Philanthropy as Oligarchy

As frustrating as it can be, Democracy has accountability built in – ultimately through elections but also along the way through transparency, public comment, media scrutiny and rules of ethics.

Philanthropy has virtually none of those guard rails except as willingly self-policed by the ultra-wealthy and their advisors. If a wealthy donor starts a private foundation, they’ll be able to operate in large part under the radar if they wish. They don’t have to be (re-)elected – they are in charge by virtue of their donation. They don’t have to have anyone except themselves as board members. They can donate to organizations they belong to and benefit from, like their own church or synagogue. They can even hire their kids or friends to run the organization and pay them a salary – as long as they follow some pretty soft guidelines laid out by the IRS. 

Now, there is a tax return filed every year that is a public document, and if you know how to read it you can learn a lot about how the foundation is operating, but few watchdogs are paying attention to this corner of the yard: the IRS is over-taxed (LOL, #sorrynotsorry), the press is mostly focused on big dollar gifts, and the public allows a “halo effect” of charitable intentions to keep them from asking tough questions. 

And if a donor is really concerned about keeping their activities private, they can set up a Donor Advised Fund (DAF) housed at a financial services company like Fidelity or Schwab, which provides complete anonymity along with a better tax deduction – all the way up to 50% of Adjusted Gross Income instead of the 30% deduction for contributions to their own private foundation. Even better (for them), DAFs do not have the same 5% minimum distribution requirement that private foundations must follow, you can just let it sit there and grow tax free for as long as you’d like without actually giving it away. 

And here’s a dirty little secret: a private foundation can meet its 5% minimum distribution requirement by giving it out as a grant to their own DAF. Where it can sit until they decide to do something with it, theoretically growing tax-free and untouched forever.

Tax benefits are driving wealthy donors to put money in foundations and DAFs in several ways (at their advice of their savvy financial and tax advisors):

  • They get an immediate tax deduction, up to 50% of their AGI for a DAF and 30% for a private foundation;
  • They can avoid capital gains taxes on property contributed to the foundation or DAF that is subsequently sold, such as highly appreciated stock;
  • They reduce their estate and therefore estate taxes, but the control of the assets and benefits associated with the charitable entity passes to their designated successors, so it’s a way to “pass down” the assets to heirs without paying taxes.

In short – donors get a host of financial benefits up front when they make the donation, but can easily avoid actually using the money to do good things, which is supposed to be the point. And let’s not forget – avoiding taxes means avoiding paying for communal goods, like roads, schools, emergency relief and public health. In providing those tax deductions, we the public have given up our say in the use of funds for our collective priorities through the democratic process. 

In this system, the point of leverage is to change the rules about tax deductions for charitable gifts. What if the donor did not receive a deduction for putting it INTO a vehicle such as a private foundation or a DAF, but only when it was distributed OUT of that vehicle to a public charity operating actual programs in the community? And putting funds into that charity’s endowment wouldn’t count either (I’m looking at you, Harvard), it would have to be actually spent.

I am inclined to believe that there would be significant changes in donor behavior, both positive and negative. A few examples:

  • More donors would give gifts directly to operating charities like schools, workforce development programs, libraries, etc., bypassing the foundations and DAFs altogether.
  • More donors would give the funds away to operating charities during their lifetimes, instead of establishing a foundation or DAF in their will or one that is intended to last in perpetuity.
  • More donors who have a “liquidity event” that generates taxable income (such as the sale of their business or an appreciated asset such as real estate) would seek out large organizations they feel could handle a major gift, which could further concentrate large donations in already well-resourced institutions like Ivy League universities, or major international charities like TNC, EDF, Doctors Without Borders, etc., over small local organizations. 
  • More donors would set up an LLC-type structure like the Chan Zuckerburg Initiative or Emerson Collective – this allows for privacy and control but they don’t receive any deductions until funds are granted to actual charity and must pay for expenses associated with their giving (staff, offices, travel, etc.) from non-exempt funds.
  • Fewer donors would set up a foundation and staff it with professionals and costs year after year, meaning they are less likely to have long-term, strategic visions for social change which seems like a bad thing but might be a good thing, I’m honestly not sure. 
  • The field of philanthropic advisors may switch from long-term employment to short-term consultants to design grants on an “as-needed” basis driven by donors’ major income events.
  • The tax planning and financial management industry would lobby hard for additional loopholes or deductions to replace this one.

