A Boon for Charitable Giving Is Being Threatened by Congress
While many continue to wait for the relief they hoped 2021 would bring, many small businesses and social service organizations are still struggling. Some 83 percent of nonprofits have reported a decline in revenue with nearly three-quarters having to reduce their services. This at a time when upper-income households are faring better during the pandemic — and Wall Street is under fire for favoring big investors. It is welcome news, then, to learn that, like any well-managed endowment, Americans funds dedicated to charitable causes and available at the discretion of small donors across the nation, have grown by more than 5 billion dollars from 2015 to 2019 alone.
This is not a hypothetical. It has actually taken place as a result of a dramatic change in the world of charitable giving in recent years. And it provides a special reason for optimism.
The endowment is a collection of what is technically known as donor-advised funds (DAF). These personal charitable giving accounts allow taxpayers who itemize their returns to support charitable causes and groups by directing donations to their own type of mini-foundation. Donors are allowed a tax deduction while being free to decide when, how much, and who to help.
These accounts have mushroomed in numbers — growing from 241,507 in 2014 to 873,228 in 2019 — as have the amount of assets housed in them. They are managed by national financial firms such as Fidelity or Vanguard, hundreds of community foundations, colleges, and universities as well as mission-oriented nonprofits like the United Way or Feeding America. The total assets in these accounts — which can only be used for charitable giving — grew from $112 billion in 2017 to $142 billion in 2019. While some are controlled by the very rich — including Mark Zuckerberg — the average account holds only $166,000. These are effectively foundations for the middle-class but without administrative overhead or a minimum deposit. Any American could open a DAF account at Fidelity Charitable with $20.
Just like a university endowment, these hundreds of thousands of accounts can be thought of as an “American Endowment,” which can be tapped for immediate giving or allowed to grow in value to help people at a later date.
In a new study for The Philanthropy Roundtable and American Enterprise Institute, I find that, like well-managed endowments, the value of these charitable accounts has grown, because of new donor contributions and because of how these funds are managed and invested, including in stocks and bonds. Based on data from the four largest DAF account sponsors — Fidelity, Vanguard, Schwab, and the National Philanthropic Trust — I found that these funds grew by more than $5 billion between 2015 and 2019 alone.
Widespread across the nation, and managed by 53 national charities and more than 600 community foundations whose focus is to strengthen cities, towns and counties in their areas, these individual charitable accounts are major philanthropic drivers in large states. DAF dollars set aside by the four largest DAF sponsors in California total $8.09 billion. There’s another $2.91 billion in Florida, $2.43 billion in Illinois, $3.89 billion in New York, $1.67 billion in New Jersey, $3.45 billion in Texas, and $3.99 billion in Massachusetts.
Anyone concerned about the future of effective education, biomedical research, or support for religious institutions should be reassured, since those are some the leading causes supported by charitable giving.
It is thus all the more puzzling that despite positive results, Congress is now being asked to rein in DAF accounts. The Initiative to Accelerate Charitable Giving would force any contributions to these individual charitable accounts to be paid out as grants within 15 years. The theory is: many charities need funds now and cannot afford to wait for funds that are set aside for the future.
This theory runs counter to what any good endowment manager understands: When funds increase in value, they make future ongoing charity and potential big-ticket gifts possible. Both are important — and it’s best to leave the decision up to individual donors who are engaged with organizations directly. As these DAF accounts grow, they make it possible to step up giving in times of crisis, which happened during the 2008 financial crisis and in the wake of the coronavirus pandemic.
Whether to support new regulations and restrictions on charitable giving will be an important decision for Senate Majority Leader Chuck Schumer. His home state of New York has more than 15,000 donor-advised fund account holders with combined total assets of nearly $4 billion. Anything that increases the costs and complications of this popular charitable giving vehicle will inevitably discourage its use, likely reducing charitable giving in the long run and harming the very nonprofits who are already struggling to continue to serve those in need.
Charitable giving will never replace government — but it is, and has been, a source of innovation and progress. The Gates Foundation helped fund a Covid-19 vaccine just as Andrew Carnegie pioneered the growth of public libraries. In the same fashion, personal charitable giving accounts — or donor-advised funds — are the latest innovation in American philanthropy that is keeping thousands of small nonprofits across the country alive today.
Howard Husock is an Adjunct Fellow at the American Enterprise Institute and an Executive Senior Fellow with the Philanthropy Roundtable. He is the author of Appreciation in Donor-Advised Funds: An Analysis of Major Sponsors.