THE THEORY
Some donor-advised-fund critics complain that the funds allow donors to warehouse money instead of giving it to operating charities. A forthcoming paper offers some support for those criticisms and suggests the accounts may create another loser: the federal Treasury.
THE DATA AND ANALYSIS
James Andreoni, an economist at University of California at San Diego found that money placed in donor-advised funds fully cycles out to charity after an average of four years.
Meanwhile, the U.S. Treasury takes a hit.
People who give to donor-advised funds, Mr. Andreoni writes, are often millionaires who do so to avoid a tax hit from a one-time event such as an initial public offering or a merger. “Rather than face millions of dollars in capital gains tax, a person could instead fund a lifetime of charitable giving,” he writes.
So what’s the problem?
Donations of illiquid or hard-to-value assets, such as artwork, antique cars, or shares of ownership in private businesses have often raised red flags with the Internal Revenue Service over inflated appraisals. Mr. Andreoni notes that the lack of transparency with donor-advised funds may compound the problem.
“The reporting requirements from donor-advised-fund providers can make it difficult to detect any abuses,” he writes, adding that more data would be needed to determine if the funds encouraged foul play.
He also notes that donor-advised funds may be tools in complicated “tax arbitrage” maneuvers, in which wealthy people move money around for no purpose other than avoiding taxes.
DIG DEEPER
One could argue that if donor-advised funds spur some wealthy people to give when they otherwise wouldn’t, the funds are still a net plus for charities.
But Mr. Andreoni offers a cautionary note there as well. If you think of nonprofits and government as a team — with both providing benefits and services — the data suggests that donor-advised funds have a net negative effect. “Donor-advised funds are unlikely to stimulate more new giving than they cost in tax revenue,” he says. — Alex Daniels
FIND IT
“The Benefits and Costs of Donor Advised Funds,” by James Andreoni, is forthcoming in Tax Policy and The Economy, Vol. 32, No. 1, 2018.
