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Daily Tax Report: State

California Looks Into Billions Held in Funds Intended for Charities

Jan. 14, 2020, 10:56 PM

California could become the first state to scrutinize how much of the billions of tax-sheltered donations in managed charitable funds actually flow out to charities.

A.B. 1712 by Assemblywoman Buffy Wicks (D) is intended to shine a light on donor-advised funds, the largest of which are sponsored by the nonprofit arms of financial services firms such as Fidelity Investments, Goldman Sachs Group Inc., Charles Schwab Corp., and Vanguard Group, according to a legislative staff analysis.

The bill passed its first hearing in the Assembly Judiciary Committee on Tuesday with a 7-2 vote and will be heard next in the Assembly Appropriations Committee. It must pass the Assembly by Jan. 31 to stay alive for the year. If Wicks meets the Assembly deadline, the bill will move to the Senate for debate over the next eight months. Gov. Gavin Newsom (D) hasn’t taken a position on the bill.

Aside from the financial services firms, there are dozens of funds run by community foundations, such as the Silicon Valley Community Foundation, the largest regional foundation in the United States. It distributes 22% of its $8.8 billion in assets a year, according to a 2018 survey. Other funds are run by organizations with specific missions, such as support for religious charities and universities.

Immediate Tax Benefit

When donors place money, stock, cryptocurrency, or other assets in accounts with fund sponsors, they receive an immediate state and federal charitable tax deduction. But the account owners, who are often wealthy individuals, may opt to not distribute money to charities for years, Wicks and supporters of the bill argue.

Under the bill, fund sponsors would disclose to the state attorney general their policies for accounts that are inactive or don’t make distributions to charities for more than 36 months, and how they monitor and enforce their giving policies. Sponsors that are part of financial institutions would need to disclose the value of donor assets the institutions invest in their own mutual funds or other investment vehicles, a practice that has come under criticism.

The Institute for Policy Studies, a research center, has argued that there exists “a mutually-beneficial symbiotic relationship between national sponsor donor-advised funds and the corporations that founded them that may be detrimental to getting money out to charities.”

“The money that an individual is getting a tax write-off for, that money should be spent in the community,” Wicks said in an interview. “Right now we don’t know that money is reaching the community the way it’s supposed to.”

The General Accounting Office raised three concerns about donor-advised funds in a September 2019 report on identifying abusive tax schemes involving tax-exempt entities: dormant accounts that accumulate funds indefinitely; lack of public benefit from funds set up for tax shelters rather than charitable giving; and donors regaining their donations through complicated transactions while keeping the tax benefits.

Wicks said California would be the first to require such disclosures if the bill passes.

$121.4 Billion In Assets

Total assets in donor-advised funds are about $121.4 billion nationally and the funds pay out an average of 20.9% of assets a year, according to a 2019 report from the National Philanthropic Trust cited by a coalition of groups backing the bill that includes the California Association of Nonprofits. The group estimates that California loses $300 million a year in tax breaks for fund-account holders but cautions that the figure is a broad guess.

Fidelity Charitable, Charles Schwab Charitable, and Vanguard Charitable are opposed to the bill, as are dozens of community foundations from around California.

In a joint letter to the committee, the three financial institution funds along with the Silicon Valley Community Foundation and 13 others said concerns about donor privacy and reporting burdens could depress charitable giving if the bill passed.

“In its current form the bill codifies a suspicious and oddly dark view of the personal generosity that results in several billion dollars of annual support to California families and communities in need,” Nicole Taylor, president and chief executive officer of the Silicon Valley Community Foundation, told the committee.

Wicks said she has tried to address the concerns with amendments that require the information submitted to the California attorney general about individual donors be stripped of identifying information such as names and addresses, and to exempt funds that hold less than $300 million in assets from the bill.

If the law passes, the attorney general may determine that all is well, Wicks said.

“Maybe there’s no problem, and the money is getting out the door,” she said. If not, the state may need to set rules such as setting minimum annual distribution percentages, she added.

To contact the reporter on this story: Laura Mahoney in Sacramento, Calif. at lmahoney@bloomberglaw.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; David Jolly at djolly@bloombergtax.com

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