17 ms·

The Super-Rich Are Stockpiling Wealth in Black-Box Charities

240 points by petethomas 8y ago

kayhi 8y ago
Looks like donating to charities to get a tax break, which seems fine. Is there a way that they are controlling how these monies are spent?
- jjoonathan 8y ago
  Yes, that's the "Donor Advised" part of "Donor Advised Fund."
- rectang 8y ago
  A donor can impose conditions on how a 501(c)(3) charity may spend a particular donation. However, those conditions may not supersede the 501(c)(3)'s duty to avoid using tax-deductible donations to unduly benefit a commercial actor. Because dealing with such conditions is a pain, 501(c)(3) charities prefer to receive undirected funds.
  - _delirium 8y ago
    Charities prefer undirected funds, but most will accept restricted funds if the funds are big enough. They often have whole negotiation & legal teams devoted to working with donors to figure out a set of restrictions that's mutually agreeable (i.e. reflects the donor's wishes while minimizing how much of a pain it is to the charity to deal with). Two common examples are donations to museums that are restricted to development of a certain collection or type of work, and donations to universities restricted to funding a specific field of research.
- myinitialsaretk 8y ago
  There was a good HN comment thread about Donor Advised Funds a few months ago. https://news.ycombinator.com/item?id=17126875 https://news.ycombinator.com/item?id=17126875 I have one, but can see how this leaves a bad taste in mouths. I can "donate" money to my DAF, get the tax break, invest it and it doesn't do any real good by going to a charity until I decide to recommend a grant. On a related theme, I really like the sentiment shared by the Gates and Buffett families to try and "spend all of our resources within 20 years after Bill's and Melinda's deaths" > The decision to use all of the foundation’s resources in this century underscores our optimism for progress and determination to do as much as possible, as soon as possible, to address the comparatively narrow set of issues we’ve chosen to focus on. https://www.gatesfoundation.org/Who-We-Are/General-Information/Financials/Foundation-Trust https://www.gatesfoundation.org/Who-We-Are/General-Informati...
  - leetcrew 8y ago
    assuming the gates foundation is one of the "good charities", why is this better than taking sustainable withdrawals from the endowment and spending ~8bn/year in perpetuity? $8 billion every year until the end of civilization is a whole lot more than $150 billion plus appreciation over twenty years.
    - tlb 8y ago
      It's a "good charity" because Bill is actively involved in deciding what are the highest-impact projects. Once Bill dies, it'll be managed by a succession of people who probably aren't as effective. Also, the Gates foundation funds projects that create benefits that continue indefinitely, such as eradicating diseases. Better to do that now and have malaria-free populations contribute to their own increasing prosperity than to keep the money in a bank for later.
    - bluGill 8y ago
      The assumption that the gates foundation is "good" today does not imply that the foundation will be good in the future. There are several family foundations that I'm sure are supporting things that the original "robber baron" who earned the money would strongly opposed to.
    - logfromblammo 8y ago
      The actuarial calculation will show that the amount you spend now is exactly equal to the present value of periodic amounts spent into perpetuity, if your assumptions about future rates of return hold forever. My personal hypothesis is that spending is better for the economy than investment, so I would prefer to spend 10% and invest 90% for 20 years, then spend the remainder, than to spend 3% and invest 97%, forever.
    - LeifCarrotson 8y ago
      8*20 is 160 billion, so your endowment's investment return is pretty optimistic. More importantly, inflation and opportunity costs will take a big chunk out of your investment. Assuming consistent 2% exponential growth, and a civilization lasting millenia, that generous $8 billion you set aside today for budget year 3018 is worth about $20 in today's dollars. http://www.in2013dollars.com/2018-dollars-in-3018?amount=20&future_pct=0.02 http://www.in2013dollars.com/2018-dollars-in-3018?amount=20&...
- nerdponx 8y ago
  the money compounds until they decide where to dole it out. The point is, they aren't actually giving the money away.
  - mercutio2 8y ago
    This is technically incorrect. They definitely are giving the money away, to the DAF. You may not like that the money sits in a DAF instead of your preferred charity’s coffers, but it’s still given away, they can never get it back. If you want to criticize DAFs (which I don’t, but I’d rather debate my opponents’ best arguments, not their worst), the tax credit significantly precedes the distribution to any 501c3s, and those 501c3s might theoretically be benefitting society. I’m generally in favor of removing the charitable deduction entirely, but the time shifting really doesn’t bother me. Most 501c3 missions barely benefit the people I think actually need and deserve help, in large part they just provide jobs to rich westerners and then as almost an after thought benefit needy people, often with such onerous strings attached that their primary purpose looks like marketing and signaling, not improvements to the aggregate human condition.
    - nerdponx 8y ago
      Thank you for clarifying
- kareemm 8y ago
  That's a fairly simplistic way of looking at it. Here's another way of looking at it: taxpayers are subsidizing tax breaks for the rich. Guy puts $1M in stock or some other non-cash asset that can change in value into a DAF. Gets a tax receipt for $1M and uses it to reduce his taxable income (this is where the subsidy happens). The $1M may sit in the DAF for years, not going to work in the charitable sector. It may depreciate in value. In this case when liquidated and moved from the DAF to some charity actually doing charitable work, it may be worth substantially less than $1M. Which means although taxpayers subsidized the $1M donation, it's actually a lot less money that's actually put to work in the charitable sector. Of course, it could also appreciate in value. Source: I built an online DAF for 8 years that's taken in $410,000,000+ in donations.
  - coldtea 8y ago
    >Of course, it could also appreciate in value. True, though the 1M saved (from taxation) can also be invested elsewhere to something that might appreciate in value.
    - charlesdm 8y ago
      His own hedge fund, for example.
  - kayhi 8y ago
    Thanks for your comment and now makes me think there could be a bunch of wiggle room with assets that have a hard to determine value.
    - logfromblammo 8y ago
