10k a year to charity. In 2018, this may
not provide any tax deduction! However a DAF allows you to make a much larger
donation of $100k, realize a tax deduction, and then dish it out in $10k
increments over the years.

DAFs also shields donors from providing contact info to the charity, allowing
donors to escape the never-ending solicitation mail and calls. (Charities
really dislike this, for obvious reasons.)

The concerns about money sitting in DAFs is overblown. A charity with an
endowment also has money that "sits" and isn't being spent, but you wouldn't
describe that as a "black hole."

~~~
skybrian
Seems like a large donation wouldn't be deductable due to AMT? Particularly
when there are high state taxes.

~~~
toast0
In addition to charitable deductions being deductable for AMT, you may also
want to know deductions for state and local taxes are very limited in the 2018
tax year (and beyond), so AMT is likely to mostly disappear (if it wasn't
abolished for individuals? There was some talk of that, but I didn't follow
up, because state tax was my big deduction)

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Erem
My Fidelity DAF is the linchpin of my family's giving strategy -- I don't know
how we could achieve what we want to achieve without it.

The plan has been simple: put 5% of our monthly income into mutual funds
through the DAF until it hits 100k, then start additionally supporting
charitable organizations from the annual interest forever, without ever
donating the principle.

I view the impact of this account as probably my lasting legacy on Earth and
enjoy the idea of passing it's stewardship on to my children.

So it troubles me to read that this giving strategy is somehow contentious.
And I don't yet understand whether what I'm doing is somehow abusing the
original intent of the vehicle, or why it would upset people that we give in
this way.

~~~
s73v3r_
The issue is that, maybe not in your case, but certainly in the cases of
wealthier people, they're getting the tax break, but the money isn't actually
going to anything charitable. If the money isn't actually going to charity,
then why are we, as a society, giving a tax break for it?

~~~
yellowstuff
DAFs can invest the money or make grants to charities. All the money
eventually goes to charity except for management fees, but any investment
account pays management fees. That's why there's a tax break.

~~~
s73v3r_
Does it? What's the thing that forces it to eventually go to charity, as
opposed to laying around in limbo for ever?

~~~
toast0
All the DAFs I researched had a policy that if their overall granting wasn't
at 5% every 5 years, they would enforce that level on each DAF; I had recalled
a larger grant requirement, but on further review I was mistaken, so I've
edited my comment.

Some of the other comments have mentioned funding a DAF with a DAF, though,
which seems like it could workaround the distribution requirements, but also
seems readily closeable.

------
russnewcomer
The two major problems with DAFs stem from the fact that they are designed to
give advantages to donors immediately but not require any further interaction.

Problem - the organization most benefited by DAFs seem not to be charities,
but Vanguard/Fidelty/etc that take management fees for the DAF for the next 10
years. Just running a ballpark with 4% interest and a 1 percent total
management fee, putting 500k into a DAF makes the manager about 70k, and grows
the fund about 170k. Not bad, but the benefit goes almost entirely to the fund
manager.

Problem - Giving to organizations is deferred to a later point in time,
leading to grander visions. Theoretically, this should result in charities in
the future receiving large checks, which is good. One problem with this,
however, is that as numbers being donated get larger, it seems that charitable
giving becomes more 'results' or 'mission' oriented. People give big chunks to
bigger picture, systemic problems like curing cancer, fighting climate change,
etc. These are good things. But the charities working on day-to-day problems
get marginalized. My argument is certainly not that we should look for
structural fixes to problems like pandemics, homelessness, or institutional
racism. But a society that only gives to research universities to look for
cures for pediatric cancer, and doesn't also help fund something like St.
Jude, is a society with deep problems.

DAFs have significant advantages and good things. But perhaps we have, as an
American society, gone the wrong way to give incentives to high-net-worth
individuals to give mainly to big causes, and not to day-to-day problems.

~~~
namibj
You are implying that Vanguard takes 1%. It's under 0.14% for the Total Stock
index, which broadly goes f or marketcap weighted US stocks. If the DAFs
broker takes that much of a premium, they have the wrong broker. E.g. at the
volumes you are talking about, Motif Investing seems to have significantly
lower costs. Please don't think that these are what you should choose, they
are just an example for what I'd potentially (depending on what the specific
goals are) choose if I'd be running a DAF in the US.

~~~
MichaelDickens
Vanguard Charitable charges a 0.6% management fee* on top of the mutual fund
fees:
[https://www.vanguardcharitable.org/individuals/fees_and_expe...](https://www.vanguardcharitable.org/individuals/fees_and_expenses)

*assuming you have <$500K

~~~
namibj
Yes, and I did not mention Vanguard as a broker, due to them not being nice
fee-wise for small fish.

------
cjensen
I enjoy backseat driving as much as the next person. It's fun to tell someone
with money that they should spend it on X and not Y. But it's probably not
productive, though it does lead to lots of clicks and outrage.

Would it be more productive to simply promote specific unmet needs in the
Valley?

~~~
pmoriarty
The outrage isn't over what these people do with their money, but over a tax
loophole that allows rich people to get tax breaks for effectively doing
nothing.

