donor-advised fund - Alliance for Charitable Reform

Report
A solution in search of a problem
DonorsTrust / Donors Capital Fund Analysis of the
Camp Donor-Advised Fund Payout Proposal
2:00 – 3:30 PM
May 29, 2014
A solution in search of a problem
Agenda
• What is DonorsTrust?
• Why do donors choose DonorsTrust?
• What is the Camp proposal for donor-advised fund account
payouts?
• What rules govern payouts from private foundations?
• What’s wrong with the Camp donor-advised fund account
payout proposal?
DonorsTrust
2
A solution in search of a problem
What is DonorsTrust
– We are a national “community foundation” or cause-related
donor-advised fund sponsoring organization
– Our community is philosophic rather than geographic
– DonorsTrust’s primary program is provision of donor-advised
fund (DAF) accounts for donors who share our mission
– The central and animating purpose of DonorsTrust is to protect
charitable intent in support of liberty -- limited government,
personal responsibility, and free enterprise
– Because DonorsTrust has a specific mission and serves a
specific community, DonorsTrust has and does turn down
advisor grant requests that fall outside our mission and purpose
DonorsTrust
3
A solution in search of a problem
What is DonorsTrust (continued)
– In keeping with DonorsTrust’s commitment to protect account
holder’s charitable intent, we require DAF accounts to sunset within
25 years or so after the death of the original account-holders
• No perpetual accounts at DonorsTrust
• Successor advisors to administer during sunset term, only
– Based on preliminary analysis, 75% of contributions to DonorsTrust
are paid out within 5 years of receipt
• Some accounts were specifically created to payout only at a future date,
and in some cases that date is substantially beyond a 5 year period
– Our 2013 payout rate was 116% (DonorsTrust and Donors Capital
Fund -- 2013 grants / 5 year avg. value at end of year)
– Over our lifetime, we have received $680.3 million in contributions
and issued $564.5 million in grants – an 83% lifetime payout ratio
DonorsTrust
4
A solution in search of a problem
What is DonorsTrust (continued)
• Established in 1999
• Between DonorsTrust and Donors Capital Fund (a
supporting organization of DonorsTrust), 215 donoradvised fund accounts during its history
• Median payout rate is 92.4%
• 164 have cumulative payout rates 50% or higher
• 27 have cumulative payout rates 100% or higher
For purposes of these statistics “payout rate” looks at contributions into a
particular DAF account and grants from the DAF account
DonorsTrust
5
A solution in search of a problem
Why do donors choose DonorsTrust?
– Administrative ease
•
•
•
•
–
–
–
–
Only one charitable gift receipt to keep track of
No due diligence or paperwork to process
Quarterly reports and online access
Assistance with choosing grantees
Move from checkbook giving to strategic giving
Current accounts allow us to document our donors’ preferences
Our donors do not view us as a useless middleman
Protect their charitable intent
• We ask for detailed mission statements
• We ask for sunset beneficiaries
• We pledge to support their sunset plans, and to monitor successor
advisors and sunset beneficiaries for “mission drift”
DonorsTrust
6
A solution in search of a problem
What is the Camp proposal?
• Chairman of House Ways and Means committee, Dave Camp, put
forth draft legislation, the “Tax Reform Act of 2014”
• Section 5203 of the Act introduces a new Internal Revenue Code
(“Code”) provision (Section 4968 of the Code)
• Proposed Section 4968 of the Code would require that all
contributions to a DAF be distributed within five years of receipt -existing DAF account balances as of December 31, 2014, would be
treated as if contributed on December 31, 2014
DonorsTrust
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A solution in search of a problem
What is the Camp proposal (continued)?
“The proposal generally is effective for contributions made
after December 31, 2014. In the case of a contribution
made before January 1, 2015, any portion of which
(including any earnings attributable thereto) is held in a
donor advised fund as of such date, such portion is treated
as having been contributed on such date.”