      Think about how certain individuals that are currently prominent politically have abused the ability to declare the value of their own assets, which are mostly real estate holdings and shell companies. If you have your own yes-man assessor, you can inflate the value of your worst-earning asset, donate it to a charitable trust you control, take a tax deduction for the amount you declared to offset the cash flow from your better holdings, decline to distribute for years, as your management company manages the asset for operating costs and your financial management company reaps administrative fees, then eventually buy the asset back from the trust for pennies per dollar of its previously declared value, and repeat. There are no doubt plenty of legal loopholes that enable this. The net result is perpetual tax avoidance, very little money actually getting spent for charitable purposes, and a founder that can declare he is the most charitable-giving person the world has never seen. It is yet another example of rich people moving money between their various pockets in lieu of actually spending it. The maximum benefit from moving a dollar is realized when the person who moved it no longer has any control of it after the move. The best thing you can do with a dollar is spend it; it is literally that dollar's sole purpose for existing. Allowing someone else to temporarily use your dollar is just a cruel joke upon them, because most of what they do with it will then belong to you.
- sametmax 8y ago
  Not if you control the charity. In the US, charities can have a huge investment portfolio. So you put money into the charity, then the charity invest in what you want to boost, including friends companies or your own. The remaining can be spent on reasearch projects which you can benefit from as well. Basically is tax free investment and R&D mechanism. The gates foundation is famous for it, even caught investing in companies doing the total opposite of the foundation mission statement, such as weapon makers. But the best part is that people think bill is a great guy because he gives away so much.
  - maxxxxx 8y ago
    It's also a good way to give high paying jobs to friends, family or other people you want to give money to.
    - prostoalex 8y ago
      Getting a deduction on 20% capital gains tax and having a family member pay ~35% of income tax on it is not exactly a sustainable strategy for wealth transfer.
      - maxxxxx 8y ago
        It's not only about the money. The receiving person gets a prestigious job and the donor gets good PR for his/her charity.
  - throwawaymath 8y ago
    > But the best part is that people think bill is a great guy because he gives away so much. I'm inferring that you think people are silly for buying into some kind of curated persona. But to provide a counterpoint: even after what you've said, I still think Bill Gates is a great guy for his philanthropy. I don't really care if Gates is motivated by purely ascetic altruism or a complex sea of competing incentives. I'm really happy with the work he does. That's not to say he's perfect. Some of his charity is controversial, that's definitely true. And I'm generally skeptical anyone is wholly motivated by altruism. But much of his work has had a profoundly beneficial impact on the world on a global scale. I like the world with the Bill & Melinda Gates Foundation as it is more than I like the idea of the world without it.
jacobush 8y ago
IKEA is famous for having an incredibly obfuscated control and ownership structure with many foundations and charities.
- RanInt1111 8y ago
  The topic of IKEA has always fascinated me because of the bizarre contradiction between IKEA's public image of social responsibility and do-goodery that is in stark opposition to it's dark financial, corporate, and business practices. Between the nested dolls of corporate shell companies and offshore accounts to basically pay zero taxes anywhere while claiming a mantel of social responsibility is intriguing to me, not just for the way in which they are so easily able to deploy dark patterns to fool people. IKEA has been exposed as having used that shell game of corporations and foundations to obscure illicit wood sourcing practices ... all the while people feel good about buying furniture amidst a whirlwind of diversity and social responsibility and environmentalist PR propaganda. It's utterly fascinating to me, it's like observing how a cult leader operates to snare and psychologically rope in their members and then brain wash them so thoroughly that they can't even operate without anchoring everything in the cult. If you were to strip away all the social justice, diversity, environmental responsibility, social do-goodery propaganda, you are left with a corporation that by all indications that are only available in a gleaning fashion, is quite devious and malevolent. It's very existence as a company that produces what is essentially throw away furniture alone, by itself, when you think about it, is in stark contrast to the very notion of environmentalism and ecological responsibility, even without examining their sourcing and manufacturing practices. It's all just such a fascinating exposition of the gaslighting nature of the European corporate culture in general where the facade of social responsibility that is projected outward to the commoners is in direct and stark opposition to the nefarious activities and behaviors of the ruling elite that remain obfuscated behind their now legal and tax and accounting walls, where they would have remained hidden away behind castle walls in the past. It's very much at the core of the subject article; where these "charities" that serve to boost an image of benevolence, are actually far more self-serving tax avoidance malevolence. I am all for lowering and doing away with taxes whenever we can, but what is worse is dishonest and insincere taxation and charity that are far more fraud and theft than the benevolent do-goodery they are touted as being by the psychopathically dishonest. Why should lower taxes only be something for the elite that saddle the middle and lower classes with the costs of their exploitation? ... well, because nothing has really changed from the aristocratic elite of the past, even though the methods have shifted and the labels for them have been revised and rebranded. All hail the king and our lords.
karmajunkie 8y ago
It seems like a relatively simple fix for this is to set the same minimum distribution requirements that private foundations have. The article mentions 5%, which seems like a safe level.
- lotsofpulp 8y ago
  Simple fix is to remove tax loopholes like deductions for charities.
  - ModernMech 8y ago
    But that's actually helpful for legitimate charities.
    - lotsofpulp 8y ago
      There's no reason to introduce subjective terms like charities into the tax code, unless you wish to create a loophole and jobs for lawyers and accountants. Charities can exist with or without tax breaks. The whole point of democracy is to get together and decide where to focus our resources, and letting people get away with directing funds to their personal causes is an avenue for fraud.
      - charlesdm 8y ago
        They can. But without a tax break, people will give less.
        Retric 8y ago
        But, the government ends up with more money. In theory charities fill in gaps that the public does not want to spend government money supporting. So, why spend public money supporting people giving to charity? It’s not like Tax breaks create new money they just redistribute resources.
        8y ago
qubax 8y ago
This isn't new. It's been going on since the end of gilded age with wealthy tycoons setting up family run charities and foundations. Rockefeller, Carnegie, etc all did this. Gates is the most famous one to do this in recent times. It's a great way to shelter money from taxes and governments. It has been used to fund worthwhile enterprises. But it could also be used to give wealthy families political/institutional power for generations.
- creaghpatr 8y ago
  University endowments are another great example, and many of those overlap the examples you mentioned.
- dahart 8y ago
