The Super-Rich are Stockpiling Wealth in Black-Box Charities

Donor-advised funds (DAFs) consist of money that grows tax-free in individual accounts and they are reshaping the landscape of philanthropy in the United States. A donor creates the account, waits until it grows in their designated investments, and then will decide how the funds will be doled out. DAF assets were $30 billion in 2010, but by 2016 had grown to $85 billion.

Assets that fund DAFs may start off as highly appreciated property or complex assets such as real estate, oil and gas royalties, publicly traded stock, and closely held business. If a client were to sell those assets they would face a steep tax bill. If they are donated to a DAF, they bring huge tax benefits and a bigger pool of charitable funds than if they had been sold outright and the proceeds donated. A term of art has now been coined to describe this type of tax-powered alchemy to squeeze out every dollar from the wealthy client’s portfolio: philanthropic fracking.

DAFs don’t have a legal requirement for minimum payouts as private foundations must pay out at least 5% of assets annually. Charities see this as problematic because the money DAFs accumulates far out paces the money coming out of it – in essence, the amount being truly donated. Roger Colinvaux, a professor at Catholic University of America’s Columbus School of Law explains, “DAFs are set up to treat money like it’s still the donor’s money. It’s like having your own mutual fund at Fidelity: You get statements and watch it grow. You feel like if you spend it, you lose it.”

See Suzanne Woolley, The Super-Rich are Stockpiling Wealth in Black-Box Charities, Bloomberg, October 3, 2018.

Special thanks to Joel C. Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.