Technical Explanation of The Tax Reform Act of 2014, A Discussion Draft of the
Chairman of the House Committee on Ways and Means to Reform the Internal
Revenue Code: Title V – Tax Exempt Entities, Section C.3., Excise tax on
failure to distribute within five years a contribution to a donor advised fund . . .
Emphasis added.
DonorsTrust
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A solution in search of a problem
What is the Camp proposal (continued)?
• Failure to meet the requirements of Section 4968 would
result in imposition of an excise tax equal to 20% of the
amount of the contribution not distributed within the
applicable timeframe
• Excise tax imposed at entity level
• Distribution to a DAF account at a different sponsoring
organization would not be a qualified distribution
– Impossible for a DAF account advisor to establish a DAF at a
different sponsoring organization without subjecting the original
sponsoring organization to a perpetual 20% excise tax
– Locks donors into the sponsoring organization where the DAF is
first established
DonorsTrust
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A solution in search of a problem
Private Foundations and Payouts
• DAFs are often considered an alternative to non-operating private
foundations (PFs)
• PFs are subject to a minimum required distribution (“MRD”) rule
• MRD rule requires a PF to calculate its average monthly endowment
and pay-out 5% of this amount on or before December 31 of the
following year (for calendar year PFs)
• Payouts in excess of the 5% minimum requirement can be carried
forward to future years and count toward future years’ MRD
• Failure to meet the minimum payout requirement may result in
imposition of an excise tax equal to 30% of the amount the PF failed
to distribute in a timely manner
DonorsTrust
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A solution in search of a problem
PF MRD Rule vs. Camp DAF Rule
• PF payout based on average account value
– Camp rule much more complex – track individual contributions
• PF payout only 5% of total endowment value
– Camp rule requires 100% of each contribution be distributed
within 5 years
– Camp rule eliminates a “permanent endowment” for a DAF
account
• Not necessary a bad result, but why effectively destroy the use of
DAF accounts as a philanthropic platform and turn it into an
enhanced charitable checkbook?
– PF rule allows a permanent endowment
DonorsTrust
11
A solution in search of a problem
PF MRD Rule vs. Camp DAF Rule (continued)
• PF payout rule administratively simple
– PFs can use any reasonable method to calculate average monthly
value of their endowment, provided it is consistently applied
– Camp DAF rule imposes complex requirement to track each
separate contribution to a DAF account to ensure the total value of
each separate contribution is distributed within 5 years of its receipt
• Why should the DAF payout rule be more stringent than the
PF MRD rule?
– While true that contributions to DAF accounts receive more
favorable tax treatment than contributions to PFs, it is generally no
more favorable than contributions to properly structured charitable
remainder trusts, which are not required to distribute to charitable
beneficiaries for a life-in-being plus 20 years
DonorsTrust
12
A solution in search of a problem
What’s wrong with the Camp proposal?
• Arguably, DAFs “democratize” or pluralize philanthropy
– DAF accounts provide a philanthropic platform to a much broader group of
potential philanthropists than the primary alternative – private foundations
– DAF accounts can be established using a relatively minimal amount of startup capital ($10,000 in the case of DonorsTrust; $5,000 in the case of
Fidelity Charitable; $25,000 in the case of Vanguard Charitable Fund)
– Camp proposal restricts, if not eliminates, an individual’s choice of low cost
charitable administration solutions
• DAF accounts allow individuals to evolve from checkbook donors to
thoughtful philanthropists
– The camp proposal undermines, if not eliminates, the use of DAF accounts
as a means of moving away from checkbook giving to strategic giving
– Why favor the 1% over the 99%?
• Severely restrict ability of donors to monitor for mission drift
– Cannot use a DAF account to protect charitable intent
DonorsTrust
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A solution in search of a problem
What’s wrong with the Camp proposal (cont.)?