  > This isn’t new. Well, something here is new since the sum total of DAF contributions tripled in 6 years. Are you referring to charities in general, or DAFs specifically? This article is less about charities as a whole and more about a specific style of donation where the funds accrue interest and are locked up and not usable by the charity until later.
chottocharaii 8y ago
For a great book on how these 'charities' are corrupting American politics, and the specific tax loophole that enables them; check out the book 'Dark Money' by Jane Meyer Reforming this law would cause outrage among the non-profit and charity sector, because it would instantly dry up alot of US philanthropy. It still seems like a necessary reform however.
- bilbo0s 8y ago
  >It still seems like a necessary reform however... Why? (Serious question. As a matter of full disclosure, I've read 'Dark Money'. To my mind, DAF's don't seem any more evil than any of the other much larger pools of concentrated wealth out there. eg-corporate lobbying money. In fact, the rules seem to make DAF's a good deal less evil.)
  - Eridrus 8y ago
    https://qz.com/1092737/us-tax-reformers-should-get-rid-of-the-charitable-deduction-too-bad-they-wont/ https://qz.com/1092737/us-tax-reformers-should-get-rid-of-th...
    - bilbo0s 8y ago
      This link concerns the overall idea of a charitable deduction, it's not really about the funds. My question was, "Why do DAFs need to be reformed?" Even if you got rid of the charitable deduction, you would still have things like DAFs and Foundations. Think of it this way, WRA came into being in 1917. But if you take, say, the Carnegie Foundation, that's been around since 1905 at minimum. So even without a charitable deduction, these foundations and DAFs would exist. So the question is, why do they need to be reformed? (Or, more precisely, why do DAFs need to be reformed?) You linked to an article explaining why you believe WRA to have been a bad idea. (Or maybe why you believe that WRA has become a bad idea? But either way, it's about the reforms introduced by WRA, not specifically about DAFs.)
      - Eridrus 8y ago
deleted 8y ago
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pacoWebConsult 8y ago
Everyone is mentioning Gates but the same thing was done by the Clintons and McCains
- epmaybe 8y ago
  This is a technology focused website, hence why Gates is mentioned more than political figures.
readhn 8y ago
Interestingly this is apparently how some corrupt russian government officials like to hide/park their dirty cash/bribes etc. funnel money/bribes/transfer assets into "charities", then have charities buy/own the assets you are interested in owning... houses, yachts etc. Then they have interesting situations where on paper a charity owns a villa ... but in reality a high profile politician lives in it. This is charity abuse taken to the extreme, but i have a feeling russians have copied the approach from their western counterparts. https://themoscowtimes.com/news/prime-minister-medvedevs-supposed-secret-empire-is-russias-biggest-charity-group-57820 https://themoscowtimes.com/news/prime-minister-medvedevs-sup...
newyankee 8y ago
It is the same with most 'NGOS' in India
patrickg_zill 8y ago
This is not really that new... as the 1954 Reece (Congressional) investigation into charities showed: https://en.wikipedia.org/wiki/United_States_House_Select_Committee_to_Investigate_Tax-Exempt_Foundations_and_Comparable_Organizations https://en.wikipedia.org/wiki/United_States_House_Select_Com... Also, Wright Patman's report on Family Foundations and Charitable Trusts: https://openlibrary.org/works/OL11465104W/Tax-exempt_foundations_and_charitable_trusts_their_impact_on_our_economy https://openlibrary.org/works/OL11465104W/Tax-exempt_foundat...
andrewla 8y ago
This article makes my head hurt, as do so many discussions of charitable giving. The only reason to give to charity is to benefit that charity. Yes, donors get a deduction for charitable giving. But they are ALWAYS better off (in terms of money received in their bank account) by NOT GIVING TO CHARITY. There is no way to give money to charity in such a way that you end up with more money than if you had not given to charity. The article points out that there can be some hedging; the assets donated can be managed and management fees paid to a manager before liquidation. And the particulars of the valuations mean that they can sometimes get a larger deduction than if they sold the asset and then donated the proceeds to charity. And there are loopholes that allow them to claim a larger deduction than the maximum deduction allowed in the tax code. But no matter what, if they just sold the damn asset and kept the money, they would have more money at the end of the day than they would having gone through this rigmarole.
- izzydata 8y ago
  I get what you are saying, but if the charity is for a thing that you want to see grow then you are essentially spending money on yourself. These people probably have so much money that funding a new public building in the spot of their choosing could be like buying a new car.
- lotsofpulp 8y ago
  Donors are not always better off not giving to charity. There are many ways to corrupt the "charity" by designating it for purposes that solely benefit the donor or their tribe, in which case the "charity" simply ends up being a vehicle used to obtain a tax subsidy (the taxes not paid by the donor) for the donor's causes, which may not benefit society.
  - rectang 8y ago
    A 501(c)(3) that uses tax-deductible donations for commercial purposes is illegally violating its charter and is subject to enforcement action by the IRS. Note that a 501(c)(3) non-profit charity is different from 501(c)(6) non-profit business league. Donations to a 501(c)(6) are not tax-deductible, so how they are spent is not restricted -- and thus 501(c)(6) organizations are more subject to influence by their donors.
lealephx 8y ago
Just like the Clinton Foundation paying for Chelsea's wedding. Or paying for the personal expenses of the family.
- rconti 8y ago
  I had not heard of this because I don't live in that particular bubble. I looked it up, and it is rated as 'Unproven'; appears to be likely untrue, and based on who's pushing it, it's even less likely to be true. https://www.snopes.com/fact-check/clinton-foundation-paid-for-chelseas-wedding/ https://www.snopes.com/fact-check/clinton-foundation-paid-fo...
- Terr_ 8y ago
  I don't think those are true, and even if they were they don't hold a candle to the other 2016 candidate's "charity". For example, The Trump Foundation paid $10k for a portrait of Trump himself. Not only that, the painting somehow found its way into one of his resorts. https://www.washingtonpost.com/news/fact-checker/wp/2018/06/27/foundation-face-off-the-trump-foundation-versus-the-clinton-foundation/ https://www.washingtonpost.com/news/fact-checker/wp/2018/06/...
- deleted 8y ago
  [deleted]
dumbfounder 8y ago
If you can setup a non-profit like this they can theoretically give forever. That is what the philanthropists are going for. They want their gift to keep giving and be their legacy. Preventing that is not a good idea in my opinion.
- petermcneeley 8y ago
  Western society is historically opposed to your "good idea" https://en.wikipedia.org/wiki/Rule_against_perpetuities https://en.wikipedia.org/wiki/Rule_against_perpetuities In essence, the rule prevents a person from putting qualifications and criteria in a deed or a will that would continue to affect the ownership of property long after he or she has died, a concept often referred to as control by the "dead hand" or "mortmain".
