How do we ensure that “donated” funds will be put to charitable use? We need to make changes to encourage the movement of charitable dollars from foundations and DAFs to charities.
For the past seven years, I have had the incredible privilege of running my family’s foundation. Spending my working hours leading a team that makes decisions about how to give away funding, I have the unique privilege of seeing up close the instrumental work nonprofits are doing to address the needs of our community. From housing our unsheltered neighbors to connecting vulnerable young people with caring mentors, nonprofit organizations ensure donated dollars reach the people who need them most.
As charities continue their important work, they simultaneously face financial hardship—especially today. One report showed that more than one-third of nonprofits throughout the country are in jeopardy of closing within two years. In addition, the nonprofit workforce has lost nearly 960,000 jobs, a devastating blow to local economies and the most vulnerable populations in our community whom those nonprofits serve.
While the outlook is uncertain for nonprofits, the baby boomer generation is in the midst of planning the largest generational transfer of wealth in both US and world history. At the federal level, we have long-established charitable tax deductions to incentivize us to give. Now is the time to re-start a public conversation about what we mean by charitable giving.
I am a proud Minnesotan. Minnesotans are generous people—setting aside money for the public good is in our DNA. Our largest corporations led the nation in charitable giving in the latter half of the twentieth century. Over the next two decades, Minnesotans will act on their generosity by setting aside money to support those working charities we all understand to be both essential and in a precarious financial position.
TAX POLICY TODAY
The simple fact right now is this: our current charitable giving laws no longer work as intended to increase the flow of resources to charitable organizations, especially at a time when charities need help.
Currently, donors can set their funds aside in charitable intermediaries—private foundations and donor-advised funds (DAFs)—and claim the full tax benefits of charitable giving. However, there’s no guarantee that these funds will ever be put to charitable use, breaking the connection between charitable tax benefits and benefits to charities. Taxpayers are left footing the bill without any certainty of receiving the public benefits that come from working charities.
TAX POLICY FOR TOMORROW
The data makes clear that we need to update our charitable tax policy. Over the years, there has been a substantial shift in giving towards DAFs and private foundations and away from direct contributions to charities. According to a report in May, charitable giving by individuals as a share of income has hovered around 2% over the past forty years while contributions to DAFs and private foundations have grown from 5% in 1991 to 28% of all individual giving in 2019. Currently, more than $1 trillion sits in private foundations and DAFs combined.
All this charitably directed wealth could do tremendous good, but in order to protect the vitality of the nonprofit sector in Minnesota, policy changes must be made to distribute dollars from donor-advised funds and private foundations to working charities more quickly. Community foundations and other public intermediaries can play a unique role in ensuring this by connecting newer donors to pressing community issues and leaders. No matter how it happens, donors that claim the full tax benefits of charitable giving need to feel the urgency of actually giving that money away.
My family created our foundation as a way for us to work together to professionally give money away. We have grown closer by building working relationships with community leaders and investing in transformational ideas. But the most important and fulfilling part of my job is very simple: make sure we meet our annual giving budget with fidelity so that the foundation’s endowment is emptied by 2044. So much of our society is focused on the efficient accumulation of wealth; it is my hope that charitable giving laws that govern charitable giving encourage donor-advised funds and private foundations to make distributions that meet or exceed their endowment’s long-term financial returns.
Society’s problems are compounding. Having lived through the last year as a resident of Minneapolis, I know this all too well. Today’s philanthropists should be helping with today’s problems by focusing our attention and resources away from private control and towards the community.