The Money Redirect That’s Coming for Donor Wallets

I speak to countless people in the nonprofit sector during the year, including many wealthy major gift donors. Throughout my time working with nonprofits, I often get asked and tell others what I see on the horizon. Recently, I wrote about a nonprofit crash that’s on the way. What's next? I see a big governmental money redirect.

It’s no secret that zombie philanthropy took root in the sector. According to the National Philanthropic Trust’s "2020 Donor-Advised Fund Report," these funds, also known as DAFs, have approximately $140 billion under management by money managers at institutions such as Fidelity Charitable Trust, Schwab Charitable and Vanguard Charitable. Because these organizations are set up as 501(c)(3) organizations, donors receive immediate tax deductions.

In the process, they've become the largest nonprofits in the nation, holding fortunes that are sitting or parked in those funds making money for money managers. The idea for many donors is to allow the funds to grow to make more significant gifts at some point in the future. Currently, there is no legal requirement to distribute gifts, and therein lies the problem. So, while more than $25 billion went to charitable causes in 2019, so much money remains sitting for years in DAFs, and not working for improving peoples' lives.

Shifts That Aren’t Taking Us Back to Business As Usual

As we know, the economy took a significant hit in 2020. While we’re well on our way to recovery, with the remnants of the pandemic and the reality that businesses changed how they operate — leaning more into technology — businesses are becoming more efficient with less need for human workers. In other words, we're not going back to the way things were in 2019 or early 2020. The industrial age is entirely on life support and won't beat the digital age.

For instance, the behemoth companies of the 20th century, such as IBM or Exxon, had employees numbering in the hundreds of thousands. Today's top tech companies, which have much higher market values, have significantly fewer employees. And, as technology continues to expand, the reality is that business leaders and workers have to champion futureproofing humans in the age of AI. By the way, many people have made a lot of money on tech, and they too have contributed to the sharp increase of DAFs.

Government May Be Slow, But It Too Sees the Problem

While anyone could fault local and federal governments for being slow, they're not blind. As more and more people realize billions are parked in donor-advised funds, including government members, there's going to be an increased push to change things. And there's one thing that governments, as well as businesses, love to do—follow the money.

It's not surprising that we now see legislation looking to open the spigot on donor-advised funds. Again, we have to understand that the U.S. doesn't have a robust social safety net other than Social Security and Medicare. Therefore, as more people find it harder to obtain traditional work or get displaced, the social contract continues to fray.

Recently, Sens. Chuck Grassley and Angus King led legislation to increase giving. It’s called the Initiative to Accelerate Charitable Giving, targeting wealthy donors, foundations and donor-advised funds. In short, the legislation would allow for the immediate tax deduction—if they drew down the funds within 15 years.

If donors prefer to delay the tax deduction, they would have 50 years to give away the money. Further, foundations couldn't meet that obligation by donating to donor-advised funds. It's too early to tell if this particular legislation will pass. Still, with increased social needs and more discussions about parked money, some legislation will inevitably pass to spur giving and move it from funds to where it's needed most.

Final Piece to the Puzzle

However, when I look into the future, that's not all I see. In other words, the government won't just push money from foundations and DAFs into the nonprofit sector. I also see more control on the horizon. As we know, there’s an effort to dictate where money flows.

The most prominent examples of where it's appropriate or inappropriate to donate, depending on your political and social views, are Planned Parenthood and the National Rifle Association. Legislation, social shaming, shadow banning and fights in courts have these two organizations at the forefront of where people think money should or should not go. Further, the public is used to this debate, so it won't be surprised when the government begins to encourage or incentivize where it's acceptable to make charitable donations.

As a practicing attorney, it's not much of a stretch to see legislation that will turn on the spigot for foundation and DAF giving but encourage (ahem) that giving to go to causes of, say, social services, but not to university education or cultural institutions. On that point, I can’t yet see where it will be deemed appropriate for money to go because it depends on which political party’s in power when the legislation becomes law. However, you heard it here first when you see it happening.