Those in the nonprofit Jewish world, particularly the stewards of large communal donor advised funds such as those run by the Jewish federations across the country, would do well to demonstrate to the public, and to their elected officials, all the good that these billions of dollars bring about.

by Robert Evans and Avrum Lapin

As Americans approach the looming April 15th personal income tax deadline, we take our yearly scan of proposed changes to U.S. tax laws, particularly those that may impact the charitable deduction and the nonprofit community.

Once again, our politicians of both major parties, including President Barack Obama, have included a call to cap itemized charitable contributions at 28 percent in budget proposals and negotiations. The push for the 28 percent cap has been part of the discussion since the recession of 2009, when it was seen as a way to collect more tax revenue. Five years ago, the proposal elicited a “sky is falling” response from the nonprofit world. Since then, Congress has repeatedly decided to set aside this controversial notion and few give it any chance of becoming law right now. So, in 2014, the nonprofit world has met the 28 percent cap’s latest incarnation with something of a shrug.

On the other hand, the 1,000 page tax overhaul proposal released earlier last month by House Ways and Means Committee Chairman Dave Camp (R-MI) has generated a bit more discussion and concern. One particular proposition of interest to the nonprofit community specifically targets donor advised funds (DAF’s). Camp’s idea is to use tax incentives as a way to motivate donors to more quickly move money out of those funds to charitable organizations. Camp has proposed a 20 percent excise tax on donor advised fund contributions that are not disbursed to charities within five years.

In a recent interview, Steven Woolf, senior tax policy analyst for the Jewish Federations of North America (JFNA), said that Camp’s proposal, while well intentioned, could have a deleterious effect on a rapidly expanding and important vehicle for charitable giving. Fortunately, Woolf said, the entire tax overhaul proposal has generated little interest on Capitol Hill – even from fellow Republicans.

But, to quote Arthur Miller, “attention must be paid.”

“Anytime you have something that has been worked on for so long by so many people, it will be referred back to,” said Woolf, referencing the three years of work that went into the Camp proposal.

In order to delve into why donor advised funds are important and why the government should not fiddle with them – at least too much – it is important to understand exactly what they are and the purpose they serve.

Some have described the concept as a kind of mutual fund for charitable contributions: an imperfect description but a good starting point. This charitable vehicle allows people to set aside dollars in a philanthropic instrument for charitable purposes, often to achieve particular or personal interests and goals.

It offers the creator of the fund a tax deduction: the dollars can grow tax free because of how they are invested, though there are some fees involved with maintaining the donor advised fund, which is managed by charitable entity. A number of Jewish federations and community foundations, for instance, maintain and manage large pools of donor advised funds. Once money is placed into a donor advised fund, it cannot be withdrawn directly by the donor, who does keep an advisory role in how the funding is disbursed to charities. Generally, donor advised funds are much less costly to set up and less complicated to maintain, than charitable foundations. And, perhaps most significantly, donor advised funds are not subject to the same set of stringent reporting requirements as are private charitable foundations.

We speculate that the attention from our lawmakers comes as a result of very significant dollars pouring into DAF’s in the last several years. For example, in 2012, DAF’s saw a 77% increase in contributions over the previous year: a statistic that sets DAF’s apart from many other viable charitable options.

According to Andrew M. Grumet, an attorney at the international firm Edwards Wildman, whose law practice is focused on philanthropy and nonprofit organizatons, donor advised funds have been around for decades but came to prominence as a result of the new wealth created in the “dot-com boom of the 1990s.” Many entrepreneurs had newly found money to give away but little idea how to give it or whom to give it to. Also, few dot-comers were interested in setting up their own foundations, he told us.

Despite the dot-com bust that followed, the growth in assets for donor advised funds has only continued. The total number of donor advised funds rose from roughly 160,000 in 2007 to more than 200,000 in 2012. In fact, the largest philanthropic gift of 2013 was made to a donor advised fund: Mark Zuckerberg and Priscella Chan’s $996 million gift to the Silicon Valley Community Foundation.

So what, exactly, is the problem?

Well, there’s a perception that too much money set aside for charity is sitting idle in donor advised funds, with generous tax benefits to boot, without any value proposition to the philanthropic arena. According a National Philanthropic Trust report, donor advised funds took in $9.6 billion in 2012 and disbursed $7.7 billion to charitable organizations. For many, roughly $2 billion is just too much to leave on the proverbial table.

Grumet said that what he believes is driving the push for change is the question of whether or not “it is fair or appropriate for funds earmarked for philanthropy to be temporarily ‘parked’, or should those funds be deployed on a current basis.”

Grumet does believe it is fair, as do we. Donor advised funds offer individuals, families and communities a tool to allow their available pool of charitable dollars to grow while offering time to formulate strategic approaches to giving. And while we agree that there should be some latitude, there should also be some direction on the part of the donor or institution managing the fund. While private foundations have been around far longer than donor advised funds, there seems to be little outcry directed toward foundations and their spending down policies though such vehicles serve similar goals.

“Donors are ready, willing and able to ask tough questions of our service providers to determine whether or not and at what time their philanthropic dollars should be spent,” said Grumet. “They are more likely today to say no than maybe 30 years ago.”

One offshoot of the rise of donor advised funds is that it has produced some tension among proponents and holders of private charitable foundations. Administrators of private foundations are asking: why do we have stringent reporting requirements while they don’t. Why do we have to spend 5 percent of our assets every year while they don’t have to disburse anything? These are legitimate questions, though creating an “us and them” mentality is not in the best interest of the nonprofit community, or ultimately, all the worthy causes and individuals served.

If Congress does one day pass a five year, or any other, requirement for donor advised funds, they may simply incentivize donors to move their money to charitable foundations rather than donors advised funds. Alternatively, the marketplace will adjust and decision-making among donors would be expedited. (Note, however, that DAF’s usually only require nominal dollars to establish the fund, while donors usually do not create and fund foundations under an initial corpus of $1.0 million.)

A worst case scenario, which Congress certainly doesn’t want to see happen, nor do we, is that large numbers of charitable dollars will end up out of the charitable arena altogether. Now, the tax code concerning charitable organizations is quite complex and has been evolving for the entire course of our nation’s history. A knee-jerk reaction against change is not in the best interest of the nonprofit community. For instance, we do think it would make sense for Congress to require public reporting from donor advised funds similar to the extent of that asked of private foundations. And as a general rule, we think more transparency is a good thing as far as charitable enterprises of all kinds are concerned.

Those in the nonprofit Jewish world, particularly the stewards of large communal donor advised funds such as those run by the Jewish federations across the country, would do well to demonstrate to the public, and to their elected officials, all the good that these billions of dollars bring about. Questions over the role of government in regulating nonprofits – and whether dollars being used in the public interest should be regulated by private individuals or the state – go back to the earliest days of our Republic. As the debate continues, it is important for nonprofit leaders to neither panic nor ignore the issue, but to engage in the discussion and make the case that, while they may not be perfect, donor advised funds offer a vehicle for philanthropic individuals to achieve their goals, for which they should be recognized and honored … perhaps even bring about transformational social change.

Robert I. Evans, Managing Director, and Avrum D. Lapin, Director, are principals of The EHL Consulting Group, a fundraising consulting firm located in suburban Philadelphia. They are frequent contributors to eJewishPhilanthropy.com. The EHL Consulting Group is one of only 38 member firms of The Giving Institute. EHL Consulting works with dozens of nonprofits on fundraising, strategic planning, and nonprofit business practices and strategies. Learn more at ehlconsulting.com

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