Today’s “working robber barons” have used a tax break to create a $110 billion charity stockpile, called donor-advised funds. It isn’t getting any smaller.
Chuck Brown remembers the exact moment he realized he was part of the problem.
It was early 2018 and his bosses at the Silicon Valley Community Foundation (SVCF) were, once again, crowing about how much their charitable accounts had grown in the previous year. Leaders proudly announced that they now oversaw $13.5 billion in assets, before turning to their too-familiar refrain: “We’re as small,” the call-and-response went, “as we’re going to ever be.”
“I just remember hanging my head,” said Brown, one of the key fundraisers for the foundation. “If we’re putting our hat on how big we’re getting and how much we’re growing, then we’re definitely doing the wrong thing here.”
Brown would leave the foundation a few months later. That culture would lead to the ouster of the foundation’s CEO a few months after that.
You might think that charities growing larger and larger speaks to an opening of Americans’ hearts and a new age of generosity. But the explosive rise of these tax-exempt philanthropic vehicles — called donor-advised funds, or DAFs, and housed at places like Brown’s former employer — has uncorked a fierce new debate about whether the motives of the wealthy, particularly in Silicon Valley, are as pure as they seem at first blush.
“We here are providing a service for the wealthiest folks in our country in order to create the perception of giving, in order to suck away from the tax basis,” Brown said, “without actually guaranteeing that any of this money is actually going to go out to serve society.”
The money in a DAF does have to go out — theoretically. You can think of donor-advised funds as charitable checking accounts to be drawn on gradually over time. But it can be very gradual, raising questions about whether donors use them to abuse our tax system.
And so a “warehouse” of wealth, totaling $110 billion in DAF assets, has been built on some warped incentives: A donor’s contributions can’t be returned to them, but donors have limited pressure to spend that money and can consider it an asset for their children to disburse later. The middlemen who sponsor the accounts, like the SVCF, are making their own money by piling up donor assets and collecting fees.
And because DAFs are shrouded in secrecy, no one really knows how big this problem is.
Now, for the first time, the inner workings of these DAFs are poised to come into sharp relief thanks to a new lawsuit from two fund donors against the institution that has towered over this new philanthropic gold rush: Fidelity Charitable. While the lawsuit does not existentially threaten DAFs, it will almost certainly pull back the curtain on philanthropic black boxes with billions of dollars that have, until recently, largely evaded any serious scrutiny over their responsibilities, according to about a dozen people interviewed by Recode.
For instance, when professor Brian Mittendorf asks his lecture hall full of Ohio State University accounting students on the first day of each semester to name the 10 highest-grossing charities in the US, the brands of the Red Cross, United Way, or Habitat for Humanity come easily. But his students miss some big ones.
“No one has ever said Fidelity Charitable or Schwab Charitable or the Silicon Valley Community Foundation,” he recalled. “There’s this whole other machinery playing out — just not in the public view.”
Sunlight arrives in the dark world of DAFs
Those three institutions are among the country’s most prolific collectors of donor-advised funds, which have tripled in size over the past decade by offering a seemingly sensational deal: Deposit the money now. Take the tax cut now. Donate the money later. Or not.
DAFs provide an immediate, supercharged tax write-off for donors who have some assets that have appreciated, allowing them to avoid paying a capital gains tax while also providing a deduction as if they had donated their money to a charity directly. The donations are housed at either Wall Street institutions like Fidelity or community foundations like SVCF — and these institutions technically control the fund, but there’s no legal requirement that the money actually be spent in the donors’ lifetimes.
Malcolm and Emily Fairbairn, the plaintiffs in the Fidelity Charitable lawsuit, very much want to donate some of their hedge fund fortune. They are not anti-DAF zealots. They say they just want to help find a cure for Lyme disease.
But their lawsuit could become the most comprehensive, public look at how entities like Fidelity Charitable operate, offering a window into what DAFs say to raise billions of dollars and how exactly that money does (or doesn’t) get spent. The suit’s ongoing discovery process has the potential to uncover key information about Fidelity Charitable, which has only once before faced a lawsuit.
So everyone from nervous foundation leaders to a group of feisty academic critics are closely watching the suit, which they all see as a spotlight on a philanthropic boomlet that has largely avoided mainstream scrutiny. And it is lost on few that the case comes amid invigorated debates about American income inequality and the track record of charitable billionaires as they try to solve it.
