Wealthy use loophole to reap tax breaks — and delay giving away money

For years, New York hedge fund tycoon Robert Mercer ­itemized in public tax filings the millions of dollars his family foundation gave to conservative causes. Then, in 2018, the foundation made by far its largest gift to an account called a donor-advised fund that effectively keeps his philanthropy secret.

At the Allender Family Foundation Inc., based in a house near Las Vegas on Marie Antoinette Street, a millionaire family has used the same sort of fund for another purpose increasingly popular among the wealthy: keeping the tax benefits of philanthropy while delaying for years actually giving to those in need.

The Mercers and the Allenders are among a small but growing number of wealthy Americans who've discovered how to bypass rules designed more than a half-century ago to ensure philanthropists stay accountable for the billions of dollars in tax breaks they receive each year. The key is the donor-advised fund, or DAF, which is so flexible that charitable dollars can sit in one indefinitely, and so opaque that no one needs to know either way.

The surge of assets into the funds has long sparked concern, but one gaping loophole has attracted far less attention. Private foundations are using them to sidestep federal laws designed to make sure the wealthy donate money to the needy in a timely fashion, not delay the gifts for generations.

The workaround involves the foundations that many rich people set up to manage their philanthropy. The organizations are generally required to pay out 5% of their assets annually and report each charitable gift to the public. Donor-advised funds, which are considered charities, satisfy that mandate, so they're an ideal way for foundations to postpone their giving. For example, Tesla Inc. co-founder  Elon Musk, who built up $3 billion in a foundation, could report that he met the requirement for moving out money only because he transferred tens of millions of dollars to DAFs in recent years.

Millionaires and billionaires in every corner of the country have embraced the same strategy, filings show: an industrialist in Montana, a chicken processor in Arkansas, many New York-area hedge fund managers, and the founders of Google. A Bloomberg News analysis of private foundation tax returns provides the fullest accounting to date of the torrent of money passing through this loophole — as well as just who is making the most use of it. At least $4 billion flowed from foundations into large sponsors of DAFs, including those established by Charles Schwab, Fidelity and Vanguard, according to the review of more than 360,000 filings submitted to the Internal Revenue Service since 2016. This extraordinary transfer of philanthropic wealth allowed money managers to collect fees on assets intended for charity while letting donors give — or not give — in secrecy.

In more than 1,000 instances, foundations would have fallen short of their required payout for the year were it not for contributions to DAFs, according to Bloomberg's analysis. If they'd paid out exactly what they were supposed to in previous years, closing the loophole could have forced them to push an additional $800 million directly to working charities over the six years examined. That's more than twice as much as the annual expenses of the Alzheimer's Association or the World Wildlife Fund.

DAFs are essentially investment accounts, with a few twists. People who use them give irrevocable control and ownership to a nonprofit in exchange for charitable tax advantages. In practice the nonprofit organizations that sponsor the funds, including many set up by financial companies specifically for that purpose, almost always defer to donors' wishes, imposing no disclosure requirements and no deadlines for disbursing the money to working charities.

The flood of assets into the funds has irked lawmakers, nonprofits and even some billionaire philanthropists. They're calling for new rules to unlock more of the almost $1.5 trillion in private foundations and DAFs — a pool of money earmarked for good causes but impossible for most nonprofits to access. "The needs have never been greater," says Melanie Lundquist, who with her husband, California real estate developer Richard Lundquist, has committed $400 million to charity. After receiving a tax break for a donation, "I just don't think we have the right to shelter that money."

Defenders of the funds say their convenience stimulates more giving. Wealth advisers point out that it takes just a couple of clicks to make a gift. "DAFs are flexible, accessible giving vehicles that really democratized charitable giving," says Elizabeth McGuigan, senior director of policy and government affairs at the Philanthropy Roundtable, a group that advocates for fewer restrictions on charitable giving. Foundations use the funds for legitimate purposes such as pooling resources and donating internationally, she says, and any changes to DAF rules could have unintended consequences. "Charities lose in the long run if there are more handcuffs on charitable giving," she says.