  - dumbfounder 8y ago
    This seems like a very narrow point directed at wills controlling real property. Harvard has a very large endowment it uses provide free tuition and much more, but I would think the overall sentiment is positive about their actions. What about the Norway's sovereign fund? Why would it be different for an individual who wants to setup an organization to impact the world in some way in perpetuity?
    - softawre 8y ago
      Because times change. Would you want the "Keep the blacks as slaves" foundation to still be ticking along these days? A charity should have to get money from each generation to survive.
      - dumbfounder 8y ago
        There are a lot of charities I don't want, but I don't think I should have the right to say what charities exist. Also, charities need people to run them, they aren't soulless automatons that execute on whatever evil plan was concocted by its benefactor. They are generally given broad direction and have the ability to change over time.
petermcneeley 8y ago
Tax deductions for charities are anti democratic. Simply because it redirects collective money which would be directed through a democratic process and puts its control back into private hands. One can talk about potential corruption with an individual charity, but the real sin is the very idea of privately redirecting public funds.
- prostoalex 8y ago
  The implicit social contract is that some charities (churches, Habitat for Humanity, various food banks) pick up the slack where the government blind spots are - food for the poor, housing, etc. It also feeds into Americans' general belief of government's inability to deal with local issues swiftly - democratic process sounds fine and dandy, but it's pretty unrealistic to require extensive legislative processes to address one-off issues in every town - families losing income, escaping abusive significant others, needing help while transferring jobs, etc.
  - petermcneeley 8y ago
    These situations are also handled by government in many northern European countries. (unemployment insurance, government housing, social work, free school, free medicare)
    - prostoalex 8y ago
      The cost-benefit analysis of providing such services through centralized government would look different for the US than European countries. E.g., 20% of Swedes live in Stockholm, so a government-run hospital or food bank there would be accessible to a larger share of Swedes than a similar institution in NYC or LA.
usaar333 8y ago
I find it odd to blame DAFs rather than the absurd tax laws that enable them. There are several oddities in our tax laws: - extremely generous treatment of donating long term appreciated property. You deduct the FMV and also avoid paying capital gains tax. I have yet to understand why we think it is good policy to offer both advantages. Allowing only basis to be deducted (as is case for short term) seems much more reasonable. - our tax system has a standard deduction that itemizations must go over to see benefits - we have a progressive tax system that doesn't smooth over multiple years of unsteady income. I've been a big user of one myself, contributing heavily in a year of an IPO (abnormally high income plus lots of highly appreciated stock). Using a Daf allowed me to have more time to vet target charities; if they didn't exist, I would have still donated heavily in the IPO year (because the tax benefits are leveraging my donations), just less efficiently (less vetting). Point being, the way our tax system handles charitable donations is what is "unfairly" benefiting the rich; DAFs are just a symptom.
gumby 8y ago
The unasked question here is why we even have the idea of special treatment for nonprofits? Nonprofits pay the same as for-profits for their utilities, computers, payroll and the like. Yet their existence permeates and distorts the tax code.
anon49124 8y ago
Silicon Valley Community Fund has an endowment of between Stanford's and Harvard's, around $14 billion USD. The reason is that backers can pledge funds and get tax advantages now, while deferring transfer of funds/assets until later. It's also under no obligation to help anyone, and donors can put strings attached to realize their own pet projects. IOW, the whole thing is a tax-dodge.
- URSpider94 8y ago
  That’s not correct, you can not take a tax benefit until you actually turn over control of the assets to the fund. “Pledges” do not generate tax deductions.
abuckenheimer 8y ago
Really I think the specific the problem here with DAF's is just misaligned incentives, the DAF values the donors donation but the government is the one that has to pony up the tax rebate. Obviously there is some auditing mechanism here where the valuation can't be too far from reality otherwise the government would come down on it but in practice it seems like that is one of their benefits. I think the more interesting and subtle problem though is that the rebate is awarded at donation time instead of when the money actually gets put to use which lets the DAF accrue fees on government money. in a highly stylized example: 1. A donor gives the DAF a $10m yacht * DAF gives a donor $10m donation receipt * Government gives donor <donor tax rate> * <donation receipt> rebate i.e. .30 * $10m = $3m 2. DAF liquidates yacht into $9m cash and invests it * the DAF charges .006 management fee on this for 5 years with a 5% return 3. At the end of 5 years the DAF liquidates its investments and puts all of that money to work on a cause. * ~$11.2m goes to work on a charitable cause * DAF has collected ~340k in fees This is more or less the description the DAF in the article but now but we've simplified to assume a conservative consistent return and that the whole donation gets put to work at once at the end of a set term whereas more likely it would be slowly liquidated over time. Now let's assume that instead of the government paying up the tax rebate when the donation is made that it is paid out when the money left the DAF and went to work on a cause. 1. donor gives a DAF $10m yacht * DAF values it at $9m and gives the donor <donor tax rate> * <donation receipt> rebate i.e. .30 * $9m = $2.7m 2. DAF liquidates yacht into $9m cash, covers their $2.7m rebate outlay and invests $6.3m * the DAF charges .006 management fee on this for 5 years with averages a 5% return 3. At the end of 5 years the DAF liquidates its investment and puts all of that money to work on a cause. * ~$7.8m from the DAF goes to work on a charitable cause + a $2.7m from the government to match that original rebate for a total of ~$10.5m * DAF has collected ~238k in fees What's the difference here? 1. The government saves $300k on a rebate because the DAF has to liquidated the yacht to come up with the money to pay the rebate so the valuation is based on something the reflects the actual cash 2. The government keeps <rebate amount> ($2.7m in this case) in its bank account for the 5 years while is in the DAF. This means the government can use it for it's own operations over that time period rather than it sitting in the "warehouses of wealth". It also means the DAF can't collect fees on this money because it is not managing it. I'm not trying to make a statement on if the government should or should not subsidize donations to charity, just point out how that subsidy seems to be leveraged by the introduction of DAFs against its original intent. sorry for the terrible formatting

