A solution in search of a problem DonorsTrust / Donors Capital Fund Analysis of the Camp Donor-Advised Fund Payout Proposal 2:00 – 3:30 PM May 29, 2014

A solution in search of a problem Agenda What is DonorsTrust? Why do donors choose DonorsTrust? What is the Camp proposal for donor-advised fund account payouts? What rules govern payouts from private foundations? What’s wrong with the Camp donor-advised fund account payout proposal? DonorsTrust2

A solution in search of a problem What is DonorsTrust –We are a national “community foundation” or cause-related donor-advised fund sponsoring organization –Our community is philosophic rather than geographic –DonorsTrust’s primary program is provision of donor-advised fund (DAF) accounts for donors who share our mission –The central and animating purpose of DonorsTrust is to protect charitable intent in support of liberty -- limited government, personal responsibility, and free enterprise –Because DonorsTrust has a specific mission and serves a specific community, DonorsTrust has and does turn down advisor grant requests that fall outside our mission and purpose DonorsTrust3

A solution in search of a problem What is DonorsTrust (continued) –In keeping with DonorsTrust’s commitment to protect account holder’s charitable intent, we require DAF accounts to sunset within 25 years or so after the death of the original account-holders No perpetual accounts at DonorsTrust Successor advisors to administer during sunset term, only –Based on preliminary analysis, 75% of contributions to DonorsTrust are paid out within 5 years of receipt Some accounts were specifically created to payout only at a future date, and in some cases that date is substantially beyond a 5 year period –Our 2013 payout rate was 116% (DonorsTrust and Donors Capital Fund grants / 5 year avg. value at end of year) –Over our lifetime, we have received $680.3 million in contributions and issued $564.5 million in grants – an 83% lifetime payout ratio DonorsTrust4

A solution in search of a problem What is DonorsTrust (continued) Established in 1999 Between DonorsTrust and Donors Capital Fund (a supporting organization of DonorsTrust), 215 donor- advised fund accounts during its history Median payout rate is 92.4% 164 have cumulative payout rates 50% or higher 27 have cumulative payout rates 100% or higher For purposes of these statistics “payout rate” looks at contributions into a particular DAF account and grants from the DAF account DonorsTrust5

A solution in search of a problem Why do donors choose DonorsTrust? –Administrative ease Only one charitable gift receipt to keep track of No due diligence or paperwork to process Quarterly reports and online access Assistance with choosing grantees –Move from checkbook giving to strategic giving –Current accounts allow us to document our donors’ preferences –Our donors do not view us as a useless middleman –Protect their charitable intent We ask for detailed mission statements We ask for sunset beneficiaries We pledge to support their sunset plans, and to monitor successor advisors and sunset beneficiaries for “mission drift” DonorsTrust6

A solution in search of a problem What is the Camp proposal? Chairman of House Ways and Means committee, Dave Camp, put forth draft legislation, the “Tax Reform Act of 2014” Section 5203 of the Act introduces a new Internal Revenue Code (“Code”) provision (Section 4968 of the Code) Proposed Section 4968 of the Code would require that all contributions to a DAF be distributed within five years of receipt -- existing DAF account balances as of December 31, 2014, would be treated as if contributed on December 31, 2014 DonorsTrust7

A solution in search of a problem What is the Camp proposal (continued)? “The proposal generally is effective for contributions made after December 31, In the case of a contribution made before January 1, 2015, any portion of which (including any earnings attributable thereto) is held in a donor advised fund as of such date, such portion is treated as having been contributed on such date.” Technical Explanation of The Tax Reform Act of 2014, A Discussion Draft of the Chairman of the House Committee on Ways and Means to Reform the Internal Revenue Code: Title V – Tax Exempt Entities, Section C.3., Excise tax on failure to distribute within five years a contribution to a donor advised fund... Emphasis added. DonorsTrust8

A solution in search of a problem What is the Camp proposal (continued)? Failure to meet the requirements of Section 4968 would result in imposition of an excise tax equal to 20% of the amount of the contribution not distributed within the applicable timeframe Excise tax imposed at entity level Distribution to a DAF account at a different sponsoring organization would not be a qualified distribution –Impossible for a DAF account advisor to establish a DAF at a different sponsoring organization without subjecting the original sponsoring organization to a perpetual 20% excise tax –Locks donors into the sponsoring organization where the DAF is first established DonorsTrust9