Here’s what happened.
In December 2017, the Fairbairns donated $100 million worth of stock they owned in a company called Energous to their DAF at Fidelity, after what the Bay Area-based couple alleges was obsequious and persistent courting by one of Fidelity’s “relationship managers” in Silicon Valley, Justin Kunz. They say he promised to help them turn their hundreds of millions of dollars into a Lyme disease eraser.
But the couple was concerned about donating so much stock all at once. The Fairbairns were donating 10 percent of Energous, and they worried that Fidelity would sell the shares “at the earliest date possible,” as is Fidelity policy. Stocks can sometimes tank when such a large shareholder sells off such a large volume of shares at once — and while the money in the DAF was no longer “theirs,” the Fairbairns say they expressed concerns that their total Fidelity war chest could depreciate unless Fidelity handled the liquidation carefully.
Two days after Christmas, the couple alleges that Kunz made them a series of assurances that convinced them Fidelity would not sell the stock recklessly. But these are called donor-advised funds for a reason. The donors might be able to give whatever advice they want, but Fidelity sat at the controls. And just a few days later, as 2017 ended, Fidelity sold almost all of the shares.
“Fidelity Charitable violated each of its representations to the Fairbairns, and the predictable result was the very outcome the Fairbairns had feared,” the couple’s lawyers claim, “the very reason they went with Fidelity Charitable only once it made those promises.”
The couple, their lawyers, and Fidelity each declined additional comment. But Fidelity claims in its own filings that the Fairbairns’ allegations of oral “assurances” are vague and that it bears no responsibility for any loss of money in a DAF that the couple no longer legally controlled.
“Plaintiffs’ lawsuit seeks to recover substantial damages from a charitable fund for losses to property that Plaintiffs did not own or control, based on vague and incoherent narrative of fraud,” Fidelity’s lawyers write.
But a judge last month ruled against Fidelity’s motion to dismiss the case and to send it toward trial, which the Fairbairns’ team and DAF critics watching the suit have claimed as an early victory.
Because the case focuses primarily on the technical details of how Fidelity acted and not the broader fairness of these philanthropic middlemen, few of those involved think that DAFs are doomed if the Fairbairns win. But a trial will cast some of the first sunlight into these institutions and offer a real example in what has been an abstract, static debate between cranky academics and stubborn philanthropists.
“It exposes the myth of donor-advised funds. And the myth is two conflicting myths: The first is the fig leaf that the sponsoring organization — Fidelity Charitable — maintains control. They are the decision-makers,” said Al Cantor, a consultant for nonprofits. “The other myth, which is sold to the donors, is that the donors are assured that they can control things.”
How DAFs took over the world of charity
The Fairbairns are hardly alone in buying into this “myth.” It can feel like everyone in Silicon Valley has set up a donor-advised fund over the past decade.
DAFs have been around for 30 years, but their growth in the past decade has been astounding. Total yearly contributions to DAFs across the country tripled between 2007 and 2017, with the wealthy giving almost $30 billion to these accounts in the latter year, according to the National Philanthropic Trust.
Everything else has tripled in turn: Disbursements from DAFs tripled from about $6.5 billion in 2007 to $19 billion in 2017. And despite donors’ efforts to get rid of their billions, the cash stockpile parked in DAFs is three times larger than it was a decade ago: What was $32 billion sitting in DAFs in 2007 has mushroomed to $110 billion over the ensuing 10 years, enough assets to eclipse the GDP of some small countries.
Why? Well, DAFs are very simple. Pam Norley, the head of Fidelity Charitable, which took in almost $7 billion in new money in 2017, says that donors can now set them up on a Fidelity app in five minutes. It’s an “Amazon-like frictionless experience,” she promised in an interview, just after returning from a trip to visit some donors in Colorado.
Advocates say it leads to more consistent, less episodic giving.
For instance, Greg Sands, a venture capitalist at Costanoa Ventures, said that whenever he makes money off a startup’s success, he’ll put some money in his DAF housed at Fidelity. Then he’ll try to spend most of it in short order, before retopping it with more money from a different startup exit.
The funds have become especially wildly popular in tech, whose wealthy are more likely to need to park unconventional assets like pre-IPO stock or cryptocurrencies, which DAFs accept with open arms. Everyone from Facebook CEO Mark Zuckerberg to Google co-founder Sergey Brin to Twitter CEO Jack Dorsey have dumped billions into these holding accounts.