240 points by petethomas 8y ago

Looks like donating to charities to get a tax break, which seems fine. Is there a way that they are controlling how these monies are spent?

jjoonathan 8y ago
Yes, that's the "Donor Advised" part of "Donor Advised Fund."
rectang 8y ago
A donor can impose conditions on how a 501(c)(3) charity may spend a particular donation. However, those conditions may not supersede the 501(c)(3)'s duty to avoid using tax-deductible donations to unduly benefit a commercial actor. Because dealing with such conditions is a pain, 501(c)(3) charities prefer to receive undirected funds.
- _delirium 8y ago
  Charities prefer undirected funds, but most will accept restricted funds if the funds are big enough. They often have whole negotiation & legal teams devoted to working with donors to figure out a set of restrictions that's mutually agreeable (i.e. reflects the donor's wishes while minimizing how much of a pain it is to the charity to deal with). Two common examples are donations to museums that are restricted to development of a certain collection or type of work, and donations to universities restricted to funding a specific field of research.
myinitialsaretk 8y ago
There was a good HN comment thread about Donor Advised Funds a few months ago. https://news.ycombinator.com/item?id=17126875 https://news.ycombinator.com/item?id=17126875 I have one, but can see how this leaves a bad taste in mouths. I can "donate" money to my DAF, get the tax break, invest it and it doesn't do any real good by going to a charity until I decide to recommend a grant. On a related theme, I really like the sentiment shared by the Gates and Buffett families to try and "spend all of our resources within 20 years after Bill's and Melinda's deaths" > The decision to use all of the foundation’s resources in this century underscores our optimism for progress and determination to do as much as possible, as soon as possible, to address the comparatively narrow set of issues we’ve chosen to focus on. https://www.gatesfoundation.org/Who-We-Are/General-Information/Financials/Foundation-Trust https://www.gatesfoundation.org/Who-We-Are/General-Informati...
- leetcrew 8y ago
  assuming the gates foundation is one of the "good charities", why is this better than taking sustainable withdrawals from the endowment and spending ~8bn/year in perpetuity? $8 billion every year until the end of civilization is a whole lot more than $150 billion plus appreciation over twenty years.
  - tlb 8y ago
    It's a "good charity" because Bill is actively involved in deciding what are the highest-impact projects. Once Bill dies, it'll be managed by a succession of people who probably aren't as effective. Also, the Gates foundation funds projects that create benefits that continue indefinitely, such as eradicating diseases. Better to do that now and have malaria-free populations contribute to their own increasing prosperity than to keep the money in a bank for later.
  - bluGill 8y ago
    The assumption that the gates foundation is "good" today does not imply that the foundation will be good in the future. There are several family foundations that I'm sure are supporting things that the original "robber baron" who earned the money would strongly opposed to.
  - logfromblammo 8y ago
    The actuarial calculation will show that the amount you spend now is exactly equal to the present value of periodic amounts spent into perpetuity, if your assumptions about future rates of return hold forever. My personal hypothesis is that spending is better for the economy than investment, so I would prefer to spend 10% and invest 90% for 20 years, then spend the remainder, than to spend 3% and invest 97%, forever.
  - LeifCarrotson 8y ago
    8*20 is 160 billion, so your endowment's investment return is pretty optimistic. More importantly, inflation and opportunity costs will take a big chunk out of your investment. Assuming consistent 2% exponential growth, and a civilization lasting millenia, that generous $8 billion you set aside today for budget year 3018 is worth about $20 in today's dollars. http://www.in2013dollars.com/2018-dollars-in-3018?amount=20&future_pct=0.02 http://www.in2013dollars.com/2018-dollars-in-3018?amount=20&...
nerdponx 8y ago
the money compounds until they decide where to dole it out. The point is, they aren't actually giving the money away.
- mercutio2 8y ago
  This is technically incorrect. They definitely are giving the money away, to the DAF. You may not like that the money sits in a DAF instead of your preferred charity’s coffers, but it’s still given away, they can never get it back. If you want to criticize DAFs (which I don’t, but I’d rather debate my opponents’ best arguments, not their worst), the tax credit significantly precedes the distribution to any 501c3s, and those 501c3s might theoretically be benefitting society. I’m generally in favor of removing the charitable deduction entirely, but the time shifting really doesn’t bother me. Most 501c3 missions barely benefit the people I think actually need and deserve help, in large part they just provide jobs to rich westerners and then as almost an after thought benefit needy people, often with such onerous strings attached that their primary purpose looks like marketing and signaling, not improvements to the aggregate human condition.
  - nerdponx 8y ago
    Thank you for clarifying
kareemm 8y ago
That's a fairly simplistic way of looking at it. Here's another way of looking at it: taxpayers are subsidizing tax breaks for the rich. Guy puts $1M in stock or some other non-cash asset that can change in value into a DAF. Gets a tax receipt for $1M and uses it to reduce his taxable income (this is where the subsidy happens). The $1M may sit in the DAF for years, not going to work in the charitable sector. It may depreciate in value. In this case when liquidated and moved from the DAF to some charity actually doing charitable work, it may be worth substantially less than $1M. Which means although taxpayers subsidized the $1M donation, it's actually a lot less money that's actually put to work in the charitable sector. Of course, it could also appreciate in value. Source: I built an online DAF for 8 years that's taken in $410,000,000+ in donations.
- coldtea 8y ago
  >Of course, it could also appreciate in value. True, though the 1M saved (from taxation) can also be invested elsewhere to something that might appreciate in value.
  - charlesdm 8y ago
    His own hedge fund, for example.
- kayhi 8y ago
  Thanks for your comment and now makes me think there could be a bunch of wiggle room with assets that have a hard to determine value.
  - logfromblammo 8y ago
    Think about how certain individuals that are currently prominent politically have abused the ability to declare the value of their own assets, which are mostly real estate holdings and shell companies. If you have your own yes-man assessor, you can inflate the value of your worst-earning asset, donate it to a charitable trust you control, take a tax deduction for the amount you declared to offset the cash flow from your better holdings, decline to distribute for years, as your management company manages the asset for operating costs and your financial management company reaps administrative fees, then eventually buy the asset back from the trust for pennies per dollar of its previously declared value, and repeat. There are no doubt plenty of legal loopholes that enable this. The net result is perpetual tax avoidance, very little money actually getting spent for charitable purposes, and a founder that can declare he is the most charitable-giving person the world has never seen. It is yet another example of rich people moving money between their various pockets in lieu of actually spending it. The maximum benefit from moving a dollar is realized when the person who moved it no longer has any control of it after the move. The best thing you can do with a dollar is spend it; it is literally that dollar's sole purpose for existing. Allowing someone else to temporarily use your dollar is just a cruel joke upon them, because most of what they do with it will then belong to you.
sametmax 8y ago
Not if you control the charity. In the US, charities can have a huge investment portfolio. So you put money into the charity, then the charity invest in what you want to boost, including friends companies or your own. The remaining can be spent on reasearch projects which you can benefit from as well. Basically is tax free investment and R&D mechanism. The gates foundation is famous for it, even caught investing in companies doing the total opposite of the foundation mission statement, such as weapon makers. But the best part is that people think bill is a great guy because he gives away so much.
- maxxxxx 8y ago
  It's also a good way to give high paying jobs to friends, family or other people you want to give money to.
  - prostoalex 8y ago
    Getting a deduction on 20% capital gains tax and having a family member pay ~35% of income tax on it is not exactly a sustainable strategy for wealth transfer.
    - maxxxxx 8y ago
      It's not only about the money. The receiving person gets a prestigious job and the donor gets good PR for his/her charity.
- throwawaymath 8y ago
  > But the best part is that people think bill is a great guy because he gives away so much. I'm inferring that you think people are silly for buying into some kind of curated persona. But to provide a counterpoint: even after what you've said, I still think Bill Gates is a great guy for his philanthropy. I don't really care if Gates is motivated by purely ascetic altruism or a complex sea of competing incentives. I'm really happy with the work he does. That's not to say he's perfect. Some of his charity is controversial, that's definitely true. And I'm generally skeptical anyone is wholly motivated by altruism. But much of his work has had a profoundly beneficial impact on the world on a global scale. I like the world with the Bill & Melinda Gates Foundation as it is more than I like the idea of the world without it.

