Boston College Law School professor, Ray Madoff, testified at the Special Senate Committee on the Charitable Sector in September 2018. At BC, Madoff teaches and writes on philanthropy policy, taxes, property and estate planning. She is the co-founder and director of Boston College Law School Forum on Philanthropy and the Public Good, a think tank devoted to considering whether our current rules governing the charitable sector are adequately serving the public good, and has twice been among the NonProfit Times Power & Influence Top 50, primarily for her work on donor advised funds (DAFs).
Her book Immortality and the Law: The Rising Power of the American Dead was published in 2010. She has appeared as an expert witness in front of the U.S. House and Senate committees, and her writing has appeared in the New York Times, the Washington Post, the Wall Street Journal, the LA Times, the Boston Globe and the Chronicle of Philanthropy. It was because of her expertise on the subject of donor advised funds and philanthropy that Professor Madoff was asked to testify in front of the 2018/19 Special Senate Committee on the Charitable Sector.
She began her testimony,
I bring a cautionary tale from the United States, with the hopes that Canada will take steps to adopt rules to protect Canadian charities and the beneficiaries they serve as well as protect government resources from imprudent tax expenditures.
On May 13th, she spoke with editor in chief Gail Picco. The following interview has been edited for clarity and length.
Gail Picco: Hi Ray. It’s great to meet you. I was reviewing the Special Senate Committee on the Charitable Sector’s report Catalyst for Change. Your testimony really stood out for me. How did you, as a U.S. academic, end up in front of the Senate special committee in Ottawa?
Ray Madoff: I got an email from a woman who worked for Canadian Senate. They were looking for an expert to provide testimony on donor advised funds (DAFs) and I’ve been doing a lot of writing in that area for several years. I was very pleased with the opportunity to participate. This is just the type of hearing that I have hoped would happen in the United States and I was very excited to see it happening in Canada. So, I went to Ottawa, testified and submitted written testimony.
Gail Picco: What was your experience of testifying?
Ray Madoff: I’d never been to Ottawa before; it was a beautiful city and I was very impressed with the Senate Special Committee on the Charitable Sector. They had lengthy hearings on a variety of issues involving the charitable sector and the committee seemed to be very committed to learning all that they could about the operation of the sector in Canada. I spent 30 minutes testifying and answering questions. I got a lot of good questions and sensed that there was great interest in the topic; I didn’t feel any of the heat that can sometimes surround these discussions in the United States.
Gail Picco: What drew your interest to donor advised funds and philanthropy?
Ray Madoff: I teach and write in the areas of wills and trusts, with a special interest in taxes and wealth inequality. In 2010 I wrote a book, Immortality and the Law: The Rising Power of the American Dead, about how the law treats interests of the dead, and what that tells us about the values of the living. One of the most powerful ways we let people “live on” after death is through the creation of charitable foundations.
I was interested to find in my research that earlier in our history, Americans were not allowed to create a charity that would last beyond their life. Yet today, people can create a foundation that can exist in perpetuity, and the person creating that foundation can receive tax benefits that in the United States can be worth around 70% of the donation."
This caused me to think about the policy issues and how much the public benefits—if at all—from these private charitable trusts. In 2008, I wrote an op-ed for the New York Times called Dog Eat Your Taxes? about a then-famous case involving the [hotelier] Leona Helmsley who left instructions that her charitable bequest of $8 billion be used for the care and welfare of dogs. Many people were troubled by this idea that so much money would be committed to dogs when there were so many needy causes. In the article, I pointed out that Leona Helmsley was not only spending her own money, but was spending ours too since the charitable deduction constitutes a subsidy from the federal government. In Mrs. Helmsley’s case, given that her fortune, without the charitable trust, would have been eligible for an estate tax rate of 45 percent, her $8 billion donation for dogs was really a gift of $4.4 billion from her and $3.6 billion from taxpayers. Even more troubling was the fact that the dogs might not even receive any of those funds, since our laws only require spending 5% of the assets, and this spending requirement can be entirely satisfied by paying administrative costs of the private foundation.
Gail Picco: And the road from foundations led you to donor advised funds?
Ray Madoff: Yes—in the U.S., foundations have to pay out 5% of their assets every year, a regulation brought in to make sure foundations would execute on their charitable purpose. But donor advised funds, by contrast, have no payout requirements at all. And they’ve become more and more important in the charitable sector. DAFs represent a significant portion of charitable giving in the U.S. For the past several years, the list of charities that received the most donations has been dominated by donor-advised fund sponsors. One reason for their popularity is that donor-advised funds facilitate the giving of appreciated property, and donations of appreciated property are much more advantageous from a tax perspective than donations of cash. If you donate cash to a charity, you get an income tax deduction (in the United States worth as much as 37% of the gift), but if you give appreciated property, you get both an income tax deduction and also get to avoid capital gains taxes on the appreciation.
The problem is, under current law, all benefits are provided up front and there is no requirement or incentive for funds to ever be distributed out of the donor advised fund and into the working charities."
Gail Picco: What is the Forum on Philanthropy and the Public Good and what prompted its creation?
Ray Madoff: I had been writing articles and op-eds on private foundations and donor-advised funds, which examined these philanthropic vehicles from a public policy perspective. Since the creation of these vehicles cost the government significant revenue in foregone taxes, it seemed appropriate to ask what the public was getting for this expense.
I was frustrated, however, by the fact that most of the discussion about charitable tax benefits focused on practical discussions about how to provide the most benefit to donors, with very little policy discussions on the benefits to the public."