Representatives of the biggest DAF sponsors say their funds pay out more in aggregate than foundations. Fidelity Charitable says DAFs "can be efficient, low-cost, and impactful vehicles." Schwab Charitable adds that "new regulations may unintentionally discourage giving." And Vanguard Charitable points to its low costs, which make "even more available to charities across the country and world."

Still, charitable giving as a share of the economy hasn't budged in decades, despite a surge in the fortunes of the top 0.1% and promises by billionaires such as Musk to donate their wealth eventually. After an initial burst of generosity at the start of the pandemic, donations including those to DAFs failed to outpace inflation in 2021, rising 4%, to $485 billion, according to Giving USA estimates.

Meanwhile, more of those gifts are getting soaked up by DAFs rather than going directly to the needy — 15% of individual giving in 2020, up from 3% in 2009. That wouldn't be as controversial if donors merely used the funds as checking accounts to park their donations before disbursing them to charities. And some do use them that way. They include billionaire MacKenzie Scott, former wife of Amazon.com Inc. founder Jeff Bezos, who's given away money at an unusually fast pace. DAFs paid out grants of $34.7 billion in 2020, the National Philanthropic Trust estimates, but that's $13.2 billion less than they received.

And some, such as the Allenders, are letting their funds sit entirely idle. From 2015 through 2020, the Allender Family Foundation sent a total of $3.2 million to one of Fidelity's charitable accounts, the only grants it made each year. Patrick Allender, a former chief financial officer of conglomerate Danaher Corp., funds it, but it's run by his son, John, who says the money is parked in the account because he doesn't know yet what cause the family wants to champion. He offers no time frame for when the stash will ultimately make its way to charity. "I don't know when I'm going to find that cause," he says.

In a study of more than 2,600 DAF accounts, the Council of Michigan Foundations found that the majority of donors paid out less than 5% of assets in 2020. More than one-third gave nothing to charity at all. The biggest sponsors of the funds have rebuffed calls to release that kind of account-level data, even as the number of accounts has swelled to more than 1 million. As of 2020, DAFs held almost $160 billion, an 85% increase in four years. Although the industry says it's paying out more than one-fifth of its assets a year in aggregate, the reality is probably less: Some of the biggest recipients of grants from the funds are other funds, as donors shift money from one sponsor to another. "There's a lot of paralysis with this very wealthy set," says Stephanie Ellis-Smith, chief executive officer of Phila Engaged Giving in Seattle, who advises the rich on philanthropic plans. "Oftentimes you see the more money there is [in a DAF], the slower it is to move out."

As the wealth of the richest Americans ballooned in recent decades, they've lavished their private foundations with cash, stock, real estate and other property, amassing more than $1.3 trillion for charitable causes, according to the Federal Reserve, and earning valuable tax write-offs. In return, they must move out their money or face penalties. Yet some foundations have trouble meeting the 5% payout rule, so they turn to DAFs.

Take Montana industrialist Dennis Washington. From 2015 to 2019, his billion-dollar foundation sent more than $66 million to Fidelity Charitable, the country's largest sponsor of DAFs. Mike Halligan, executive director of the Dennis and Phyllis Washington Foundation, says he and his two-person team sometimes struggle to get the board to approve the annual amount the IRS requires, so they send it to the fund for future use. But he says he doesn't know what actually happens to the money because, despite being the head of the foundation, it's not in his "basic purview." A spokesperson for the Washingtons declined to comment.

Even more striking is the Zoom Foundation, which hedge fund manager Stephen Mandel established. From July 2014 to June 2020 it sent $336 million, more than 99% of its donations, to Fidelity Charitable, slightly exceeding the amount it was required to distribute in those years. Zoom's website says it funds "innovative change efforts that have high potential for sustainable impact, particularly in the areas of education, the environment and democracy," yet it lists no grant recipients. A spokesperson for Mandel declined to comment.