jacobush 8y ago

IKEA is famous for having an incredibly obfuscated control and ownership structure with many foundations and charities.

RanInt1111 8y ago
The topic of IKEA has always fascinated me because of the bizarre contradiction between IKEA's public image of social responsibility and do-goodery that is in stark opposition to it's dark financial, corporate, and business practices. Between the nested dolls of corporate shell companies and offshore accounts to basically pay zero taxes anywhere while claiming a mantel of social responsibility is intriguing to me, not just for the way in which they are so easily able to deploy dark patterns to fool people. IKEA has been exposed as having used that shell game of corporations and foundations to obscure illicit wood sourcing practices ... all the while people feel good about buying furniture amidst a whirlwind of diversity and social responsibility and environmentalist PR propaganda. It's utterly fascinating to me, it's like observing how a cult leader operates to snare and psychologically rope in their members and then brain wash them so thoroughly that they can't even operate without anchoring everything in the cult. If you were to strip away all the social justice, diversity, environmental responsibility, social do-goodery propaganda, you are left with a corporation that by all indications that are only available in a gleaning fashion, is quite devious and malevolent. It's very existence as a company that produces what is essentially throw away furniture alone, by itself, when you think about it, is in stark contrast to the very notion of environmentalism and ecological responsibility, even without examining their sourcing and manufacturing practices. It's all just such a fascinating exposition of the gaslighting nature of the European corporate culture in general where the facade of social responsibility that is projected outward to the commoners is in direct and stark opposition to the nefarious activities and behaviors of the ruling elite that remain obfuscated behind their now legal and tax and accounting walls, where they would have remained hidden away behind castle walls in the past. It's very much at the core of the subject article; where these "charities" that serve to boost an image of benevolence, are actually far more self-serving tax avoidance malevolence. I am all for lowering and doing away with taxes whenever we can, but what is worse is dishonest and insincere taxation and charity that are far more fraud and theft than the benevolent do-goodery they are touted as being by the psychopathically dishonest. Why should lower taxes only be something for the elite that saddle the middle and lower classes with the costs of their exploitation? ... well, because nothing has really changed from the aristocratic elite of the past, even though the methods have shifted and the labels for them have been revised and rebranded. All hail the king and our lords.

karmajunkie 8y ago

It seems like a relatively simple fix for this is to set the same minimum distribution requirements that private foundations have. The article mentions 5%, which seems like a safe level.

lotsofpulp 8y ago
Simple fix is to remove tax loopholes like deductions for charities.
- ModernMech 8y ago
  But that's actually helpful for legitimate charities.
  - lotsofpulp 8y ago
    There's no reason to introduce subjective terms like charities into the tax code, unless you wish to create a loophole and jobs for lawyers and accountants. Charities can exist with or without tax breaks. The whole point of democracy is to get together and decide where to focus our resources, and letting people get away with directing funds to their personal causes is an avenue for fraud.
    - charlesdm 8y ago
      They can. But without a tax break, people will give less.
      - Retric 8y ago
        But, the government ends up with more money. In theory charities fill in gaps that the public does not want to spend government money supporting. So, why spend public money supporting people giving to charity? It’s not like Tax breaks create new money they just redistribute resources.
        8y ago

qubax 8y ago

This isn't new. It's been going on since the end of gilded age with wealthy tycoons setting up family run charities and foundations. Rockefeller, Carnegie, etc all did this. Gates is the most famous one to do this in recent times. It's a great way to shelter money from taxes and governments. It has been used to fund worthwhile enterprises. But it could also be used to give wealthy families political/institutional power for generations.

creaghpatr 8y ago
University endowments are another great example, and many of those overlap the examples you mentioned.
dahart 8y ago
> This isn’t new. Well, something here is new since the sum total of DAF contributions tripled in 6 years. Are you referring to charities in general, or DAFs specifically? This article is less about charities as a whole and more about a specific style of donation where the funds accrue interest and are locked up and not usable by the charity until later.

