Push for charitable giving reforms divides Minnesota nonprofits, foundations

A national push for charitable giving reforms is dividing Minnesota's nonprofits and the foundations that often fund them.

The two groups, usually on the same side, are split over federal tax reforms — especially on whether oversight should be added for rapidly growing donor-advised funds.

Often likened to charitable checking accounts, donor-advised funds enable individuals and foundations to donate cash, stocks or assets and get the tax deduction immediately while sitting on the funds, perhaps for years.

The Minneapolis-based Graves Foundation and Minnesota Council of Nonprofits signed on recently to the Initiative to Accelerate Charitable Giving, a coalition started by Texas billionaire John Arnold last year to push reforms.

Some of the coalition's proposals are addressed in a bill introduced in June by U.S. Sens. Angus King, a Maine Independent, and Chuck Grassley, R-Iowa. The state Council of Nonprofits supports the federal legislation and is urging Minnesota's congressional delegation to back the bill, saying it would be the first significant tax reform for philanthropy since 1969.

"Is the right amount of money being put to work in organizations that are active in the community, and how much is actually being stored in bank accounts?" said Jon Pratt, the outgoing head of the state Council of Nonprofits, which has about 2,200 members. "Our goal is to strengthen nonprofits and have a positive charitable giving climate. The goal is not to simply have high net worth stored in charitable accounts."

Donor-advised funds can be set up at foundations or at financial institutions like Fidelity Charitable, which has the largest donor-advised fund in the nation. Such funds make up an estimated $140 billion in the U.S., according to Grassley's and King's offices.

Money in donor-advised funds "becomes like a black box," Boston College law Prof. Ray Madoff said at a webinar last week that was co-sponsored by the Minnesota Council of Nonprofits. Madoff is one of the leaders of the national initiative and an architect of the bill.

"Basically someone gives to the donor-advised fund … [and] everything that happens afterward is top secret," she said.

The coalition is urging Congress to expand the charitable deduction for taxpayers who don't itemize, and require money in donor-advised funds to be distributed within a set amount of time. Private foundations must distribute 5% of the contributions they get annually, but the coalition wants federal law to stipulate that they can't count salaries or travel expenses for a foundation's family members or distributions to donor-advised funds as part of the 5%.

"I think it's in the general public's interest to see that more of those dollars reach working charities," said Bill Graves, president of the John and Denise Graves Family Foundation. "It has enormous implications for the vitality of the nonprofit sector in the coming decades."

Graves said that foundations like his, which aims to give away all its money — currently $47 million — by 2044, should be part of the broader discussion on how charitable dollars are distributed.

"We are entering into an unprecedented time of intergenerational wealth transfer and a lot of that planning may be happening right now," he said. "I think it sounds wonky because it's really talking about the nuances of tax law that are not really applicable to most people. But the end result could be an enormous amount of wealth dedicated and actually transferred to working charities."

The Senate bill, called the Accelerating Charitable Efforts Act or ACE Act for short, creates two forms of donor-advised funds based on the number of years in which funds must be distributed.

In the 15-year format, the donor gets the tax benefits immediately and funds must be distributed within 15 years. In a 50-year fund, a donor doesn't get the income tax deduction until funds are doled out, no later than 50 years after a donation. It makes an exception for community foundations with donor-advised funds of up to $1 million.

Grassley said in a statement it would ensure dollars are "not sitting stagnant to provide tax advantages for some and management fees for others."

The Minnesota Council on Foundations, which has received mixed reactions from its members, hasn't taken a formal stance on the bill. The national Council on Foundations opposes the bill, saying it will have a negative impact on foundations.

The Community Foundation Public Awareness Initiative, made up of some 130 community foundations including the Minneapolis Foundation and St. Paul & Minnesota Foundation, also opposes the bill, saying it offers "solutions in search of problems."

"We think it would stifle charitable giving," said Jeremy Wells, senior vice president of philanthropic services at the St. Paul & Minnesota Foundation. "The harder you make giving for people, the fewer people participate. That's one of the reasons donor-advised funds have grown so much is you're making it accessible and easy for folks."

The St. Paul & Minnesota Foundation drew a record number of contributions last year in donor-advised funds, which make up half of its assets — totaling between $700 million and $800 million. The foundation also made a record amount of grants. It reflected unprecedented generosity amid the COVID-19 pandemic.

Instead of giving donations to different nonprofits, donors only need to track one gift while still helping multiple charities, Wells said. They also can tap into the foundation's expertise, or give a noncash asset like a house.

"Donor-advised funds have gotten so many more people involved in philanthropy that haven't been active philanthropists before," he said.

Between 2010 and 2020, nearly 80% of the St. Paul & Minnesota Foundation's nonpermanent assets — mostly donor-advised funds — had been distributed. The payout rate in 2020 for the funds was 14%, Wells said. The foundation changed its policy four years ago to revisit donor-advised funds that aren't distributing money within three years and recommend grants.

"We're not sitting on dollars," Wells said. "Our goal is certainly to get that in to the community."

The Minneapolis Foundation also regularly checks in with donors to encourage granting. Over the past five years, donor-advised funds there paid out an average of 14% each year — nearly three times what's required of private foundations, said R.T. Rybak, the foundation's CEO.

Rybak said reforms should involve foundations' input and draw a distinction between for-profit financial institutions and community foundations.

"Stop creating the wrong impression that we're not actively moving money into the community," Rybak said, adding that the Minneapolis Foundation has more than doubled the money it has granted in the past five years. "Our record speaks for that."

The Minnesota Council of Nonprofits met with staff for Gov. Tim Walz and legislators to seek similar state changes, but no bill was introduced this year and Pratt said nonprofit leaders decided it was better to seek tax reforms at the federal level.

Pratt said critics of the ACE Act give "the same arguments [as] in 1969 — that this will be the end of charitable giving."

"[With] everything from COVID to recovering from the uprising in Minneapolis, we see a lot of charitable appeals," he said. "And the idea that billions of dollars is sitting in bank accounts … wouldn't you want to see those put to work in your community?"

Kelly Smith • 612-673-4141