America’s biggest “charity” is built on a lie
Fidelity Charitable took in $9 billion in tax-deductible contributions last year. It’s unlike any charity you know.
As the season of giving comes to a close, we can be sure of this: The charity that will raise more money than any other in 2019 will be Fidelity Charitable, an enterprise that manages the charitable giving of more than 200,000 mostly well-to-do clients.
While legally classified as a 501(c)(3) nonprofit, Fidelity Charitable is a charity in name only. In fact, it functions as a middleman where donors can invest their money for as long as they like before giving it to what most of us would recognize as a real charity. Fidelity Charitable has grown like wild in recent years because clients can take a tax deduction immediately when they deposit money in Fidelity Charitable, even if they have no intention of giving the money away anytime soon.
Last year (2018), Fidelity Charitable collected $9bn in deposits. That’s more than the combined haul of the five biggest actual charities — the United Way, the Mayo Clinic, the Salvation Army, Alsac/St. Jude’s Children Hospital and Harvard — on the list of America’s Favorite Charities compiled annually by The Chronicle of Philanthropy.
Formed in 1991, Fidelity Charitable was created by Fidelity Investments, one of the world’s largest financial services firms. Fidelity Charitable’s clients open what are euphemistically known as donor-advised funds (DAFs) that hold their money until they decide to make donations to what most people would recognize as bona fide charities — United Way, the Mayo Clinic, a local food bank or church. You can think of Fidelity Charitable as a rest stop on the way to the ultimate charitable destination. Other big financial firms that have formed nonprofits to hold donor-advised funds for their clients include Schwab, Vanguard and Goldman Sachs.
So where’s the lie? It’s the very concept of a donor-advised fund. In practice, donors don’t merely advise the funds. They exercise absolute control over them. This distinction is crucial.
That’s because the tax deduction depends on the claim that the money in DAFs is controlled by Fidelity Charitable. The IRS’s published guidance about DAFs is explicit about this: It says that donations to DAFs are tax deductible only if “the charities maintaining the funds must have the ultimate authority over how the assets in the funds are invested and distributed.”
Yet when Fidelity Charitable was challenged recently to defend controversial donations that flowed from its DAFs, it admitted that the donors — and not Fidelity — controls the DAFs. The admission came in response to a campaign, called Hate is Not Charitable, launched by a liberal nonprofit called the Amalgamated Foundation which wants to stop DAFS from making donations to so-called hate groups. When CBS News asked Fidelity Charitable about those donations, a spokesman, seeking to sidestep the controversy, said that the depositors, and not Fidelity, control their donations:
As an independent charity that is cause-neutral, it is not Fidelity Charitable’s role to dictate what their values should be. Each of our individual donors has the right to decide which IRS-qualified charities they choose to support.
So, while Fidelity Charitable is assuring the IRS that it exercises “ultimate authority” over its DAF accounts, it is telling CBS News that the donors “dictate” where the money goes. In fact, all meaningful decisions are made by the individual donor-depositors. They cannot withdraw money from their DAF accounts once they have deposited it, but they can let the funds sit there for as long as they wish, growing tax-free.
This, as it happens, is just fine with Fidelity Charitable, which pays investment fees to for-profit Fidelity Investments. No wonder every big financial services firm has set up its own charitable arm to collect DAFS: They’re profit centers. It’s also the reason why the financial industry opposes regulation requiring distributions from DAFS. Their incentive is to accumulate assets and to collect fees — not to push money out the door to solve problems.
Did we mention that Fidelity Charitable holds more than $30 billion in assets?
The average DAF holder, meantime, belongs to “the wealthiest one tenth of one percent of Americans, with annual income over $1 million,” according to a report from the Institute for Policy Studies aptly titled Warehousing Wealth. They are enjoying tax breaks for their charitable giving that are unavailable to the vast majority of Americans. Aside from the immediate tax deduction, they can donate appreciated assets, including stock, and avoid paying capital gains taxes on their gains. Last year, about 63 percent of the donations to Fidelity Charitable were made in the form of publicly traded securities or non-publicly traded assets.
There are other good reasons to criticize DAFs. Law professor Ray Madoff and philanthropist Lewis Cullman laid them out in a 2016 article in the New York Review of Books; it’s behind a paywall but they made their case here to The Washington Post. Nonprofit consultant and blogger Al Cantor has been a persistent critic, here, here and here. John Arnold, an unusually thoughtful and outspoken philanthropist, told Vox that DAFs should be required to give away five percent of their assets to real charities each year. This month, Teddy Schliefer of Vox/Record reported that Google co-founder Larry Page used a DAF to skirt a rule requiring his private foundation to give to charity.
Do we need DAFS? I’m not sure we do. At minimum, depositors should be required to move their money out the door within a short period of getting their tax deduction. This won’t burden most depositors. [Fidelity says that three quarters of deposited dollars are granted within five years.] Beyond that, the debate over DAFs creates an opportunity to rethink the charitable deduction from the bottom up. Inexplicably, there’s scant desire among the major players in the nonprofit sector to ask Congress to take a look at DAFs. Why that’s the case is a story for another day.