chottocharaii 8y ago

For a great book on how these 'charities' are corrupting American politics, and the specific tax loophole that enables them; check out the book 'Dark Money' by Jane Meyer Reforming this law would cause outrage among the non-profit and charity sector, because it would instantly dry up alot of US philanthropy. It still seems like a necessary reform however.

bilbo0s 8y ago
>It still seems like a necessary reform however... Why? (Serious question. As a matter of full disclosure, I've read 'Dark Money'. To my mind, DAF's don't seem any more evil than any of the other much larger pools of concentrated wealth out there. eg-corporate lobbying money. In fact, the rules seem to make DAF's a good deal less evil.)
- Eridrus 8y ago
  https://qz.com/1092737/us-tax-reformers-should-get-rid-of-the-charitable-deduction-too-bad-they-wont/ https://qz.com/1092737/us-tax-reformers-should-get-rid-of-th...
  - bilbo0s 8y ago
    This link concerns the overall idea of a charitable deduction, it's not really about the funds. My question was, "Why do DAFs need to be reformed?" Even if you got rid of the charitable deduction, you would still have things like DAFs and Foundations. Think of it this way, WRA came into being in 1917. But if you take, say, the Carnegie Foundation, that's been around since 1905 at minimum. So even without a charitable deduction, these foundations and DAFs would exist. So the question is, why do they need to be reformed? (Or, more precisely, why do DAFs need to be reformed?) You linked to an article explaining why you believe WRA to have been a bad idea. (Or maybe why you believe that WRA has become a bad idea? But either way, it's about the reforms introduced by WRA, not specifically about DAFs.)
    - Eridrus 8y ago

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pacoWebConsult 8y ago

Everyone is mentioning Gates but the same thing was done by the Clintons and McCains

epmaybe 8y ago
This is a technology focused website, hence why Gates is mentioned more than political figures.

readhn 8y ago

Interestingly this is apparently how some corrupt russian government officials like to hide/park their dirty cash/bribes etc. funnel money/bribes/transfer assets into "charities", then have charities buy/own the assets you are interested in owning... houses, yachts etc. Then they have interesting situations where on paper a charity owns a villa ... but in reality a high profile politician lives in it. This is charity abuse taken to the extreme, but i have a feeling russians have copied the approach from their western counterparts. https://themoscowtimes.com/news/prime-minister-medvedevs-supposed-secret-empire-is-russias-biggest-charity-group-57820 https://themoscowtimes.com/news/prime-minister-medvedevs-sup...

newyankee 8y ago

It is the same with most 'NGOS' in India

patrickg_zill 8y ago

This is not really that new... as the 1954 Reece (Congressional) investigation into charities showed: https://en.wikipedia.org/wiki/United_States_House_Select_Committee_to_Investigate_Tax-Exempt_Foundations_and_Comparable_Organizations https://en.wikipedia.org/wiki/United_States_House_Select_Com... Also, Wright Patman's report on Family Foundations and Charitable Trusts: https://openlibrary.org/works/OL11465104W/Tax-exempt_foundations_and_charitable_trusts_their_impact_on_our_economy https://openlibrary.org/works/OL11465104W/Tax-exempt_foundat...

andrewla 8y ago

This article makes my head hurt, as do so many discussions of charitable giving. The only reason to give to charity is to benefit that charity. Yes, donors get a deduction for charitable giving. But they are ALWAYS better off (in terms of money received in their bank account) by NOT GIVING TO CHARITY. There is no way to give money to charity in such a way that you end up with more money than if you had not given to charity. The article points out that there can be some hedging; the assets donated can be managed and management fees paid to a manager before liquidation. And the particulars of the valuations mean that they can sometimes get a larger deduction than if they sold the asset and then donated the proceeds to charity. And there are loopholes that allow them to claim a larger deduction than the maximum deduction allowed in the tax code. But no matter what, if they just sold the damn asset and kept the money, they would have more money at the end of the day than they would having gone through this rigmarole.

izzydata 8y ago
I get what you are saying, but if the charity is for a thing that you want to see grow then you are essentially spending money on yourself. These people probably have so much money that funding a new public building in the spot of their choosing could be like buying a new car.
lotsofpulp 8y ago
Donors are not always better off not giving to charity. There are many ways to corrupt the "charity" by designating it for purposes that solely benefit the donor or their tribe, in which case the "charity" simply ends up being a vehicle used to obtain a tax subsidy (the taxes not paid by the donor) for the donor's causes, which may not benefit society.
- rectang 8y ago
  A 501(c)(3) that uses tax-deductible donations for commercial purposes is illegally violating its charter and is subject to enforcement action by the IRS. Note that a 501(c)(3) non-profit charity is different from 501(c)(6) non-profit business league. Donations to a 501(c)(6) are not tax-deductible, so how they are spent is not restricted -- and thus 501(c)(6) organizations are more subject to influence by their donors.

lealephx 8y ago

Just like the Clinton Foundation paying for Chelsea's wedding. Or paying for the personal expenses of the family.

rconti 8y ago
I had not heard of this because I don't live in that particular bubble. I looked it up, and it is rated as 'Unproven'; appears to be likely untrue, and based on who's pushing it, it's even less likely to be true. https://www.snopes.com/fact-check/clinton-foundation-paid-for-chelseas-wedding/ https://www.snopes.com/fact-check/clinton-foundation-paid-fo...
Terr_ 8y ago
I don't think those are true, and even if they were they don't hold a candle to the other 2016 candidate's "charity". For example, The Trump Foundation paid $10k for a portrait of Trump himself. Not only that, the painting somehow found its way into one of his resorts. https://www.washingtonpost.com/news/fact-checker/wp/2018/06/27/foundation-face-off-the-trump-foundation-versus-the-clinton-foundation/ https://www.washingtonpost.com/news/fact-checker/wp/2018/06/...
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dumbfounder 8y ago

If you can setup a non-profit like this they can theoretically give forever. That is what the philanthropists are going for. They want their gift to keep giving and be their legacy. Preventing that is not a good idea in my opinion.