• Places smaller DAF sponsoring organizations at a
disadvantage compared with larger organizations
– In a classic one size fits all government “solution,” the Camp
proposal leaves the largest DAF sponsoring organizations in a
stronger position than their smaller brethren
– Expense of complying with the onerous burden of tracking each
separate contribution to a DAF account much easier for larger
organizations to absorb
• Classic Washington DC -- picks winners and losers
rather than letting the market and individuals decide
– PF over DAF sponsoring organizations
– Larger sponsoring organization over smaller sponsoring
organization
DonorsTrust
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A solution in search of a problem
What’s wrong with the Camp proposal (continued)?
• Treats similar philanthropic platforms in vastly different
manner
– Why are the rules imposed on DAF accounts so much harsher
than those imposed on private foundations?
– Arguably, the rules imposed on DAF accounts should be less
strenuous than those placed on PFs
• Fewer entities for the Internal Revenue Service to “police”
DonorsTrust
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A solution in search of a problem
What’s wrong with the Camp proposal (continued)?
• There are a number of philanthropic platforms that allow
an immediate tax benefit without requiring the entire
amount (or even any amount) of the contribution be put
to use within 5 years:
–
–
–
–
Private foundations
Charitable remainder trusts
Charitable gift annuities
University endowments
• No good reason for payout rules imposed on DAF
accounts to be more draconian than those imposed on
PFs
– Granted, no one has ever successfully argued there is consistent
rhyme or reason to the Code
DonorsTrust
16
Giving More:
The Magic of Donor-advised Funds
Brent Christopher, President & CEO
Alliance for Charitable Reform Webinar
May 28, 2014
It is essential for
charitable dollars to be
put to work.
And, we need more
of them.
What makes a donor-advised
fund so effective?
Donor-advised Funds
Simple
. . .which also
means, less
expensive
Donor-advised Funds
Democratize Giving
Easier for more people
to be philanthropists—
to bring structure,
thoughtfulness and
discipline to their
giving, small and
large
Donor-advised Funds
Multi-generational
Pass down family
values and engage
children, but without
private control in
perpetuity
Donor-advised Funds
Unique Assets
Beyond the usual cash
and stock, put a broader
range of assets (that
most charities aren’t
equipped to handle) to
work for the public good
Donor-advised Funds
Time to Think
Align grants with
your interests
and community
needs to support
effective charities
Donor-advised Funds
Oversight
Satisfy public charity
accountability and
transparency, with
back-office support
to ensure compliance
Donor-advised Funds
Your Horizon Preference
Choose to pay out for immediate
needs, or to be a reliable future
resource for the community
Donor-advised Funds
. . .and at
community
foundations, help
to underwrite
community
engagement.
Dallas Mayor Mike Rawlings addresses a group of community leaders concerned
about building economic stability for low-income working families.
Donor-advised Funds
Why not a five-year payout?
Many donors highly value:
• capitalizing on a liquidity event to give a much
larger gift than their routine giving
• involving their family over time
• being thoughtful and being able to plan for
future grants
• meeting future community needs
Donor-advised Funds
Flexibility = Maximum Generosity
Donor-advised Funds
Flexibility = More Giving
Donor-advised Funds
Flexibility = More Public Good
Donor-advised Funds
Howard Husock, Contributor
3/28/2014 @ 6:40AM |897 views
Does Dave Camp
Hate Mark
Zuckerberg? The
Surprising Attack
On Donor
Advised Funds
Mark Zuckerberg interviewed by Financial Times, Scobleizer, and Techcrunch (Photo credit: Robert Scoble)
Philanthropy and
donor-advised funds
Philanthropy, charity, giving voluntarily
and freely…call it what you like, but it is
truly a jewel of an American tradition.