Hedge fund executives stand out as repeat users of the loophole. At least three foundations tied to insiders at Renaissance Technologies LLC, a hedge fund on Long Island, sent almost all their grants to DAFs. The largest foundation, with almost a half-billion dollars in assets, is CEO Peter Brown's Quetzal Trust. It transferred almost $112 million to Fidelity Charitable from 2015 to 2020, according to tax forms reviewed by Bloomberg. Brown declined to comment.

His co-CEO at Renaissance until 2018, Robert Mercer, has also leaned on DAFs. With his daughters he oversees the Mercer Family Foundation, which had long given mostly to working nonprofits. Since 2018 it's been writing its biggest checks to Donors Trust Inc., which offers donor-advised accounts and bills itself as "the community foundation for liberty."

The shift in giving coincided with a burst of negative attention. Mercer and his daughter Rebekah were prominent Republican donors who helped elect Donald Trump president in 2016. Two years later, Rebekah penned an opinion piece in the Wall Street Journal saying she's "been the subject of intense speculation and public scrutiny, in large part because of the philanthropic investments of the Mercer Family Foundation." Giving to Donors Trust accounted for $28.8 million, or 87%, of the foundation's grants from 2018 to 2020, the last year of available data. That compares with 8% in the prior two years.

Ray Madoff, a Boston College Law School professor who studies philanthropic policy and taxes, says these kinds of examples reflect an erosion of norms. "As the practice becomes more common, the more OK it feels to others," she says. "It's like driving above the speed limit. People don't feel bad about it, so long as they are part of a crowd."

In 1969, Congress tried to stamp out the hoarding of ­charitable money in foundations by imposing the 5% payout rule. At the time, foundations were marketed to the wealthy as a tax dodge, a way to hold on to dynastic wealth while giving little to charity. Conservatives, in particular, objected to foundations' political involvement and the lack of transparency over where money went. They were outraged by the Ford Foundation's funding of liberal causes, including civil rights groups and a voter registration drive that helped elect Cleveland's first Black mayor. "There was concern that private wealth was almost this secret government running the country," says Jon Pratt, senior research fellow at the Minnesota Council of Nonprofits.

The New York Community Trust established the first DAF-like charitable account in 1931, but the funds weren't heavily promoted until investment firms such as Fidelity, Schwab and Vanguard won IRS permission in the 1990s to set up charities that would offer the accounts.

The move presented an opportunity to collect fees. More than half of Fidelity Charitable's $50 billion in assets sat in Fidelity products in June 2021, the latest audited financial statements show. Those investments would generate about $90 million in management fees annually based on current fund expenses. That's on top of administrative fees that start at 0.6% of assets a year and decline for larger accounts. Fidelity Charitable says those costs were far lower than for "virtually any other method of grant-making" except writing a check.

As the accounts became more popular, Wall Street companies including Goldman Sachs Group Inc. and Morgan Stanley set up their own nonprofits to sponsor the funds. It didn't hurt that financial advisers, who often continue managing the charitable dollars after they move to the accounts, pitched the benefits: Donors could have control over the timing of disbursements. The accounts also simplified the administrative burden of philanthropy, so much so that many wealthy people liquidated private foundations and put the money into them. Privacy has also been a big draw. Individuals can make anonymous gifts; foundations can't.

As the wealth of billionaires soared during the COVID-19 pandemic, controversy intensified over charitable rules. Calls for bigger and bolder giving came from prominent individuals and institutions, urging the wealthy to voluntarily unlock money in their donor-advised funds and foundations. A coalition of philanthropy experts, major foundations and billionaires, including former hedge fund trader John Arnold, Galaxy Digital Holding's Michael Novogratz and Baupost Group's Seth Klarman, pressed for new rules to accelerate giving.