One well-off Silicon Valley banker said he opened a DAF at Fidelity about a decade ago and has watched such funds become universal in his social groups.
“When I first had one, only people with a lot more money than me had one. Now all my peers who are financially sophisticated have them,” the banker said. “There are very few tax breaks available to the working robber barons — but this is one.”
Lest you think this is some niche product for a few billionaires, consider that gifts to DAFs have grown to account for more than 10 percent of American individuals’ total giving to charity. That’s twice what it was five years before that. The average Fidelity account is only $19,000, and so even just regular old centimillionaires like the Fairbairns have flocked to DAFs.
That gives some fuel to the argument that contributions to DAFs could be crowding out contributions to charities directly, which declined in 2018 for the first time in a decade. In 2015, Fidelity Charitable finally displaced the United Way — the 125-year-old nonprofit that is one of America’s most recognizable philanthropic brands — as the country’s largest charity in money raised, putting an exclamation point on the rise of the country’s largest donor-advised fund after outpacing everything from the American Red Cross to the Salvation Army.
“I have seen so many of my clients, the nonprofits, be hurt by it, but they’re not able to say anything because there’s a tremendous power imbalance. They don’t want to risk alienating their donors,” Cantor said. “They virtually to a person agree with me, but none of them will say anything.”
How both DAF critics and advocates can live in their own reality
The question at the core of the debate over DAFs: Are any of these middlemen parting with the cash as aggressively as they’re collecting it?
The lack of disclosure requirements makes it impossible to answer this essential question. That allows both advocates and critics of DAFs to claim their own information realities. And no one can definitively rebut either side.
Take Ray Madoff. The Boston College law professor has for years been the most vocal critic of the DAF, saying they are “facilitating all the worst aspects of our charitable system.”
But Madoff has no statistical proof that tons of DAFs are sitting on stockpiles of cash. Individual DAF accounts are not required by law to share how much money they’ve disbursed each year. So the only data comes from aggregate payout rates from DAF sponsors like Fidelity — which is simply the total distributions over the total assets, and doesn’t tell you how common it is for donors to distribute nothing or virtually nothing.
I pressed Madoff on how she could so certainly characterize this system as a sham, given that she had no hard data.
“I don’t care about data. I care about integrity,” she said. “If you told me that everyone was disbursing all of their money within five years, I’d still think there should be [regulation].”
To her, it’s a matter of principle: There are at least some DAF accounts that are sitting dormant for years, having deprived the federal government of tax revenue while providing no money to charity. That means the burden of proof should be on DAFs.
“The question isn’t, ‘Where’s the abuse?’ The question is, ‘Where’s the benefit?’” Madoff said. “You prove to me that there’s a positive.”
Mittendorf, the Ohio State professor, acknowledged that his case was based on conjecture but put it this way: “We don’t regulate the average behavior. We regulate extreme behavior,” he said, comparing the argument to, “The average person doesn’t commit crimes, so we don’t need laws on the books.”
But they’re not the only ones offering unsupported opinions. DAF leaders insist that the vast majority of their donors are throwing money out the door — but they volunteer no detailed data to support that, and their topline figure, total assets under management, continues to spike.
Take Fidelity, which cites an aggregate payout rate of up to 28 percent. If Fidelity really wanted to take critics seriously, it would release full details on how many of its DAF holders are sitting on money and not spending it in a given year. I asked Norley, the head of Fidelity Charitable, why she wouldn’t.
“We’re not in business to address our critics,” she told me.
Fidelity in recent years has taken steps that seem to be an attempt to curtail any DAF abuse, although Norley insists it is “not a reaction.” If a donor does not award any grants from their account in a four-year period, Fidelity tells them that it will possess 5 percent of the DAF’s assets in a year’s time unless the donor outlays some cash. Fidelity then spends that money on its own charitable work.
Fidelity said that in 2018, 2 percent of its accounts hadn’t made a distribution in three years and therefore required one of these warning shots. And unsurprisingly, 88 percent of those donors who receive a warning make a gift within a year, with an average gift of just $4,000.
The rules at the Silicon Valley Community Foundation, with a topline payout rate of 9 percent, are more drastic. If a donor does not make a recommendation for at least a $200 gift over two years, foundation leaders reclaim 5 percent of the account balance if no contribution is made in the next three months. And if the donors continue to hoard money for four years, then the entire DAF account’s balance is reclaimed by the SVCF for its own grant-making strategy. And in a sign of the times, the SVCF is in the process of shortening that rule to three years.
