The American economic landscape is undergoing an enormous shift. During the next few decades, approximately $30 trillion in Baby Boomer assets will transfer to their Gen X and millennial children and grandchildren. Will these heirs contribute a significant portion of these dollars to their local communities? Not if the philanthropic option of donor-advised funds (DAFs) retains its current form.

DAFs are the fastest-growing vehicle for Americans to set aside billions of dollars for supposedly charitable use. Currently, there are an estimated 285,000 DAFs with assets totaling around $85 billion.

DAFs are popular because they are easy to use and appealing: A donor establishes a fund at a commercial national charity (such as Fidelity Charitable, Vanguard Charitable, or Schwab Charitable), donates cash or an appreciated asset such as stock or real estate to that fund, and takes an immediate tax deduction equal to the amount contributed. The commercial national charity then invests the liquated asset and awards grants to nonprofits at the recommendation of the donor. However, neither donors nor commercial national charities have any obligation to distribute any of the money from DAFs to nonprofits. (Note: Private foundations, which typically are created by a corporation, individual, or family such as Bill and Melinda Gates, rarely establish DAFs.)

According to the National Philanthropic Trust’s 2017 Donor-Advised Fund Report, total charitable assets in DAFs at commercial national charities grew by 134 percent (from $19.06 billion to $44.68 billion) between 2012 and 2016. During that same period, the annual payout rate from these funds decreased by 3.4 percent (from 24.1 to 20.7 percent). In 2016, more than $36 billion (approximately 82 percent of DAF assets) were not awarded to nonprofits.

We can see an example of this inactivity in the 2015 tax return of Fidelity Charitable, a nonprofit spinoff of Fidelity’s big asset management service established in 1991 and now ranked as America’s largest charity by contributions. Contributions to Fidelity Charitable for that tax year were $4.1 billion, with $16.1 billion total assets at year-end. Less than 20 percent of this $16.1 billion was granted to nonprofits during the tax year.

At Fidelity Charitable, the remaining 13 billion dollars generated $60.5 million in management fees and $13.3 million in investment fees for its employees. This raises the question of whether Fidelity Charitable’s activities should be considered charitable as defined by the tax code, or whether it in fact operates primarily as a for-profit holding company, passively waiting for donors to recommend grants to nonprofits.

Moreover, because Fidelity Charitable is a 501(c)3 organization, its $704.6 million in investment income in 2015 was exempt from federal income tax.

The massive growth of commercial national charities has a real effect on many charitable institutions, in particular community foundations, which rely on DAFs to support their work. The National Philanthropic Trust 2017 Donor-Advised Fund Report indicates that in 2012, commercial national charities and community foundations nearly tied with respect to total charitable dollars in DAFs (around $18 billion each). By 2016, commercial national charities were at $44.68 billion, while community foundations were at $29.8 billion. It is clear community foundations are dramatically falling behind commercial national charities in capturing donations for their communities.

Coalition Letter Supports DAFs

In September, The Columbus Foundation (on behalf of the Community Foundation Public Awareness Initiative), Council on Foundations, Independent Sector, and The Philanthropy Roundtable wrote a letter to Senate Finance Committee members opposing tax-reform proposals they believed would negatively affect DAFs and community foundations.

The letter responded to law professors Roger Colinvaux at the Catholic University of America and Ray D. Madoff at Boston College, who earlier this year called for a 10-year maximum time period for DAFs to award grants to qualified nonprofits. (Along with philanthropist Lewis B. Cullman, Madoff pointed out in a 2016 article that IRS statistics indicated nearly 22 percent of DAF sponsors report no grants at all from their funds.)

The coalition of community foundations argued that the proposed payout requirement would be a logistical nightmare if they had to track thousands of independent DAFs with diverse 10-year starting periods, and that setting a forced payout date might discourage donors from establishing DAFs at community foundations. Another argument against the requirement is that—given the United States has so many critical social and environmental issues that need immediate attention—10 years is too long to wait.

A Path Forward

How can we better manage and utilize DAFs to support nonprofits and improve our society today? Those administered by commercial national charities like Fidelity Charitable should be investigated by Congress (for example, by the Committee on Finance) to determine whether they circumvent the spirit of their charitable IRS status.

Every senator and congressional representative should be aware that commercial national charities are siphoning off billions of dollars from their states and districts—and the great majority is not being used to make progress on critical issues such as inner-city high school graduation rates, the opiate epidemic, or gender and race equality.

One way to move forward is for Congress to require that commercial national charities operate more like community foundations, in that they pro-actively pursue solutions to national and regional problems. Fidelity Charitable and its trillion-dollar parent company Fidelity Investment are well positioned to invite their donor-clients to consider co-funding with community foundations, universities, other nonprofits, and businesses to find long-term answers to serious problems. Such cooperative efforts would also enhance the reputations of both commercial national charities and community foundations.

Congress could also mandate that commercial national charities provide evidence—as part of their annual tax returns—to show they have techniques in place to determine whether their grants to nonprofits have measurably improved lives or the environment. This would assist with validating whether commercial national charities are fulfilling their intended charitable purpose, and not simply operating as a for-profit holding company.

If Congress were to institute changes or adopt new methods for DAFs, Fidelity Charitable and similar commercial national charities might be viewed more like Andrew Carnegie than the miser in Aesop’s Fables, who buried his treasure only to have it stolen by an observant thief. In his essay “The Gospel of Wealth” (1889), Andrew Carnegie empathized a more productive use of wealth: A person should “consider all surplus revenues … as trust funds, which … as a matter of duty … is best calculated to produce the most beneficial results for the community.”

Money can only do good if it is put to use. Let’s hope commercial national charities and community foundations will help younger generations embrace this message and mobilize trillions of dollars, not billions, to improve lives and protect the environment.