Americans Who Made Fortunes During Covid Save on Taxes by Giving It Away
The Covid-19 pandemic and the Black Lives Matter movement prompted some wealthy donors to put their charitable donations to work.
The bull market in stocks, and a little bitcoin, helped fuel a blitz of philanthropic giving in 2020 from accounts that provide big tax breaks for donors, a new report shows.
Two million grants worth $9.1 billion flew out of accounts that wealthy people use to park money for donations at Fidelity Charitable, the non-profit arm of Fidelity Investments, according to the company’s annual report on giving. The company reported increases in pandemic and social-justice related giving.
The dollar value of the outgoing grants was 24% higher than the previous year. The company, however, didn’t disclose how much the value of assets under management had also grown, beyond saying that there was “tremendous investment growth” in the donors’ accounts.
“It was an unprecedented year,” said Amy Pirozzolo, Fidelity Charitable’s head of donor engagement.
The accounts, called donor-advised funds, are a way for wealthy donors to receive charitable tax breaks before they have to decide where the money goes. Critics have called them warehouses of wealth, where tax-sheltered dollars can sit for many years after a donor has taken their tax write-off. An estimated $140 billion sits in DAF accounts, according to the National Philanthropic Trust.
There has been pressure to get donors to use the money more quickly. Late last year, the Initiative to Accelerate Charitable Giving was formed by a group including Texas billionaire John Arnold, investor Mike Novogratz and Baupost Group’s Seth Klarman to encourage lawmakers to change tax laws so that money would flow to non-profits more quickly. The coalition suggests, among other changes, that there be a 15-year deadline to distribute funds.
Now, there’s no deadline for when money must go to charity, and taxpayers who itemize can write off donations in the year they are given. The tax break can be as much as 74 cents on every dollar given away.
“With more than $140 billion in DAFs and $1 trillion held in private foundations, this is an enormous problem,” said Boston College law professor Ray Madoff, who helped develop the coalition’s policy proposals. “The current rules provide no meaningful assurance that these funds will ever make their way to working charities.”
The Covid-19 pandemic and social-justice movements seem to have motivated account holders to start writing checks. “It was clearly in response, first and foremost, to the pandemic and the crisis,” Pirozzolo said. “Secondarily it was in response to racial inequality.”
Nearly $500 million of the funds distributed last year from accounts with Fidelity went to pandemic relief efforts. The CDC Foundation, which supports the work at the Centers for Disease Control and Prevention, saw nearly the biggest increase among all charities in the number of accounts recommending a grant, Fidelity’s report said. The human services category, which received 11% of donor dollars in 2019, got 23% of funds in 2020.
Grants to free-food programs increased twelvefold in 2020, and Feeding America, Meals on Wheels, and World Central Kitchen made it onto the list of the top 20 most popular charities for donors at Fidelity.
The Equal Justice Initiative showed up among the most popular charities for the first time, and there were also huge percentage increases in the number of accounts giving to three NAACP-affiliated funds.
After a year when the S&P 500 rose more than 16% and the Nasdaq Composite Index more than 43%, the tax benefits of giving securities with fat gains to a DAF were particularly attractive.
Some 57% of donations to accounts came in the form of publicly traded securities, such as stocks — avoiding any capital-gains taxes that would ordinarily be levied on shares that have risen in value. After the securities are donated, Fidelity liquidates them, and the money is available in the donor’s account to be re-invested. The investments in that account also grow tax-free.
Legally, the non-profits such as Fidelity Charitable have ultimate control over the funds. But in practice, accountholders recommend charities they want to support.