The following is a conversation between Ray Madoff, Professor at Boston College Law School, and Denver Frederick, the Host of The Business of Giving.

Ray Madoff, Professor at Boston College Law School

Denver: ProPublica’s recent investigation revealing that the top 25 wealthiest Americans have paid little and sometimes nothing in federal income taxes has resulted in demands to rewrite the tax code. And there are other calls to rewrite the tax code as well, such as for reforms that would accelerate charitable giving.

Those who are advocating for new rules on foundations and donor-advised funds suggest working charities have lost $300 billion in recent years due in large part to the proliferation of donor-advised funds. At the forefront of this initiative is Ray Madoff, a professor at Boston College Law School, where she teaches and writes in the areas of philanthropy, policy, taxes, property, and estate planning.

Welcome to The Business of Giving, Ray! 

Ray: Thanks so much, Denver. It’s wonderful to be here. 

Denver: Let me start by asking you – what was your reaction to that ProPublica report? 

Ray: I wasn’t really surprised at all because the problem is that as somebody who studies taxes and the wealthy, we have a system — I know that we have a system — where the wealthy are not really subject to the same taxes as the rest of Americans. And unfortunately, that is something that is baked into our system, but few Americans are really aware of it. 

Denver: So, Ray, how did this Initiative to Accelerate Charitable Giving, which you’re doing in concert with Arnold Ventures, how did that all get started? 

Ray: Well, I’ve been writing about this issue of charitable giving and charitable tax rules for a little while. And I did an article with Roger Colinvaux in Tax Notes where we tried to take a comprehensive look about what charitable tax reform should look like. It was called “Charitable Tax Reform in the 21st Century.” 

And shortly after publishing that article, I saw that John Arnold, a philanthropist out of Texas, wrote an article in the Chronicle of Philanthropy that argued about the same issues, that there was a problem with current rules because not enough money was coming out of donor-advised funds and private foundations. And I reached out to him through his communications office, just a cold call, to talk about our shared interest in this. And that was really the source of all of the work that we did since then. 

The purpose of our charitable tax rules, since their very inception a little more than a hundred years ago, has always been to get money to working charities.

Denver: Ray, before we get into donor-advised funds, why don’t you just lay out the landscape for us in terms of US charitable giving, and how the tax laws have been designed and how they are intended to work.

Ray: Great. Thanks so much for that question, Denver. Because I think that there’s a lot of misunderstanding about this. The important thing to understand is that the purpose of our charitable tax rules, since their very inception a little more than a hundred years ago, has always been to get money to working charities.

Originally, it was primarily universities that were the focus of attention, but then, of course, all of the other organizations– food banks, hospitals… so many important organizations that make our society the place where it is… so many charities that are doing the critical work of American society.

And so, the purpose of tax rules is to get money to working charities. And that’s why the central principle of the tax rule is that you don’t get tax benefits until the donor gives up complete dominion and control. That’s the phrase from the tax roll. The donor has to give up dominion and control. And this makes sense because it’s only when a charity has dominion and control over the assets that it can put those assets to use to work for the benefit of the public.

What happened was that over the course of the early part of the 20th century, new charitable vehicles were created that were not putting the money to use immediately for charitable purposes, but instead they were accumulating the wealth of the wealthy and spending it in whatever time period they wanted to, and those were called private foundations. 

And in 1969, Congress reformed the tax rules to again place charities in the center of the tax rules. And it did so in two ways. One is it provided preferential treatment for outright gifts to working charities. They called them “public charities.” And they provided fewer tax benefits and imposed greater restrictions on these intermediary vehicles called private foundations. Most importantly, they imposed rules that required private foundations to distribute at least 5% of their assets each year. And the purpose of that was to make sure that there was a regular public benefit coming out of these charitable entities.

What’s happened since then is that the donor-advised vehicle has undermined and provided ways of sidestepping these rules, and subsequently have disempowered charities because now, donors can get all of the tax benefits. The maximum tax benefits that were intended to only apply to outright gifts to charities, now they’re available for people to put into accounts called donor-advised funds, where there is no further obligation for the funds to ever come out. 

So, we have a case where greater tax benefits are provided for contributions where there’s no payout requirement. What makes it even worse is that donor-advised funds have also undermined the rules that are applicable to private foundations because private foundations are now able to meet their payout obligations by giving to donor-advised funds.

So, we’ve taken the charitable tax rules from a system that had been designed to say: When the donor really gives money to charities, that’s when they get the tax benefits. Now, we say:” Don’t worry about it. The donor put the money aside, and give it or not, whenever you want.” You get the tax benefits upfront, and there’s nothing urging or even encouraging money to come out.

