Donor-advised funds reeled in a record-breaking $29 billion in contributions last year, and with new wealth comes heightened scrutiny. Critics charge that DAFs are warehousing philanthropic dollars, with contributions pouring in but only trickling out. The warehousing phenomenon is all the more objectionable, say critics, because DAF donors can claim tax deductions when contributions go in even though years may pass before any money reaches active charities.
The latest proposal for DAF reform comes from Roger Colinvaux and Ray Madoff, law professors at Catholic University of America and Boston College, respectively. Colinvaux and Madoff are thoughtful and accomplished scholars of nonprofit law whose ideas attract wide attention — and rightly so. Their suggested reform — under the headline “A Donor-Advised Fund Proposal That Would Work for Everyone” — would deny DAF donors a charitable-contribution deduction until money is distributed from their accounts to an active charity. At the time of distribution, under Colinvaux and Madoff’s proposal, donors would be able to deduct the amount paid out to charity (which may be more than donors put in if their DAF investments appreciated in the interim). This, the authors argue, would encourage DAF donors to put their charitable funds to use quickly rather than allowing dollars to languish in DAFs for lengthy periods.
Colinvaux and Madoff’s idea is, in some respects, a “light touch” approach to DAF reform. Contrast their proposal with alternatives that would require DAFs to distribute funds within a short timeframe (e.g., five years) or to pay out a certain fraction of their assets annually (e.g., 7 percent). Colinvaux and Madoff would not require anyone to do anything; they would instead delay (but not deny) tax benefits. Theirs is a nudge rather than a hammer.
Nonetheless, the Colinvaux-Madoff proposal would have wide-ranging ramifications for DAFs and their donors. It would stymie taxpayers who seek to use DAFs to spread philanthropic activity across the life cycle. It would dramatically reduce the tax benefits of DAFs for middle-income donors. And it raises the potential for unintended and unwanted consequences.
Read more at The Chronicle of Philanthropy