Charities, though, mostly stayed quiet. "There's a lot of feeling that when people get the tax deduction, it should be put to work," says Jan Masaoka, CEO of the California Association of Nonprofits, which lobbies on behalf of almost 10,000 charitable organizations. But "nonprofits never want to do anything that would be offensive at all to a donor or foundation. There is not a more emotional issue among our members than DAFs, and we're able to say something about it and they're not."

Especially galling to those pushing for change is that much of the money flowing into charitable vehicles in effect comes from public coffers. In 2022, U.S. taxpayers will hand those earning more than $1 million almost $30 billion in charitable incentives, according to the congressional Joint Committee on Taxation. Donors collect billions more from state and local tax breaks.

Last year, for example, Musk faced what he claimed would be the biggest tax bill in U.S. history after exercising millions of options on Tesla shares. In November, filings show the world's richest person gave $5.7 billion of the electric-car maker's stock to charity. With the top federal tax rate at 37%, the gift could cut Musk's 2021 federal tax bill by as much as 37¢ for every dollar given away. By contributing shares, rather than selling the stock for cash, he could also avoid taxes on capital gains, saving an additional 20¢. Minimizing the U.S. estate tax, a 40% levy on large fortunes at death, brings his total theoretical savings to 74% of his gift.

It may be years, if ever, before taxpayers can see where the donation went. Musk's foundation discloses donations to a wide range of causes but reserves most big checks for Fidelity Charitable and Vanguard Charitable. The defamation trial involving movie star Johnny Depp and his ex-wife Amber Heard offered a rare glimpse into the money leaving Musk's accounts. Depp's lawyers tried to undermine Heard's credibility by suggesting the actor, who'd dated Musk, hadn't followed through on a $3.5 million pledge to the American Civil Liberties Union. The group's general counsel testified that Musk made several gifts, including $500,000 in Heard's name and $5 million more in his own name to the ACLU, both from a Vanguard Charitable fund.

A bipartisan group of lawmakers, frustrated by the pace of charitable giving, is pushing legislation that includes a 15-year limit on tax-deductible dollars in the funds. "Charitable dollars ought to be doing the good they were intended for, not sitting stagnant to provide tax advantages for some and management fees for others," Republican Senator Chuck Grassley of Iowa said while introducing a bill last year with Maine's Angus King, an independent who caucuses with Democrats. Another group of lawmakers from both parties introduced the bill in the House of Representatives in February. This year the Biden administration floated a narrower change. It would prevent foundations from using DAFs to satisfy the 5% rule, unless they can show the money reaches charities by the end of the following year.

A Washington crackdown could require a cross-section of the U.S.'s top 0.1% to change their giving strategies. The Cawood family of Georgia, which made money selling self-help books and anti-aging creams, routes about $4 million annually from its foundation to the National Christian Foundation, a fund sponsor; the Colorado-based co-founder of vacation rental site Vrbo sends almost all of his Find Us Faithful Foundation's grants there, too. Others pouring money from their foundations into DAFs include an early WhatsApp engineer, the CEO of genetic testing company  23andMe, the billionaire co-founder of staffing firm Allegis Group Inc., and some heirs to the Pritzker fortune.

The transfers can be an efficient way to donate. Nwamaka Agbo, CEO of Regan Pritzker's Kataly Foundation, says the built-in infrastructure of the funds speeds up giving. Of the $58 million Kataly sent to DAFs in 2020, $40 million of it was distributed to nonprofits that year, a foundation spokesperson says.

Fidelity Charitable towers over the industry, over­taking the Bill & Melinda Gates Foundation in 2019 as the country's largest grantmaker. It gave out more than $10 billion in ­ contributions that donors recommended in 2021. So it's not surprising that Fidelity CEO Abigail Johnson, the granddaughter of the company's founder, has a private foundation that sends all its grants to Fidelity Charitable. The foundation's recent tax filings show that those donations have been disbursed, and its 2019 return lists recipients. A spokes­person for Johnson says her foundation's DAF gifts "leverage the scale and expertise" of Fidelity Charitable's technology and grant-making teams.