A solution in search of a problem Private Foundations and Payouts DAFs are often considered an alternative to non-operating private foundations (PFs) PFs are subject to a minimum required distribution (“MRD”) rule MRD rule requires a PF to calculate its average monthly endowment and pay-out 5% of this amount on or before December 31 of the following year (for calendar year PFs) Payouts in excess of the 5% minimum requirement can be carried forward to future years and count toward future years’ MRD Failure to meet the minimum payout requirement may result in imposition of an excise tax equal to 30% of the amount the PF failed to distribute in a timely manner DonorsTrust10

A solution in search of a problem PF MRD Rule vs. Camp DAF Rule PF payout based on average account value –Camp rule much more complex – track individual contributions PF payout only 5% of total endowment value –Camp rule requires 100% of each contribution be distributed within 5 years –Camp rule eliminates a “permanent endowment” for a DAF account Not necessary a bad result, but why effectively destroy the use of DAF accounts as a philanthropic platform and turn it into an enhanced charitable checkbook? –PF rule allows a permanent endowment DonorsTrust11

A solution in search of a problem PF MRD Rule vs. Camp DAF Rule (continued) PF payout rule administratively simple –PFs can use any reasonable method to calculate average monthly value of their endowment, provided it is consistently applied –Camp DAF rule imposes complex requirement to track each separate contribution to a DAF account to ensure the total value of each separate contribution is distributed within 5 years of its receipt Why should the DAF payout rule be more stringent than the PF MRD rule? –While true that contributions to DAF accounts receive more favorable tax treatment than contributions to PFs, it is generally no more favorable than contributions to properly structured charitable remainder trusts, which are not required to distribute to charitable beneficiaries for a life-in-being plus 20 years DonorsTrust12

A solution in search of a problem What’s wrong with the Camp proposal? Arguably, DAFs “democratize” or pluralize philanthropy –DAF accounts provide a philanthropic platform to a much broader group of potential philanthropists than the primary alternative – private foundations –DAF accounts can be established using a relatively minimal amount of start- up capital ($10,000 in the case of DonorsTrust; $5,000 in the case of Fidelity Charitable; $25,000 in the case of Vanguard Charitable Fund) –Camp proposal restricts, if not eliminates, an individual’s choice of low cost charitable administration solutions DAF accounts allow individuals to evolve from checkbook donors to thoughtful philanthropists –The camp proposal undermines, if not eliminates, the use of DAF accounts as a means of moving away from checkbook giving to strategic giving –Why favor the 1% over the 99%? Severely restrict ability of donors to monitor for mission drift –Cannot use a DAF account to protect charitable intent DonorsTrust13

A solution in search of a problem What’s wrong with the Camp proposal (cont.)? Places smaller DAF sponsoring organizations at a disadvantage compared with larger organizations –In a classic one size fits all government “solution,” the Camp proposal leaves the largest DAF sponsoring organizations in a stronger position than their smaller brethren –Expense of complying with the onerous burden of tracking each separate contribution to a DAF account much easier for larger organizations to absorb Classic Washington DC -- picks winners and losers rather than letting the market and individuals decide –PF over DAF sponsoring organizations –Larger sponsoring organization over smaller sponsoring organization DonorsTrust14

A solution in search of a problem What’s wrong with the Camp proposal (continued)? Treats similar philanthropic platforms in vastly different manner –Why are the rules imposed on DAF accounts so much harsher than those imposed on private foundations? –Arguably, the rules imposed on DAF accounts should be less strenuous than those placed on PFs Fewer entities for the Internal Revenue Service to “police” DonorsTrust15

A solution in search of a problem What’s wrong with the Camp proposal (continued)? There are a number of philanthropic platforms that allow an immediate tax benefit without requiring the entire amount (or even any amount) of the contribution be put to use within 5 years: –Private foundations –Charitable remainder trusts –Charitable gift annuities –University endowments No good reason for payout rules imposed on DAF accounts to be more draconian than those imposed on PFs –Granted, no one has ever successfully argued there is consistent rhyme or reason to the Code DonorsTrust16

Alliance for Charitable Reform Webinar May 28, 2014 Giving More: The Magic of Donor-advised Funds Brent Christopher, President & CEO

It is essential for charitable dollars to be put to work.

And, we need more of them.

What makes a donor-advised fund so effective?