But while some critics of DAFs like Madoff may believe seeing the data is beside the point, it does matter. Data would indicate how important DAF abuse is relative to all the other problems in the world. If people are preoccupied over just a few donors a year who are more or less using DAFs to cheat on their taxes, then they may be waging a principled but disproportionate campaign.
At the Community Foundation for Monterey County, just south of Silicon Valley, all but eight of their 135 DAF accounts made a gift in 2018 — and each of the eight that did not had good, idiosyncratic reasons why they didn’t, such as illness, said foundation chief Dan Baldwin.
The SVCF says that 100 of its more than 1,200 DAF accounts, or about 8 percent, have not made a grant in four years — which is not a small amount. But Gina Dalma, SVCF’s head of public policy, said that should challenge Madoff’s theory.
“Her arguments are really not reflective of the real data that we have,” she said.
Rates can be even higher. About 80 percent of the Columbus Foundation in Ohio’s 1,200 DAFs made at least some gifts from January 2017 to now, said Brad Britton, who oversees them. But to him, the 20 percent that didn’t are not to be reflexively criticized. Some of those DAFs, for instance, were just recently set up and are only months old.
“You’re parked in front of a library. You’re inside that library and doing research. Is it bad that you parked there?” said Britton. “You’re parked for a while, but maybe it’s for a good reason.”
So what should we do?
As income inequality widens, charitable giving shows signs of slowing, and criticism of Big Philanthropy gains momentum in the US, it is surprising that donor-advised funds have eluded scrutiny for so long.
Most of DAF critics’ policy fixes have focused on minimum payout requirements, which would require a set disbursement every year, such as 5 percent, or payout terms, which would require all the money to be disbursed within a given time frame, which Madoff has suggested could be as much as 20 years.
But at the federal level, it doesn’t seem like anyone’s really paying attention. A proposal in the House of Representatives a few years ago to impose payout terms went nowhere. Since then, there has been little serious legislative risk to donor-advised funds at the federal level. A bill currently in the California legislature would subject DAFs in the state to additional reporting requirements.
Though the Democratic Party has been energized by its most liberal voices, no presidential candidates are talking about DAFs. You could easily see someone like Elizabeth Warren making a wonky reform like this part of a policy rollout. (Her campaign didn’t respond to a request for her thoughts on the issue.)
The real risk for the world of DAFs and private foundations alike is more people paying attention.
“If Alexandria Ocasio-Cortez tweeted tomorrow, ‘Why are private foundations only paying out 5 percent when there’s so much need?” said one leader of the pro-DAF efforts, “people would freak out.”
Those who are opposed to regulating DAFs point to the experience of these private foundations — think of organizations like the Gates Foundation — as a counterpoint. DAF sponsors also point to data showing that very few private foundations, which are required to disburse 5 percent of their assets each year, donate any more than that requirement. So they speculate that any similar requirement could actually decrease aggregate giving for DAFs if the minimum payout rate becomes a ceiling as opposed to a floor.
And there is some serious deflection going on even within the world of big-money DAFs.
Local foundations take pains to argue that not all homes for DAFs are built equally. When asked about the criticisms lodged against DAFs, several leaders of community foundations tried to recast the blame toward what they refer to derisively as the “commercials”: Wall Street institutions like Fidelity or Schwab or Goldman Sachs. They paint these actors as transactional, impersonal asset-grabbers who are giving all DAFs a bad name.
If anyone’s going to get regulated, says your friendly neighborhood community foundation, go after Wall Street.
“We know that this donor loves opera. We know that that donor loves feral cats. We know that that donor loves opera and feral cats,” Britton said. “I don’t know that the large commercial gift funds get to that level of intimacy with donors.”
That’s not the experience of Chuck Brown, the former SVCF fundraising leader who has now emerged as one of the most virulent critics of Big Philanthropy. He and his teams were trying to raise about $1 billion a year, relentlessly pursuing about 160 one-on-one meetings with Silicon Valley billionaires or their advisers.
Almost all those conversations, he said, focused on the tax breaks and not on the projects they’d like to pursue.
“It turns out it was kind of irrelevant to what we were offering,” he said. “I personally find it completely unacceptable for the time and the urgency of the moment that we live in.”
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