As for promoting specific unmet needs in the Valley, there's no shortage of
that, but apparently the rich would prefer to get big tax breaks than actually
meeting those needs.

~~~
icebraining
It's not "doing nothing". It's legally pledging the money for use on
charitable purposes, rather than buying mansions or yachts. And they only get
a tax break _on that money_.

~~~
pmoriarty
That pledge is worthless if that money never actually gets spent, which is
apparently just what's happening with a lot of these "charities".

In those cases the pledges help no one except rich donors, who get tax breaks.

~~~
icebraining
Even if the money is never spent, those rich donors are still worse off than
if they had kept the money. So I have to wonder what you think is their goal.

~~~
Retric
I am not convinced that's always true.

They are double dipping on tax breaks. If you invest 1$ and it's worth 1,001$
you would normally pay taxes on that of 15% federal + state. However, if you
'donate' it you get to take a deduction on other incomes for the full 1,001$
and those incomes could be taxed at 39.6% federal + state. So it costs you
850$ - state taxes to save 397$ + state taxes.

California is 13.3% so I am not 100% but I think that works to spending 717 to
save 530$ net cost 187$. So, the question is can you make back more than 187$
from a 1,001$ donation. Our president for example would host charitable events
at his golf courses which could likely cross that threshold. But, political
donations seem like a good option also work, even just employing family is a
classic.

PS: If the numbers are a little different aka you are taxed at 39.9% not 15%,
then it's a clear net gain. Other possibility is something which is nominally
worth X, but you would have trouble liquidating for the full value.

~~~
MichaelDickens
You cannot make the required $187 from your donation if you let it sit in a
DAF forever, which is the behavior the article is questioning.

~~~
Retric
Ops, I though the Johnson Amendment had been repealed, but did not realize it
failed.

------
tunesmith
I must be missing something about the benefit. Given that these funds charge a
fee, what is the benefit of them, over just making charitable contributions
directly to non-profits? It's not a tax benefit, is it, since the contribution
size can be written off either way?

~~~
ASinclair
They do provide a tax benefit. See: [https://en.wikipedia.org/wiki/Donor-
advised_fund#Tax_efficie...](https://en.wikipedia.org/wiki/Donor-
advised_fund#Tax_efficiency_example)

~~~
wilg
It seems like that tax benefit is really reducing taxes on the donation
itself, rather than enriching the donor (as implied)? Am I understanding that
right?

~~~
xur17
That is correct.

You can donate appreciated assets (such as stock) to a charity directly, and
you get to deduct the current market price on your taxes without having to pay
capital gains on the asset.

Donor advised funds simply make this process simpler. You can donate your
appreciated asset to a donor advised fund (which acts as a 'charity') and
immediately realize the tax write-off, and then later decide what charity to
give the money to.

This article seems to be making a big issue out of the fact that there are a
lot of donor advised funds in Silicon Valley that are waiting to give the
money out, or giving it out over time instead of making one big donation
immediately. I fail to see the issue - this is just people moving money around
to optimize for taxes - the money will still be given to a charity.

------
Digory
The unappreciated risk in a setup like this is that multiple donors could
inadvertantly give the DAF sizable impact in voting shares. As I understand
it, the Fund, not the donor, owns and votes any donated shares.

If two cofounders sign the Giving Pledge and each give 50% of their voting
shares to the same, local DAF, the DAF winds up with more shares than either
donor. And it can vote them as a block.

~~~
bklyn11201
"Generally, a DAF and its disqualified persons together may own no more than
20% of the voting stock, profits interest, capital interest, or beneficial
interest in a business enterprise."

[http://www.nonprofitlawblog.com/donor-advised-
funds/](http://www.nonprofitlawblog.com/donor-advised-funds/)

~~~
Digory
Interesting. It appears there are two big loopholes to the 20% limit: a
general five-year exception that allows DAFs to wind out of large donations,
and a new exception where the DAF acquires 100% of the voting interest.[0]

[1][https://clarknuber.com/articles/private-foundations-
receive-...](https://clarknuber.com/articles/private-foundations-receive-
excess-business-holdings-relief-bipartisan-budget-act/)

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sevensor
I found it odd that the article talked throughout about "dispersal" of funds,
which sounds a bit like scattering money to the winds. Is this a standard use
with which I'm unfamiliar, or did the author mean "disbursal?"

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pmoriarty
TLDR: _" tax-subsidized contributions are being set aside indefinitely --
subject to no obligation for them ever to be put to active charitable use"_

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tomc1985
Another thing ruined by businesspeople optimizing for numbers...

~~~
twblalock
Businesspeople optimizing for numbers is the reason enough money exists that
some can be given to charity.

~~~
pmoriarty
"Charities" that exist only to give tax breaks to their rich donors.

~~~
twblalock
Some of that money does get to the public.

~~~
pmoriarty
Enough to justify the tax breaks?

Without transparency, it's hard to tell -- which is the other problem the
article is about.

------
omegaworks
DAFs let you get a nice fat tax break with your startup windfall that you can
then promise to the college of your child's choice.

This is not charity.