Denver: So the intermediaries are the big winners here… that it goes there, you get all the benefits, and it can sit there and it can be warehoused there for a certain amount of time with the private foundations, but indefinitely– as in forever– with the donor-advised funds. So what are you proposing to address that, Ray? 

Ray: So we’ve put together rules that are designed to both shore up private foundations and donor-advised funds to make sure that the funds will be put to charitable use within a reasonable period of time. 

On the donor-advised fund front, we propose two different sets of rules. One is that donors can get all of the tax benefits of charitable giving upfront, provided the funds will be spent within 15 years. The other, if the donors want more time, say, that you can get some of the tax benefits upfront. You can get the savings of capital gains and you can get a state and gift tax savings upfront, but you get income tax savings as distributions are made from the donor-advised fund. So that way, we provide an ongoing incentive and that can last for 50 years. 

On the private foundation side, we have suggested rules that, first of all, close up some of the loopholes about the 5% payout. Under current law, payout can be met not only by giving money to donor-advised funds, but a private foundation can also fully meet its payout obligation simply by paying family members’ salaries and paying for its annual meetings that might coincidentally happen to be taking place in Hawaii or other exotic locales. 

And we think that the rules that allow this really undermine the legitimacy of these charitable tax rules. And so, it’s important to clean them up so that when the public looks at these rules, they feel good about them, and they don’t feel like they need to take a shower.

The problem is that human nature is such that there’s a lot of reasons why people’s actions don’t always fit with their intentions.

Denver: What do you think is the motive for people keeping money in a donor-advised fund? Again, if I am somebody who’s made that contribution, I’ve gotten the tax benefits. I can never reclaim it. I can never get it back or whatever. Why do people keep it there for the period of time that they do? What’s their motive?

Ray: Absolutely. I think the problem is that– this is not about bad intentions, and this is not about being anti donor-advised funds. I have a donor-advised fund. John Arnold has a donor-advised fund. I think everybody on our team has one because they are convenient vehicles for charitable giving.

The problem is that human nature is such that there’s a lot of reasons why people’s actions don’t always fit with their intentions. They open their charitable vehicles. They take the tax benefits. They have all sorts of good intentions. But life gets in the way because charitable giving is hard, and people want to do really good charitable giving. Nobody wants to be like– everyone remembers the story of Mark Zuckerberg committing $100 million to fix the New Jersey schools. And—

The idea of a potential is so powerful. If you can do anything with the money, then you think about all the different things you can do. And any single choice never feels as good as all of the variety of potential that one could do. 

Denver: Actually, we do. Being in Jersey, I remember that quite well. 

Ray: Absolutely. And it was kind of a public debacle as we laid out in an article in The New Yorker and a book. And I think that people are worried about that type of thing. Not that they’re giving is going to be so public, but that they’re going to do something wasteful with their money. The idea of a potential is so powerful. If you can do anything with the money, then you think about all the different things you can do. And any single choice never feels as good as all of the variety of potential that one could do. And so, human nature, I think, makes it such that people tend to have a hard time pulling the trigger when there’s no perfect choice out there for charitable giving.

And also, you have to realize that there are subtle influences as well, which is that a lot of the growth of donor-advised funds has been fueled by the fact that individual financial advisors get compensated based on money that is kept in donor-advised funds. So, now, an individual’s most trusted advisor might say to them, “Don’t give to the Boys and Girls Club. Watch it grow. And you’ll have so much more money to give in 2-, 5-, 10- or 50 years.”

I think it’s interesting that when you open a donor-advised fund, one of the things that they really hit you over the head with is the importance of naming a subsequent advisor to create an inter-generation of wealth, of philanthropic advising. And of course, that benefits the financial advisors and the institutions, in many cases, that are sponsoring these donor-advised funds. 

The important thing to realize is that the charitable tax benefits for the wealthiest Americans are enormous. In fact, if you take together the income tax savings, the capital gain savings, and the estate and gift tax savings – those tax savings can be worth as much as 74% of the value of a gift. So somebody who sets aside $100 million in a donor-advised fund or private foundation, after taxes, it only costs that person as little as $26 million. And it costs the rest of us, the American taxpayers, $74 million in foregone tax revenue. 

Denver: Well, it’s interesting. You open up a donor-advised fund and we’re talking perpetuity right out of the gate.

