These days, discussions about American philanthropy are accompanied by an odd silence. Even though the numbers and press releases keep coming in, there’s something about the entire arrangement that seems more like an accountant’s quiet victory lap than generosity. Charitable giving in America has evolved into something completely different somewhere between the Giving Pledge announcements and the year-end tax filings. A tool for preserving wealth, disguised as doing good.
You can see the buildings where most of this takes place if you stroll through Lower Manhattan’s financial district on any weekday afternoon. Fidelity, Schwab, and Vanguard glass towers. Inside, advisors discreetly recommend a donor-advised fund to affluent clients. The pitch is sophisticated. Obtain the tax deduction right away. Later on, distribute the funds. or never. The structure doesn’t give a damn.
According to a recent Bridgespan study, roughly half of America’s top 25 generous donors have already given away more than 20% of their wealth, and they have expressed a desire to give much more. There is a $720 billion opportunity there. It’s another matter entirely if any of it ends up in the hands of operational charities. The conventional means of this type of donation, foundations, are demonstrating a waning dedication to investing. It appears that they want to endure forever. The institutional gravity pulls toward perpetuity even if the donors who founded them are no longer with them.
Donor-advised funds present an alternative, though not necessarily superior, narrative. The number of DAFs has increased by more than five times since 2010. In contrast, private foundations have only increased by 11% during the same time frame. There is more to this change than just practicality. Rich donors may just want flexibility, but it’s also important to remember that investment advisors who oversee these funds are frequently compensated according to the assets they hold. They make more money the longer the money is in circulation. It is not necessary for a dollar to ever depart.
According to a study by the Institute for Policy Studies, by 2028, private foundations and donor-advised funds may receive half of all individual contributions in the United States. Go back and read that. Half. Food banks, shelters, clinics, and other working charities honored on Giving Tuesday may find themselves increasingly eclipsed by financial instruments that appear generous on a tax return but function more like long-term investment accounts.
It’s the tax math that keeps everything running smoothly. Gifts of cash are deductible up to 60% of adjusted gross income. securities with a 30% increase in value. Some strategies have names that sound almost lighthearted. bunching. harvesting tax losses. charitable contributions that meet the requirements. Donors who are 75 years of age or older can transfer up to $100,000 straight from their IRAs to a charity that meets the requirements without it ever being considered taxable income. Nothing about this is against the law. The tax code itself encourages the majority of it. However, observing this over the last ten years gives me the impression that Congress most likely did not anticipate this when it drafted the regulations.
The most giving Americans no longer select a single tool. They make use of charitable trusts, LLCs, DAFs, and foundations. They arrange them in layers. They put them in order. Before an IPO, a founder may move appreciated stock into a DAF, take the deduction right away, and then distribute grants over a number of years. Inside the car, the wealth continues to compound. The charitable endeavor proceeds at its own speed.
The contradiction at the heart of it all is difficult to ignore. By some measures, the wealthiest Americans are giving more than ever. Additionally, they are retaining more than before. It’s still unclear whether American philanthropy is growing more giving or just more sophisticated, and the answer most likely depends on your position within the donor-advised fund.
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