Simple...which also means, less expensive Donor-advised Funds

Democratize Giving Easier for more people to be philanthropists— to bring structure, thoughtfulness and discipline to their giving, small and large Donor-advised Funds

Multi-generational Pass down family values and engage children, but without private control in perpetuity Donor-advised Funds

Unique Assets Beyond the usual cash and stock, put a broader range of assets (that most charities aren’t equipped to handle) to work for the public good Donor-advised Funds

Time to Think Align grants with your interests and community needs to support effective charities Donor-advised Funds

Oversight Satisfy public charity accountability and transparency, with back-office support to ensure compliance Donor-advised Funds

Your Horizon Preference Choose to pay out for immediate needs, or to be a reliable future resource for the community Donor-advised Funds

...and at community foundations, help to underwrite community engagement. Donor-advised Funds Dallas Mayor Mike Rawlings addresses a group of community leaders concerned about building economic stability for low-income working families.

Donor-advised Funds Why not a five-year payout? Many donors highly value: capitalizing on a liquidity event to give a much larger gift than their routine giving involving their family over time being thoughtful and being able to plan for future grants meeting future community needs

Flexibility = Maximum Generosity Donor-advised Funds

Flexibility = More Giving Donor-advised Funds

Flexibility = More Public Good Donor-advised Funds

Howard HusockHoward Husock, Contributor 6:40AM |897 views Does Dave Camp Hate Mark Zuckerberg? The Surprising Attack On Donor Advised Funds Mark Zuckerberg interviewed by Financial Times, Scobleizer, and Techcrunch (Photo credit: Robert Scoble)

Philanthropy and donor-advised funds

Philanthropy, charity, giving voluntarily and freely…call it what you like, but it is truly a jewel of an American tradition. - John F. Kennedy

Philanthropy plays an important role in America Society Econom y Family

History of charitable giving Revenue Act of 1913 Community Foundations Revenue Act of s Revenue Act of s First donor-advised fund established 1930s IRS Form 990 required 1940s1950s Revenue Act of s1970s1980s National donor-advised funds 1990s Pension Protection Act of s Today Donors focusing on strategy and goals New charitable tools and technologies emerging Definition of social good evolving, includes impact investing Transfer of significant wealth shaping future of giving

Charitable giving Donor-advised funds 2% floor on charitable deduction Extend close of tax year to April 15 Phase out itemized deduction for certain taxpayers Simplified excise tax for private foundations New excise taxes Other giving impacts Required to pay out all contributions within 5 years of receipt Contributions and grants treated on a first-in, first-out basis If payout unmet, DAF assessed annual excise tax of 20% on undistributed funds Tax Reform Act of 2014 Discussion draft proposed by House Committee on Ways and Means, led by Chairman Dave Camp

Charitable giving tools Many giving options are available; donor-advised funds lead in numbers of accounts. Source: National Philanthropic Trust, “2013 Donor-Advised Fund Report.” Data represents 2012 numbers. 201,631

Donor-advised funds National donor-advised funds (DAFs) have dominated the past five years with 50% of market share % of assets have been granted annually in all segments. *National DAFs are founded by banks or financial services firms with a national presence; data as of December 31, Sources: The Chronicle of Philanthropy surveys, National Center for Charitable Statistics, Council on Foundations, National Philanthropic Trust’s report of Donor-Advised Funds (2012) and Vanguard Charitable estimates and analysis.

Contribute to a philanthropic account and take an immediate tax deduction. Select investment options. Assets are invested and proceeds grow tax-free. Recommend a grant. Due diligence is conducted and funds issued. Craft a succession plan to establish a legacy of giving How Vanguard Charitable’s philanthropic account works

Why use a philanthropic account? Operation s Family One-time event Foundatio n Retireme nt MemorialLegacy

As of June 30, Assets under management (millions) Growth of Vanguard Charitable over the past 10 years Number of active accounts Average account size: $306,000 Median account size: $47,000 Our donor base continues to grow and diversify

Vanguard Charitable grant activity by fiscal year

As of June 30, Vanguard Charitable donors contribute and grant in a variety of ways Based on Vanguard Charitable’s fiscal 2013 results Contribution types (percentage by dollars)Grant interest areas (percentage by units)

Vanguard Charitable has payout requirements** Aggregate grant requirement ­ 5% of average net assets on a current five-year rolling basis. Per account grant requirement ­ Accounts must recommend and issue at least one $500 grant every seven years. ­ 1% of total accounts do not meet this requirement each year. Vanguard Charitable proactively outreaches to these accounts to ensure all meet this requirement. ** Both requirements part of IRS representations

How has Vanguard Charitable performed against the IRS 5-year requirement?

Thank You