Let’s talk about some of the people on the other side of the issue. And they’ll talk about how donor-advised funds are, if you’d like to call it, “the reserve capital of society;” that they’re there in countercyclical times; that donor-advised funds stepped up big time in 2008, 2009 with the recession. And here with the pandemic last year, I think Fidelity reported they’ve directed over $9 billion in grants, and that was up 24%. 

So, they’ll say, Ray, that, “Hey. Having this money here and ready to put into action really pays off when we have a hard time in this country.” What would you say in response to those concerns? 

Ray: Nothing in our proposals undermines that. We have not said money has to come out within one year, three years, five years. We’ve said 15 years. Fifteen years seems to me plenty of time for money to come out. It is not an onerous burden. But one has to realize that their numbers are based on their total assets, which are enormous, and it can hide a lot of stored capital. And that’s because the tax laws are such that a lot of people use donor-advised funds for fast giving.

There’s a couple of reasons why tax law encourages the use of donor-advised funds. One of them is because individuals get double benefit if they give appreciated property instead of cash for their charitable donations. If they give cash, they get an income tax deduction worth maybe 37%, 39%. But if they give appreciated property, then they can avoid the capital gains tax, and now their tax savings can be worth in the upper 50%, 57%, 59%. 

And so, donor-advised funds facilitate that type of giving because it’s very cumbersome to give a share of Apple stock to one charity and a share of GM to another. So, donor-advised funds facilitate the ability to take whatever stock you want to put in there or other assets… They take complex assets like privately-held business interests, and cryptocurrencies, and taxidermy – all sorts of things. They’re willing to take it, sell it, and create a charitable account. And that produces significant tax savings for donors. 

The thing is that there’s a lot of money that comes in and comes out within a single year. People will want to do their annual giving using appreciated stock. And so that money comes out every year, and so that fuels high payout. In addition, the current rules about the standard deduction make it advantageous for people to bunch their contributions, to do three years of giving in one year. And so, now, they get the tax benefits that they otherwise wouldn’t get. And that, too, tends to come out quickly. So, of course, they have high payout rates with respect to some of their money. 

At the same time, donor-advised funds are also used by the super wealthy who set aside tens or hundreds of millions and even billions of dollars in these accounts. And we have no evidence about how quickly that money is coming out. And so, we don’t know when it’s coming out or how quickly it’s coming out. 

The important thing to realize is that the charitable tax benefits for the wealthiest Americans are enormous. In fact, if you take together the income tax savings, the capital gains savings, and the estate and gift tax savings – those tax savings can be worth as much as 74% of the value of a gift. So somebody who sets aside $100 million in a donor-advised fund or private foundation, after taxes, it only costs that person as little as $26 million. And it costs the rest of us, the American taxpayers, $74 million in foregone tax revenue. 

So this is a very expensive investment from the rest of us. And the question is: What are we getting for our money? And if the answer is “Well, someday, it will be spent for the public, or not, at whatever time period that person wants, or their kids or their grandkids,” – that doesn’t feel sufficient, given the significance of our investment.

Denver: Let me ask you a question, and it’s really not taking issue with anything you’ve said, but maybe it’s a point of emphasis. And I know that part of this gets difficult because we get macro numbers and we don’t get these individual accounts. 

But the way I look at this is: If I take donor-advised funds, I say to myself, “There’s maybe $140 billion warehoused in donor-advised funds right now. The average donor-advised fund is about $160,000, $165,000, and the payout is about 22%.” So, if I look at all that just sitting here as I am, I’m not an expert in this, I say to myself, “That’s not horrible.” 

But if I go over to private foundations and I look at private foundations, and I say, “Well, we’re not talking $140 billion. We’re talking over a trillion dollars.” So we’re talking seven times as much money with only a 5% payout, and a 5% payout, which as you said you can go to Hawaii family salaries and to a donor-advised fund. Why is there so much emphasis on donor-advised funds and so little emphasis on private foundations?

Ray:  Denver, I think you’re absolutely right. Private foundations are where all the money is, and it’s critically important that we have rules designed to ensure that those funds are put to use within a reasonable period of time

And our rules do that. First of all, they close up the loopholes in the payout rules that allow money to go into donor-advised funds. So that 5% payout doesn’t have to happen at all. It can go into a donor-advised fund where it’s never paid out. And we think that that’s one of the critical problems with the current rules governing private foundations, is that it has the appearance of a payout rule, but the payout rule is totally meaningless.