- John F. Kennedy
Philanthropy plays an important role
in America
Society
Family
Econom
y
History of charitable giving
1900s
• Revenue Act of 1913
• Community Foundations
• Revenue Act of 1917
1920s
• Revenue Act of 1921
1930s
• First donor-advised fund
established
1940s
• IRS Form 990 required
Donors focusing on strategy and goals
New charitable tools and technologies
emerging
Definition of social good evolving,
includes impact investing
1950s
1960s
Today
• Revenue Act of 1969
1970s
1980s
1990s
• National donor-advised funds
2000s
• Pension Protection Act of 2006
Transfer of significant wealth shaping
future of giving
Tax Reform Act of 2014
Discussion draft proposed by House Committee on Ways and Means, led by Chairman Dave Camp
Charitable giving
Donor-advised funds
• 2% floor on charitable deduction
• Required to pay out all contributions
within 5 years of receipt
• Extend close of tax year to April 15
• Phase out itemized deduction for
certain taxpayers
• Simplified excise tax for private
foundations
• New excise taxes
• Other giving impacts
• Contributions and grants treated on
a first-in, first-out basis
• If payout unmet, DAF assessed
annual excise tax of 20% on
undistributed funds
Charitable giving tools
Many giving options are available; donor-advised funds lead in numbers of accounts.
201,631
91,250
77,000
14,616
6,498
Donor-advised funds
Charitable remainder
unitrusts
Independent
foundations
Source: National Philanthropic Trust, “2013 Donor-Advised Fund Report.”
Data represents 2012 numbers.
1,324
Charitable remainder Charitable lead trusts Pooled income funds
annuity trusts
Donor-advised funds
National donor-advised funds (DAFs) have dominated the past five years with 50% of market share.
15-25% of assets have been granted annually in all segments.
$60
Total assets (Billions)
$50
$40
$30
$20
$10
$1990
Other
1995
Educational institutions
2000
2005
Jewish federations
2010
CY2012
Community foundations
CY2013
National DAFs*
*National DAFs are founded by banks or financial services firms with a national presence; data as of December 31, 2013.
Sources: The Chronicle of Philanthropy surveys, National Center for Charitable Statistics, Council on Foundations, National Philanthropic Trust’s report of
Donor-Advised Funds (2012) and Vanguard Charitable estimates and analysis.
How Vanguard Charitable’s philanthropic
account works
to a
1 Contribute
philanthropic
account and take
an immediate tax
deduction.
investment
2 Select
options. Assets
are invested and
proceeds grow
tax-free.
a
3 Recommend
grant. Due
diligence is
conducted and
funds issued.
a succession
4 Craft
plan to establish a
legacy of giving.
Why use a philanthropic account?
Operation
s
Legacy
Family
One-time
event
Memorial
Retireme
nt
Foundati
on
Our donor base continues to grow
and diversify
Growth of Vanguard Charitable over the past 10 years
Average account size: $306,000
Median account size: $47,000
Assets under management (millions)
Number of active accounts
$4,000
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$'02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13
As of June 30, 2013.
'02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13
Vanguard Charitable grant activity
by fiscal year
60,000
$700
$600
50,000
$500
40,000
30,000
$300
20,000
$200
10,000
$100
-
$FY2005
FY2006
FY2007
FY2008
FY2009
Grant Units
FY2010
FY2011
Grant Dollars
FY2012
FY2013
FY2014F
Millions
$400
Vanguard Charitable donors contribute
and grant in a variety of ways
Contribution types (percentage by dollars)
Based on Vanguard Charitable’s fiscal 2013 results
As of June 30, 2013.
Grant interest areas (percentage by units)
Vanguard Charitable has payout requirements**
Aggregate grant requirement
- 5% of average net assets on a current five-year rolling basis.
Per account grant requirement
- Accounts must recommend and issue at least one $500 grant every
seven years.
- 1% of total accounts do not meet this requirement each year.
Vanguard Charitable proactively outreaches to these accounts to
ensure all meet this requirement.
** Both requirements part of IRS representations
How has Vanguard Charitable performed
against the IRS 5-year requirement?
30%
28%
26%
25%
25%
22%
20%
20%
15%
10%
5%
0%
FY 2009
FY 2010
FY 2011
FY 2012
FY 2013
Thank You

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