While many suggest that donor-advised funds should be mandated to pay down and increase their giving to COVID-19 relief, DAFs are already increasing payouts to those in need—without federal mandates.
The COVID-19 outbreak has shocked the world. As a nation, we are beginning to feel the effects of this new recession and wonder how much worse it will get. Charities and nonprofits have always stepped up during times of economic turmoil to help those most in need. But those organizations are now feeling hard-pressed to maintain services and staff. Most have canceled events and frozen hiring merely to meet operating expenses.
But a little-noticed section of the new $2.2 trillion economic rescue package is focused on encouraging Americans to give now and to helping these nonprofits get back on their feet. The Coronavirus Aid, Relief and Economic Security (CARES) Act creates incentives to spur donations and philanthropic giving, including tax deductions and small-business loans to nonprofit groups. Under the CARES Act, donors can earn a federal income tax deduction for charitable contributions of up to 100 percent of their Adjusted Gross Income (AGI), replacing the 60 percent of the 2020 AGI charitable contribution limit.
The CARES Act also makes it possible for private businesses to use donor-advised funds to provide direct emergency relief to affected employees and allows for generous tax deductions for these contributions.
Some critics, however, recommend adding restrictive provisions to the federal incentives, including raising the minimum payout level for private foundations, establishing a payout rate for donor-advised funds, or even forcing DAF sponsors to empty orphan funds and/or create COVID-19 special funds. In addition, there is a small movement to encourage donor-advised fund providers to “halve” their assets and give to COVID-19 relief.
But those proposed restrictions promote the dangerous idea that government should control private philanthropic giving. In fact, the primary reason the U.S. tax code allows for deductions for charitable giving is to enable individuals and groups to use their personal assets freely to serve the public good. The U.S Supreme Court established this principle when Chief Justice John Marshall ruled against an attempt by President Thomas Jefferson to control private actions that served “public” purposes. Consequently, private citizens and businesses have the right to contribute to causes that serve the public without government interference.
Donor-advised funds are ideally positioned right now to serve that public good. Because of their tremendous growth over the past decade and the fact that some donors have yet to allocate all of their funds, charitable contributions from DAFs could play an important role in easing recession pains for countless charities. The reality is they are already doing that—without being legally compelled. The commercial banks, community foundations, and mission-driven DAF sponsors are reporting dramatic increases in grant requests and total outlays year-to-date. Payout rates are clearly on the rise and will continue to grow as the year progresses. In other words, they are already doing what politicians and activisits are unnecessarily trying to compel them to do.
Can we trust DAFs and other private foundations to step up to the plate? Absolutely. There is no need for the government to “force” this to happen. DonorsTrust is already helping American workers and businesses back to work through our Growth & Resilience Project, a special fund which is not donor-advised, but rather is directed with no administrative fees by an advisory committee to finance job creation, small-business support, economic deregulation, and lowering barriers to entry in fields like education and health care. We are not alone in this effort.
Likewise, many community and family foundations have already signaled to their grantees that previous “project-specific” grants may now be used as general operation grants, thus providing discretion to nonprofit leaders to allocate funds as best they see fit. Many grant committees recognize the importance of grantmaking well above the 5% minimum payout requirement—especially now.
It is also important to remind the public that private foundations support many important charities that may not be seen currently as “COVID-19” responders but still need continued support, such as community theaters, art galleries, zoos, and recreational programs. We need foundations and donor-advised fund providers to be engaged with these because they are vital to restoring our frayed social fabric—especially after the pandemic when the return to social life takes on a renewed urgency.When society no longer lives in fear of the virus, the need for museums, sporting activities, travel, music, and volunteerism will be paramount.
No matter one’s political persuasion, it is a certain truth that government action, well-intentioned or not, has hindered and shut down social and economic activity. Thoughtful government regulations and policies are necessary to help move our nation forward, But in my experience, it’s often government inaction that frees up the resources and creativity of private businesses, foundations, innovative charities and donor-advised funds to significantly help Americans most in need. As a former colleague of mine says, “Government does not need to plant more grass, it just needs to get the rocks off the lawn.”