This other problem about what the payout rule should be is an interesting one. And one could impose a higher mandated rule, and that’s what the proposal currently is of the patriotic millionaires, that there should be a 10% payout rule. The problem that we have is that our charitable laws allow people to create charitable entities in perpetuity. It’s this idea of perpetuity. 

If I think Irish step dancing is the most important thing in the world, and I’m afraid that Irish step dancing is going to go out of existence, our current laws allow me to create a foundation that is committed to preserving Irish step dancing in perpetuity. And if it’s going to do that, we have to impose a payout rule that’s going to allow perpetual existence. 

It didn’t have to be this way. In 1969, Congress considered adopting rules requiring all private foundations to be paid out within 35 years, and then we would have had a very different system. But our current system does allow for these types of perpetual vehicles. And so that’s why the rule is what it is. 

Nonetheless, we have a number of provisions in our proposals that are designed to make things better. One of them is that we have incentives for private foundations to spend more than 5%. Namely, if they spend 7% or more, they can avoid the small excise tax that’s otherwise imposed on their income. In addition, we have rules for individuals that choose to set up their private foundations for 25 years or less, so that those too would avoid the excise tax. The idea is to provide nudges to encourage money to come out faster. 

Denver: I mentioned in the opening, Ray, and I probably should go back to it, is that you talked about how charities have lost up to $300 billion in five years, in part because of the things that we’ve been discussing. This is a report you did in concert with Jim Andreoni. How did you come up with that number? Give a little breakdown for us as to where that came from. 

Ray: Sure. What we did is we looked at the data from 30 years ago about what charitable giving looked like. And we chose 30 years ago because 1991 was the year that Fidelity Charitable was created, and really the year of the beginning of the explosion of donor-advised funds. Prior to that, donor-advised funds had existed in kind of minor form in community foundations. And so, it wasn’t that they didn’t exist at all, but they were nowhere near as popular as they’ve become.

And at that time, we saw that 5% of charitable giving by individuals went to intermediaries. At that time, it was only private foundations, and 95% of the money went outright directly to charities. We then looked 30 years later, almost 30 years. We looked at 2019, the year we had the most recent data, to see – well, what’s happened to charitable giving? And what happened is that there’s been a really interesting trend. One is that giving to private foundations went from 5% of individual giving to 15% of individual giving. So, it grew tremendously. Right, right. What’s that? Three times. 

Denver: Three times. 

Ray: In addition, donor-advised funds, which were minimal in 1991, became over 12% of individual giving. Such that 28%, by the time you add the fractions, 28% of individual giving went to intermediary vehicles instead of outright to charities. This is an enormous redirection of charitable assets. And you might think: Well, that’s probably because we’ve been increasing the pie. 

But there’s another important fact to realize, also from Giving USA, and that is that as a percentage of disposable income, charitable giving has remained remarkably constant for the past 40 years at about 2% of disposable income. And in fact, right now, we’re at a kind of low end up, and it’s about 1.9%. So charitable giving has not increased overall, and yet 28% of it is now going into these intermediary vehicles.

Denver: Giving USA says that $400 billion was contributed to charities last year. Are they including just the money that went to working charities or are they including this 28% as well? 

Ray: They’re including everything – Giving USA numbers. And one of the challenging things is that when you try to work with the Giving USA numbers, the way they group things makes it hard to tell because they have something called public benefit organizations, and that includes soup kitchens and Fidelity Charitable. Now, these are two very different types of charities. And while they might both benefit the public in one way or another, it’s very difficult to tell which ones are really being available for use by the public and which ones are in waiting rooms, waiting to be distributed.

When the matching grant program is available to only the wealthiest 10% of Americans, what we’re doing is we’re doubling down on the benefits of the wealthy and providing nothing for the interests and values of 90% of Americans.

Denver: At some other point, we should have a conversation about how these numbers are communicated because it is very interesting how the media presents things sometimes. And if you go back to the original source and find out what the actual numbers really are…. Because I think that’s what leads to a lot of confusion, and I know you have dug deeply into this and can provide a lot of clarity. 

Let me switch to a different topic for a moment though. And that is most Americans are familiar with the tax deduction you get when you make a charitable contribution. But I think, Ray, they might be surprised at how few Americans, particularly since the 2017 Tax Act, are actually eligible to receive a tax deduction. Tell us what that looks like and your proposal to change that. 

Ray: Yes. So there is an interesting phenomenon in the United States, which is that the idea of charitable deductions is something that a lot of people are aware of, in part it’s because all the– whether you’re listening to public radio or any fundraiser– they tell you that there’s charitable tax benefits available to you. And another tech scholar refers to this as the “hypersalience” of the charitable tax deduction. People are very aware of it. 