The inspiration for doing something bigger, came from Bill Bagley, my dear friend and colleague who worked in philanthropy and has been teaching Philanthropy and the Law at Boston College Law School. In 2012. Bill was diagnosed with 4th stage kidney cancer and at that time given three months to live. But Bill was lucky enough to receive immunotherapy as part of an experimental program at Dana Farber Cancer Center and, as a result, not only was able to come back to teach in 2013 but continues to work today in full force for the International Catholic Migration Commission.
In 2013, just after his treatment, Bill and I had a conversation where he encouraged me to take this work to the next level by creating a think- tank that would focus on issues of philanthropy policy reform in a more sustained way. Though I had some trepidation at the time about the work involved in creating a think tank, my feeling was that if someone with 4thstage cancer tells you to do something, you should do it! Bill has been an amazing partner in this work, and I am grateful to him (and Dana Farber) every day!
Our first project was a conference—called The Convention on Promoting Meaningful Reform in Philanthropy –that brought together leaders in philanthropy from diverse backgrounds—including legal scholars, economists, political scientists, historians and foundation and non-profit leaders –to assess different rules governing philanthropy and consider whether they adequately support the public good."
Since that first meeting, the Forum has engaged in direct research on tax policy, hosted a number of conferences on particular issues like donor-advised funds and the role of perpetuities in charitable giving (the latter resulted in the forthcoming book, Giving in Time). The Forum also brought in journalists from around the country to attend one-day Philanthropy Boot Camps for Journalists, to help them better understand the rules and resources for covering the philanthropic sector.
I wondered if we would be able to get financial support for our work, or whether funders would be put off by the fact that we were seeking reforms to the rules that govern them. But, happily, we found that many funders are interested in securing the strength of nonprofits and the legitimacy of the charitable sector as a whole. As a result, the work of the Forum has been supported by a diverse array of large and small funders including the Ford and Hewlett Foundations, and the David Bohnett Foundation, among others.
A number of individual philanthropists are also deeply concerned about these issues and we have worked with several of them as well. One early supporter of our work was the late New York philanthropist, Lewis Cullman who, in 2014, when he was 95 years old, wrote a piece for the New York Review of Books called Stop the Misuse of Philanthropy. He was a great philanthropist and was deeply committed to living and spreading the value of “give while you live philanthropy.”
My work has brought me in touch with other amazing philanthropists as well, including John Arnold, Kat Taylor and Melanie Lundquist, who have all written about reforming the rules governing the philanthropic sector."
Gail Picco: What explains these concerns for reform by individual philanthropists?
Ray Madoff: I think what happens is that people who are really committed to promoting positive change through philanthropy sometimes look around and see how inefficient the rules are in promoting current impact. As a result of their own philanthropy, they see the value that can be achieved by spending and also have a heightened awareness of the magnitude of the problems that are not able to be addressed due to a lack of funds.
It is incredibly important that philanthropists and foundation leaders are getting involved in these issues. Working charities are hampered in speaking out for themselves because they are wary that lobbying for changes that might alienate their donors."
One place we have seen this issue in the United States was with respect to the estate tax. It has been well documented that charitable giving at death is improved when there is a robust estate tax. The estate tax has been in a state of flux in the United States in recent years, but we don’t see nonprofits lobbying in favor of the estate tax, even though it would benefit them enormously, because they are afraid to alienate their major donors. The same thing occurs when it comes to promoting rules that will impose requirements on private foundations and donor-advised funds.
Many charities want to see regulation in this area but feel they cannot speak on these issues because it would risk alienating their donors.
Gail Picco: What are some of the current critiques happening inside the sector around these issues?
Ray Madoff: I think there is a general concern with wealth inequality and whether philanthropy is serving to exacerbate or ameliorate the problems raised by wealth inequality in today’s society.
Donor advised funds and private foundations are two vehicles ripe for concern because donors can receive substantial up-front tax benefits, but there is little oversight into what happens after the deduction.
In addition, there are concerns about transparency and whether the public has sufficient information to judge whether philanthropic dollars are being used for the public good.
Gail Picco: Do you think DAFs help charities fulfill their mission?
Ray Madoff: DAFs can help charities fulfill their mission when funds flow from DAFs to working charities. When funds stay in the DAFs, they do nothing for charities.
Gail Picco: Do you think DAFs should be more regulated?
Ray Madoff: Yes, in order for the charitable tax benefits associated with DAFs to be justified, the rules must provide either an incentive or requirement for DAF funds to be distributed. My preferred rule would be you get some tax benefit when the money goes into the DAF and you get tax credit (or tax deduction in the United States) as it comes out. Alternatively, the rules could provide for a current up-front deduction but also impose a time frame on the expenditures, for example requiring all funds to be distributed within 10 years.
Gail Picco: Do you see DAFs as a mechanism for charitable giving or as a tax avoidance scheme?
Ray Madoff: I do see them as a vehicle for charity activity, not as classic tax avoidance. But they are only helpful when they pass funds onto working charities.
Gail Picco: How do they rank on the transparency scale?
Ray Madoff: There is very little transparency when it comes to donor-advised funds because all of the reporting is done on the basis of the organization as a whole and not on a per-account basis. Private foundations are subject to lots of disclosure requirements, but these rules can also be avoided by private foundations doing their charitable giving through donor-advised funds.
Gail Picco: Do you think DAFs contribute to the wealth gap?
Ray Madoff: Absolutely. The donor continues to have control of the funds and control is power.
Gail Picco: Well, this has been a great conversation, the first of many, I hope.
Ray Madoff: Yes, let’s keep the conversation going.