Community Foundations: Are They Just Another Savings Account for The Rich?

Community Foundations: Are They Just Another Savings Account for The Rich? You won’t want to miss author Louis Fawcett’s take on the misuse of Donor Advised Funds. Read about the billions of charitable dollars that are being mismanaged in your community in RE-IMAGINING NONPROFITS.

Did you know that more than $150 billion dollars are held under management in Donor Advised Funds (DAFs)?  This means these monies are tied up in investment accounts rather than being put to use in communities who need this money more than wealth management advisors.  Donor Advised Funds are a huge problem in the world of philanthropy…and the laws need to change.

Donor advised funds (DAFs) are accounts to which the wealthy can contribute money (usually at least $10,000) and receive a charitable deduction on their taxes in the same year or multiple years. Here’s the catch (some see it as an advantage), monies held in DAFs are considered charitable contributions but don’t ever have to be distributed to nonprofits.  DAFs are held either at community foundations or at wealth management firms. DAFs are schemes for wealthy people to receive tax benefits, but not invest money in their communities to change and save lives.

Here’s why DAFs are scams — community foundations and investment firms make money from the funds they hold under management, so what incentive is there for them to encourage their clients to make gifts to nonprofits? If a wealth manager’s compensation is based on how much money is invested on the part of others, why would I encourage the owners of DAFs to divest the holdings and put them to work in their communities?

There are roughly 1.2 million DAFs in America. This year, 30.8 percent of monies held in DAFs were distributed to nonprofits. This means 69 percent of dollars ($103,500,000,000) held in DAFs were NOT put to work to change and save lives.

And here’s what’s funny (as in tragic) – if you look at the websites of community foundations and wealth management firms, they will applaud themselves for all the good they are doing in their communities. Really? How can they claim to be helping when they are really hurting the very communities they claim to support?

Community Foundations: Are They Just Another Savings Account for The Rich?

Instead of these billions of dollars being used to end homelessness, help veterans, improve educational outcomes, reduce domestic violence, fight human trafficking, and assist in animal rescues, these dollars are used to fatten the paychecks of executives who hold hostage philanthropic generosity.

Here’s what’s worse — there is NO MINIMUM DISTRIBUTION required by law from DAFs. Wealthy individuals and families can receive a tax benefit by contributing to DAFs without ever distributing any money to nonprofits!

Regardless of the intent of Rockefeller, who created DAFs in 1931, donor advised funds are the most detrimental investment vehicle ever established in the United States. DAFs don’t achieve significant impact, they protect the wealth of those who have them, and they make money for those who manage them. Community foundations and investment firms enjoy telling the world how much good they are doing, when, in fact, they are impeding the ability of nonprofits to change and save lives. DAFs make communities worse, not better.

DAFs should either be abolished, or laws should be enacted that require 100 percent of monies contributed to these funds to be distributed within twenty-four months of the contributions. DAFs are schemes to avoid taxes that don’t promote charitable endeavors. If wealthy families want to keep their money, fine, I have no problem with building wealth.  But let’s stop pretending that DAFs are philanthropy. If rich people want to make a difference in the world, their money should go directly to nonprofits, not DAFs.

We live in a frenetic sound bite culture of 24/7 distractions, especially in the world of charity. There are a multitude of discussion topics, webinars, conferences, organizations, political issues, and books that, while well intentioned, only distract you from growing your organization’s impact. You don’t have to work in the nonprofit sector very long to feel overwhelmed and distracted. There are days when you wonder if anyone is listening or if you are making any impact at all. Instead of being paralyzed, you should be spurred to action. Then you have wealthy people who want to be charitable but don’t want to get their hands dirty.  Everyone wants to receive awards for their acts of humanitarianism without having to visit the neighborhoods that are suffering. This is why DAFs are so harmful – they perpetuate the feeling of doing good without ever doing anything.

Part of the way we fix the nonprofit sector is by changing or abolishing DAFs. We need to get serious about treating philanthropy as part of the fabric of human existence. The money to innovate, attract and retain top talent, and take risks for the sake of changing and saving lives is already in place. The wealth needs to be released so we can solve these problems rather than just talking about them.

Idealistic conversations about the way the world should be are luxuries entertained by those who want to avoid the world as it really is. The longer we chatter away about nothing, the longer the children and families who need our help suffer. This is why we need to abolish or limit DAFS and start running nonprofits as businesses, not hobbies that make us feel good.  Our feelings don’t matter.  The only things that matter are changing and saving lives.

Community Foundations: Are They Just Another Savings Account for The Rich? was first posted at INSIDE CHARITY

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About The Author:

Louis Fawcett is the author of RE-IMAGINING NONPROFITS and serves as President of the National Association of Nonprofit Organizations and Executives (NANOE), President of PAX Global,Senior Counselor for Development Systems International and is a National Development Institute faculty member.

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