And the fact is that most people believe they’re going to get a charitable tax benefit for their giving, but in fact, less than 10% of Americans are actually able to claim those benefits of charitable giving. 

Denver: Oh, my! 

Ray: And that’s because we have something called a standard deduction. A standard deduction is basically the deduction that the government gives you, regardless of whether you have a mortgage or whether you do charitable giving. And so, everybody gets this deduction. And it’s only if you give over this amount that you itemize your deductions and can take the benefits of that additional giving or mortgage, or whatever you might have.

And under the 2017 Tax Act, they significantly increased the standard deduction. So that now, a little over 90% of Americans claim the standard deduction, and less than 10% of Americans get tax benefits for their charitable giving. We think that this is a problem because of the important role that charities play in American society as a reflection of values of pluralism. 

The idea is that all these organizations represent pluralistic American values. And so, we have this matching grant program. Remember we talked about that – that for the wealthiest Americans, that matching grant can be worth as much as 74% of the value of the gift. So we have a matching grant program that is put in place because we think that it’s a good way for the government to reflect the values of its people.

The problem is that now when the matching grant program is available to only the wealthiest 10% of Americans, what we’re doing is we’re doubling down on the benefits of the wealthy and providing nothing for the interests and values of 90% of Americans. So we think it’s important that for the strength of the charitable sector and for the legitimacy of the investment by the government, that it’s important that these charitable tax benefits be available for all Americans.

And so, we propose a non-itemizer deduction, basically a deduction that one can take in addition to itemizing your taxes. But this thing will be very, very expensive if you have it be unlimited. So there’s a current proposal right now to have an unlimited charitable deduction that is promoted by some, but that unlimited charitable deduction would cost the government more money in revenue than it would raise for charities. And we frankly don’t feel that that’s something we can afford to do as a country at this point, given the extent of need. 

So we think that there should be a non-itemizer charitable deduction, but it should be available after a floor. And that floor could be set at a dollar amount for lower-income Americans or as a percentage of income, but it should be available for people who are digging a little deeper for their charitable giving. 

Denver: So some common sense and trying to deal with all the different constituencies and needs of both the federal government and private individuals and charities.

Well, all that we’re talking about here is just talk, and the rubber meets the road in Congress and on Capitol Hill. And I know that Angus King of Maine and Charles Grassley of Iowa are introducing some legislation. Tell us where that all stands and how optimistic you are about where it might go.

Ray: Well, the legislation was just introduced two days ago, so this is hot off the press. And we’re quite optimistic because this is the time for this type of legislation. We’re all concerned about taxation of the wealthy. Are the wealthy contributing enough to the public good? And charity is the place where that happens. 

Philanthropy is the place where that happens. The wealthy put their money to good for the public. They get significant tax benefits. And it makes sense to look at: What’s happening to this money? What are we asking of this money? And these are modest, common-sense reforms designed to ensure that within some reasonable period of time, these funds will be put to use for the public benefit, either on a regular distribution payment like 5% a year like it applies to private foundations, or over a 15-year term for donor-advised funds, or for some donor-advised funds, over a 50-year term. But there’ll at least be continued incentives for those charitable funds to come out over time. 

Denver: Yes. Well, it has been 50 years since we’ve had any meaningful legislation around charitable giving. Is this bipartisan? I mean, obviously, I think King has been independent. Grassley’s obviously Republican. What’s your sense as to where this is going? Are there any milestones or benchmarks that are coming up that we should all be paying attention to? 

Ray: Well, now, you’re above my pay grade about these types of things. So you’re talking about the political process. But we are very optimistic. This is a bipartisan proposal. And it’s interesting because this is one where both Democrats and Republicans have been very supportive of getting more money to charities. So we think that there is a strong likelihood of this passing.

Denver: Finally, Ray, for listeners who want to learn more about this initiative to accelerate charitable giving or get involved or engaged in some way, where can they go to find that information? And what would you have them do? 

Ray: Absolutely. They can go to And that’s the website that will give you all the information about our efforts. And also, if they’re interested in the ACE Act, which is the name of the law, Accelerating Charitable Efforts, we hope that they will write to their Congressman or Senator and ask that they support this very important legislation to get money to charities. 

Denver: Good stuff. Well, thanks for being here today, Ray. It was a pleasure talking to you and thank you for such an interesting conversation. 

Ray: Thank you so much, Denver. The pleasure is mine. And you have a great show.

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