In a politically polarized time, charity reform may be one place where alliances are forming across parties. A recent seminar hosted by the Chronicle of Philanthropy, How to Rebuild Public Trust in Philanthropy, brought together a right-left medley of concerns about the abuses in philanthropy.

One point of agreement is that the legal framework governing philanthropy, established in 1969, needs to be modernized for these unequal times. Fifty years ago, no one could have anticipated the growing concentration of wealth and the corresponding expansion of the professional wealth-hiding industry.

The wealth defense industry — the tax attorneys, accountants and wealth managers who enable the ultra-wealthy to create dynasty trusts, shell companies and offshore accounts to avoid taxes — have manipulated the philanthropy sector to their preferred purposes. They now deploy charitable giving vehicles such as private foundations and donor-advised funds, or DAFs, as additional tools in their wealth-sequestering toolbox. For example, a year ago, Bloomberg documented the growing practice of hedge fund managers shifting assets into DAFs and private foundations to take advantage of tax benefits while retaining billions under management.

Over 41 cents of every individual dollar given to a charity goes to a private foundation (14%) or DAF (27%), based on the recent 2023 DAF Report, published by National Philanthropic Trust. These trends reflect billions of annual giving diverted away from working charities to intermediaries controlled by donors.

Donor-advised funds have been aggressively marketing themselves for their superior tax benefits, secrecy and nonexistent payout requirements (If you don’t believe it, Google “DAFs” and “tax advantages”). In a new study that we co-authored, “The True Cost of Billionaire Philanthropy,” we provide updated data showing how DAFs are the fastest growing recipient of charity dollars. And DAFs now take in more than a fourth of all U.S. individual charitable giving: The $85 billion that DAFs received in 2022 made up a full 27% of individual giving that year. Some DAF donors grant money out in a timely way, in the spirit of the law. But others do not. And because there is no account-level transparency, we don’t know how fast the money is moving out of individual funds.

The largest commercial DAF sponsors now take in more money each year than our largest public charities. In 2021, seven of the top 10 recipients of charitable revenue in the country were DAF sponsors, including those affiliated with Fidelity Investments, Charles Schwab and Vanguard. And a significant amount of DAF grants flow to other DAFs. We found $2.5 billion in grants going from national donor-advised funds to other national donor-advised funds in 2021 alone (and this doesn’t even include grants to DAFs at community foundations or other nonprofits).

Meanwhile, private foundations continue to treat their 5% minimum payout requirement as a ceiling, not a floor, with the largest foundations hewing to the line most closely. Over the past five years, the median payout rate for private foundations has hovered between 5.2% and 5.6%. For perpetual legacy foundations with assets over $1 billion, the median payout was even lower, ranging from 4.6% to 5.4%.

And private foundations can include compensation to trustees, overhead and grants to DAFs in their payout. We found that 29% of foundations compensate their trustees, some of which are founding family members and descendants. And a number of private foundations are fulfilling their payout requirement with transfers to DAFs, which have no such requirement. Billionaire hedge fund manager Paul Singer, for example, has met 85% of his foundation annual payout requirements between 2017 and 2021 of his foundation with grants to a DAF at JPMorgan Chase.

There is a growing disconnect between the generosity-based giving of ordinary people and the taxpayer-subsidized giving of the ultra-wealthy. With fewer than 10% of households deducting their donations to nonprofits, the charitable deduction is increasingly a benefit to the most affluent and wealthy households in U.S. society. The lion’s share of low- and middle-income donors contribute to local charities without any tax reduction. At the other end of the spectrum, the wealthier a donor is, the larger the tax benefit they can receive.

Our report estimates that the direct taxpayer subsidy for charitable giving is $111 billion a year, not including potentially hundreds of billions in lost capital gains tax revenue. For every dollar a billionaire donates to charity, taxpayers chip in as much as 74 cents in lost revenue. This is because the wealthiest donors use charity not only to reduce their income taxes, but also capital gains, estate and gift taxes.

The most charitably oriented billionaires in the U.S. — that is, those who have signed the Giving Pledge to donate half their wealth during their lifetimes or in their wills — are not immune from the tendency to move wealth to donor-controlled intermediaries instead of active charities.

Our report found that while a handful of Giving Pledge donors are donating funds in a timely manner, those pledges that are eventually fulfilled will likely be met by donations to perpetual private family foundations and donor-advised funds, delaying the public benefit of the taxpayer-subsidized donations. Of the $12 billion in identifiable gifts of over $1 million that the Giving Pledge signers donated to charity in 2022, 68% — more than $8 billion — went either to foundations or to DAFs.

And the wealth of the Giving Pledge donors is growing faster than they can give it away. The 73 living U.S. Giving Pledgers who were billionaires in 2010 saw their wealth grow by 138%, or 224% when adjusted for inflation, through 2022. Of these 73 people, 30 of them have seen their wealth increase more than 200% when adjusted for inflation.

In the worst cases, some pledgers have used their philanthropy for self-serving purposes, such as taking out loans from their foundations or paying themselves hefty trustee salaries. These actions by some billionaire donors raise concerns that what began as a civic-minded initiative to spur generosity is instead serving to concentrate private wealth and power at taxpayer expense.

Some might argue these abuses and examples of self-dealing are rare. But if only a small percentage of the population engages in, say, auto theft, that doesn’t mean we shouldn’t have laws against auto theft. By allowing charity abuses to remain legal — and to rely solely on private associations to police their own ranks — we undermine trust in the sector as a whole.

There are reforms that could limit these abuses and ensure more dollars end up in the hands of actual working charities. These include a payout requirement for DAFs and stronger rules to limit the shell games around payout distribution for private foundations. Lawmakers should also explore increased incentives for non-wealthy donors and a potential cap on the unlimited charitable deduction for billionaires.

This won’t happen any time soon. The defenders of the philanthropic status quo — the Council on Foundations, the Philanthropy Roundtable, the Community Foundation Awareness Network and the lobbyists for large, commercial DAFs — have done a pretty good job blocking reform. As a result, abuses will continue to happen in public, and the pressure will build for legislative changes.

The missing voice in the philanthropy discussion is the U.S. taxpayer, who subsidizes the private giving of billionaires to the tune of over a hundred billion dollars a year. Without any change, philanthropy will further drift toward becoming a taxpayer-subsidized extension of the private power and influence of our most wealthy.

Chuck Collins directs the Program on Inequality and the Common Good at the Institute for Policy Studies, where he also co-edits Helen Flannery directs research at the Charity Reform Initiative and is an Associate Fellow at the Institute for Policy Studies.

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