petermcneeley 8y ago
Western society is historically opposed to your "good idea" https://en.wikipedia.org/wiki/Rule_against_perpetuities https://en.wikipedia.org/wiki/Rule_against_perpetuities In essence, the rule prevents a person from putting qualifications and criteria in a deed or a will that would continue to affect the ownership of property long after he or she has died, a concept often referred to as control by the "dead hand" or "mortmain".
- dumbfounder 8y ago
  This seems like a very narrow point directed at wills controlling real property. Harvard has a very large endowment it uses provide free tuition and much more, but I would think the overall sentiment is positive about their actions. What about the Norway's sovereign fund? Why would it be different for an individual who wants to setup an organization to impact the world in some way in perpetuity?
  - softawre 8y ago
    Because times change. Would you want the "Keep the blacks as slaves" foundation to still be ticking along these days? A charity should have to get money from each generation to survive.
    - dumbfounder 8y ago
      There are a lot of charities I don't want, but I don't think I should have the right to say what charities exist. Also, charities need people to run them, they aren't soulless automatons that execute on whatever evil plan was concocted by its benefactor. They are generally given broad direction and have the ability to change over time.

petermcneeley 8y ago

Tax deductions for charities are anti democratic. Simply because it redirects collective money which would be directed through a democratic process and puts its control back into private hands. One can talk about potential corruption with an individual charity, but the real sin is the very idea of privately redirecting public funds.

prostoalex 8y ago
The implicit social contract is that some charities (churches, Habitat for Humanity, various food banks) pick up the slack where the government blind spots are - food for the poor, housing, etc. It also feeds into Americans' general belief of government's inability to deal with local issues swiftly - democratic process sounds fine and dandy, but it's pretty unrealistic to require extensive legislative processes to address one-off issues in every town - families losing income, escaping abusive significant others, needing help while transferring jobs, etc.
- petermcneeley 8y ago
  These situations are also handled by government in many northern European countries. (unemployment insurance, government housing, social work, free school, free medicare)
  - prostoalex 8y ago
    The cost-benefit analysis of providing such services through centralized government would look different for the US than European countries. E.g., 20% of Swedes live in Stockholm, so a government-run hospital or food bank there would be accessible to a larger share of Swedes than a similar institution in NYC or LA.

usaar333 8y ago

I find it odd to blame DAFs rather than the absurd tax laws that enable them. There are several oddities in our tax laws: - extremely generous treatment of donating long term appreciated property. You deduct the FMV and also avoid paying capital gains tax. I have yet to understand why we think it is good policy to offer both advantages. Allowing only basis to be deducted (as is case for short term) seems much more reasonable. - our tax system has a standard deduction that itemizations must go over to see benefits - we have a progressive tax system that doesn't smooth over multiple years of unsteady income. I've been a big user of one myself, contributing heavily in a year of an IPO (abnormally high income plus lots of highly appreciated stock). Using a Daf allowed me to have more time to vet target charities; if they didn't exist, I would have still donated heavily in the IPO year (because the tax benefits are leveraging my donations), just less efficiently (less vetting). Point being, the way our tax system handles charitable donations is what is "unfairly" benefiting the rich; DAFs are just a symptom.

gumby 8y ago

The unasked question here is why we even have the idea of special treatment for nonprofits? Nonprofits pay the same as for-profits for their utilities, computers, payroll and the like. Yet their existence permeates and distorts the tax code.

anon49124 8y ago

Silicon Valley Community Fund has an endowment of between Stanford's and Harvard's, around $14 billion USD. The reason is that backers can pledge funds and get tax advantages now, while deferring transfer of funds/assets until later. It's also under no obligation to help anyone, and donors can put strings attached to realize their own pet projects. IOW, the whole thing is a tax-dodge.

URSpider94 8y ago
That’s not correct, you can not take a tax benefit until you actually turn over control of the assets to the fund. “Pledges” do not generate tax deductions.

abuckenheimer 8y ago

Really I think the specific the problem here with DAF's is just misaligned incentives, the DAF values the donors donation but the government is the one that has to pony up the tax rebate. Obviously there is some auditing mechanism here where the valuation can't be too far from reality otherwise the government would come down on it but in practice it seems like that is one of their benefits. I think the more interesting and subtle problem though is that the rebate is awarded at donation time instead of when the money actually gets put to use which lets the DAF accrue fees on government money. in a highly stylized example: 1. A donor gives the DAF a $10m yacht * DAF gives a donor $10m donation receipt * Government gives donor <donor tax rate> * <donation receipt> rebate i.e. .30 * $10m = $3m 2. DAF liquidates yacht into $9m cash and invests it * the DAF charges .006 management fee on this for 5 years with a 5% return 3. At the end of 5 years the DAF liquidates its investments and puts all of that money to work on a cause. * ~$11.2m goes to work on a charitable cause * DAF has collected ~340k in fees This is more or less the description the DAF in the article but now but we've simplified to assume a conservative consistent return and that the whole donation gets put to work at once at the end of a set term whereas more likely it would be slowly liquidated over time. Now let's assume that instead of the government paying up the tax rebate when the donation is made that it is paid out when the money left the DAF and went to work on a cause. 1. donor gives a DAF $10m yacht * DAF values it at $9m and gives the donor <donor tax rate> * <donation receipt> rebate i.e. .30 * $9m = $2.7m 2. DAF liquidates yacht into $9m cash, covers their $2.7m rebate outlay and invests $6.3m * the DAF charges .006 management fee on this for 5 years with averages a 5% return 3. At the end of 5 years the DAF liquidates its investment and puts all of that money to work on a cause. * ~$7.8m from the DAF goes to work on a charitable cause + a $2.7m from the government to match that original rebate for a total of ~$10.5m * DAF has collected ~238k in fees What's the difference here? 1. The government saves $300k on a rebate because the DAF has to liquidated the yacht to come up with the money to pay the rebate so the valuation is based on something the reflects the actual cash 2. The government keeps <rebate amount> ($2.7m in this case) in its bank account for the 5 years while is in the DAF. This means the government can use it for it's own operations over that time period rather than it sitting in the "warehouses of wealth". It also means the DAF can't collect fees on this money because it is not managing it. I'm not trying to make a statement on if the government should or should not subsidize donations to charity, just point out how that subsidy seems to be leveraged by the introduction of DAFs against its original intent. sorry for the terrible formatting