It’s time for the public to demand that the tax dollars we forfeit actually be used for the public good.  If this reform is too big – two others that would make an immediate impact:

  • Require each individual Donor Advised Fund to give away at least as much as private foundations at 5% of their average annual balance.
  • Do not allow private foundations to meet their own 5% minimum distribution requirement by donating to a DAF over which they have control. Make them give it to an operating charity.

Published by Sharon Schneider

Sharon Schneider is an entrepreneur, impact investor, philanthropy expert and strategy consultant to the next generation of social impact founders and family offices. Currently, Sharon is Executive Director of the Telluray Foundation in Colorado.

8 thoughts on “Philanthropy as Oligarchy

  1. Very insightful post. It’s probably not a coincidence that a prompt on power led several of us to write about philanthropy and draw similar conclusions.

    I’m curious what your thoughts are on impact investing, as I have many of the same concerns that you outline here about conventional impact investing as it’s currently practiced.

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    1. I would say the majority of impact investing is still focused on the needs of the investor. When they talk about “risk-adjusted market rate returns” on their impact investments, I say if it’s risk-adjusted market rate, there’s not impact because the market will fill that capital need. You’re not accomplishing anything other than making yourself feel better. That is better called “Aligned Investing.” Those folks are saying “I need to get mine first, and only then am I willing to look out for everyone else.” I’ve been thinking about this attitude a lot, actually.
      I think only people willing to deploy higher risk, more patient “catalytic capital” can call themselves true impact investors. Lots more to say on this topic! Look forward to more conversation.

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  2. Your lens is highly refined on this matter. Grateful for the honesty and ideas! When Andrew Mellon petitioned to become Secretary of Treasury during our 1st Gilded Age, his opposition feared the same plutocratic paradigm that we have today. Our 2nd Gilded Age’s version of capitalism has this darling twin. It plays a seductive siren song that that lulls policy makers into inaction perhaps if for no other reason than their own wealth and/or the promise of riches after “public service”. I believe this tax structure and public service culture will dramatically change in my lifetime given the roster of talent / candidates that has emerged post-2016 election. Equity will define our next Greatest Generation. Your awareness gives me confidence in my theory.

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  3. Well said and very accessible, Sharon! I too have been thinking of that Goliath of an attitude: “I need to get mine first, and only then am I willing to look out for everyone else.” What do you think it will take to move folks? What’s the underlying assumption in attitude, emotion and thought?

    I love your initial recommendations
    • Require each individual Donor Advised Fund to give away at least as much as private foundations at 5% of their average annual balance.
    • Do not allow private foundations to meet their own 5% minimum distribution requirement by donating to a DAF over which they have control. Make them give it to an operating charity.

    And I would love to encourage you to explore them more! For example,
    1. Do you have an ideal goal of increasing more patient “catalytic capital”? is it
    X% or $Y of capital inflow? more qualitiative measurements of social impact by that operating charity? “happiness”/positive psychology measures of Billionaire life-satisfaction (like a Gallup poll)?
    2. What might some intermediary other success waypoints look like?
    3. What might be yours to do here and now in light of #1 and #2?

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  4. I read an article a long time ago on how the Walton funds worked and found the inside game fascinating, all the more because it allowed them to protect the bulk of their estate tax free for long periods of time.

    A bit of a conincidence, but I was just talking to my brother who worked in Congress for many years. We were chatting about a completely different subject, but he made the comment that (and his wife who currently works in congress agreed), that most congress people really don’t know much, or only know a lot about one thing. They’re human after all and can’t know everything. It made me think of you and your comment during the week about how you thought it would be great to help “lift the veil” so to speak. I’d be surprised if this was common knowledge.

    This seems like a big project, but a worthy one. Couple of questions come to mind: Is this the place to intervene? How much money do we as a national community leak because of these loopholes? I feel like the tweaks you’re proposing might even find bi partisan support. I mean, doesn’t seem to hard to sell that foundations should actually donate money instead of hiding it in a DAF. Do you have contacts out in DC?

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  5. Sharon – I have been taking some time to go back and read all the posts by participant and see which ones I missed. I’ve really enjoyed all you’ve contributed and feel a lot of similar feelings about working for justice and social change within the dominant institution of philanthropy. I hope there are continued opportunities to learn from your work and experience and connect. Thanks again!

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