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When charity begins with a tax deduction
In 2003, four years before her death, the famously prickly real estate mogul Leona Helmsley signed a “mission statement” setting the goals her charitable trust would pursue after she passed away. The fortune, estimated to exceed $5 billion, would support three causes: “care for dogs”; “healthcare services for indigent people”; and “other charitable activities as the Trustee shall determine.”
“But then,” says Ray Madoff, a professor at Boston College Law School, “she crossed out” the second goal—the explicitly human assignment—potentially leaving billions to the dogs.
U.S. tax policy encourages charitable giving. As Madoff noted in the New York Review of Books last July (in “The Undermining of American Charity,” written with philanthropist Lewis Cullman), a cash gift can reduce a high-income donor’s taxes by almost 40 percent of its dollar amount; gifts of property can lower the burden by almost 60 percent of their value, factoring in relief from capital gains charges.
“What makes us want to give tax-preferred status to charitable donations?” Madoff asks, framing her field of study. “Have we drawn the lines the right way?” Such questions matter in the United States more than in most Western countries, where universities, hospitals, cultural institutions, and social backstops receive more extensive government financing, she notes.
In 2015, with funding from the Ford Foundation, the Carnegie Corporation of New York, and other nonprofits, Madoff and Law School colleague William Bagley founded a non-partisan think tank called the Boston College Law School Forum on Philanthropy and the Public Good. Its aim, writes Madoff, is to provide a “full and fair airing of [the] ways in which law and regulation promote or frustrate philanthropy’s advancement of the public good.” Through conferences and other events focused on philanthropic law, the forum convenes academics, policymakers, and journalists for shared research and debate.
In October 2015, at the University Club in Washington, D.C., the forum hosted a conference called “The Rise of Donor-Advised Funds: Should Congress Respond?” DAFs, which since 1991 have become increasingly popular and increasingly controversial, are best understood by example: A donor wanting to give, say, $10,000 might open a DAF through a sponsoring organization, usually a financial institution. The donor receives the tax benefit when the account is funded. At any time, the donor may advise the sponsor on how and where to allocate the gift: all at once or gradually, to a single organization or to many. Or—and this prompts some of the controversy—the funds can be held and managed by the sponsor indefinitely, accruing interest, as the donor considers how to distribute them.
Proponents argue that DAFs simplify giving, granting maximum tax benefits while offering donors flexibility: Give now, get compensated immediately, and decide the details later. Madoff and other critics, however, worry that DAFs might impede charity. The Chronicle of Philanthropy reports that of the 10 “U.S. nonprofits [raising] the most in private support” in 2014, four were DAFs. Yet DAF donors, having already received their tax benefits, might—because of busyness or indecision, or any number of reasons—hesitate or fail to allocate the funds to active charities. And, as the money sits, the sponsor draws management fees, in effect monetizing a philanthropic endeavor. The October conference resulted in an online collection of white papers outlining the history of DAFs and various recommendations for a Congressional response. It can be found at bc.edu/daf.
Another forum conference, held in April 2016 at Stanford University, examined charitable entities designed to exist in perpetuity. Charitable foundations, Madoff explains, are required to, and often only do, spend five percent of their assets per year—money that can be put toward administrative costs. The policy exists to ensure longevity for foundations, but has the unintended consequence, Madoff argues, of inhibiting charitable spending. “A lot of my work recently has been focused on whether we should do more to encourage the flow of charitable dollars to the organizations that are actually doing the charitable work,” she says.
Madoff became interested in philanthropy while researching her 2010 book, Immortality and the Law: The Rising Power of the American Dead. “Here are these obscure rules you don’t really think about very much: the rule of perpetuity, the generation-skipping transfer tax,” Madoff says. “And this complexity often acts for the benefit of the wealthy and to the detriment of society.”
“We’re looking to charities to solve a lot of society’s ills,” Madoff says. Through the forum’s efforts, this complicated process will “be better understood by the public.”
Christopher Amenta is a Boston area writer.
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