Bloomberg found about 1,300 donations, totaling $1.3 billion, from foundations to Fidelity Charitable. That was more than twice as much as the next-biggest sponsors — the National Philanthropic Trust, Schwab Charitable, and Vanguard Charitable. In all, the review revealed about 7,300 grants from private foundations to more than three dozen major sponsors of the funds. They added up to $4.2 billion. That amount is "likely to be an understatement," because of limitations in the data, says Brian Mittendorf, an Ohio State University accounting professor who studies nonprofits and reviewed Bloomberg's findings. The tally doesn't include hundreds of millions of dollars in donations to big community foundations, such as the Chicago Community Trust and the Silicon Valley Community Foundation, which have become major sponsors of DAFs. Nor does it include records from the tens of thousands of foundations that filed their returns on paper, making them harder to analyze.

Once assets move into a charitable gift fund, donors are rarely willing to disclose the ultimate destination of their money. "I think this is very nosy," says Allison Simon, former president of the Stemmons Foundation, when asked about its 2020 liquidation, which sent $16.2 million to a DAF at Schwab. That money still goes to the same list of charities the foundation used to support, which included the opera and an exotic animal sanctuary in Texas, she says. But she bridles when asked for more details, including the pace of giving — ­something now hidden from public records. "Everything was done very legally," Simon says.

With clever planning, wealthy donors can shroud their tax-deductible philanthropy in total anonymity. Consider the Green Fern Foundation, Guilder Foundation and Kaena Foundation, a trio of $100 million-plus foundations with the same law office address in Minneapolis. Since 2015 they've collectively sent $62 million to Fidelity Charitable, making up more than 98% of their grants. The money funding all this comes from opaque trusts based in South Dakota.

On its filings, the three foundations list the same tax lawyer, Sonny Miller. When asked to speak with the people behind the foundations, Sarah Francomano, a spokesperson working with Miller's firm, laughs. It was unlikely that would happen, she says, because, after all, they want to be anonymous.

Miller says his clients often prefer secrecy for purely modest reasons: "Most of the donors I work with would love to see in the news more about the good work charity is doing and less about who gave to what charity."

Buhayar is a Bloomberg data journalist in Seattle. Alexander and Steverman write about wealth in New York.

Note on Methodology:

Bloomberg News downloaded e-filed tax returns (990-PFs) that private foundations filed with the IRS since 2016 to compile a database of 4.6 million charitable grants. The analysis matched grantees with major sponsors of donor-advised funds, or DAFs, using an approach developed by the Institute for Policy Studies, a Washington-based group that has researched private foundation transfers to the funds. The list of sponsors include those established by financial institutions and some national clearinghouses, but no big community foundations or universities, which have established DAFs for donors' convenience.

For every return, Bloomberg determined whether the foundation met its required distribution for that tax year. If qualifying distributions exceeded the requirement, Bloomberg then tested whether the same would hold if transfers to DAFs were removed. Any instances where that was not the case were included in the tally of returns showing foundations may have relied on such contributions to meet the requirement. The shortfall was calculated by subtracting distributions without DAF payments from the required annual payout. The analysis doesn't account for excess payments from prior years or the fact that some foundations make up shortfalls in the following year.

To come up with more complete tallies for certain foundations' transfers to DAFs, Bloomberg looked at scanned versions of returns filed on paper and available on the IRS website or ProPublica's Nonprofit Explorer. Some foundations provided their most recent returns directly to Bloomberg, if they weren't available through other means. In 2016, about half of private foundations submitted their 990-PFs on paper, but the proportion has fallen since then with new regulations requiring e-filing. Typos and inconsistencies in how private foundations refer to their grants could have led Bloomberg to miscategorize some donations and exclude others. The data include donations to DAF sponsors where donors or their foundations may not have advisory privileges over the accounts.