Over the past year, philanthropy – specifically, donor-advised funds – have faced increased levels of public and political scrutiny. The most recent example of this came in November 2023, when the IRS issued proposed regulations related to donor-advised funds. The regulations included several critical changes aimed at reenforcing transparency and avoiding the abuse of philanthropic funds.
While acknowledging the underlying intent and purpose of these proposed changes— The Community Foundation and a coalition of more than 25 community foundations from across the country have voiced concerns about unintended consequences that these regulations could have on our donors and the nonprofit sector, writ large.
On May 6, The Community Foundation’s President and CEO Tonia Wellons testified in front of the Internal Revenue Service Advisory Council (IRSAC) and share her perspective on the impacts these regulations could have. She spoke candidly as to how these newly proposed Internal Revenue Service and US Treasury regulations would impact the work of The Community Foundation, disrupt the structure of our funds, and – most importantly – severely limit the philanthropic potential of our many generous donors and community partners.
The following post includes extensive excerpts from that testimony, as well as donor-relevant insights provided by our Director of Fund Administration & Special Project, Benton Murphy.
Galvanizing Philanthropy into Action – A Tribute to Our Donors
One of the driving factors behind these regulations is to ensure that fund advisors -- and the philanthropic entities they work with -- disburse funds to charitable causes in a way that is both efficient and effective.
The Community Foundation is proud of our institutional payout rate (the percentage of our funds paid out as grants annually), which lies in the range of 15-20%+. Compare this to the average annual payout rate of our private foundation peers, which usually rests at 5%. These numbers are a testament to our community of givers here at The Community Foundation and the tremendous generosity of our donors and fundholders!
Our community of givers helped The Community Foundation rise to the challenge brought on by the COVID-19 pandemic, resourcing our ability to provide more than $90 million in funds to local organizations by providing personal protective equipment for frontline medical and community organization staff, ensuring essential food delivery to people in need, addressing the mental health needs of frontline workers and nonprofits whose staff members have been deeply impacted by COVID-19, and supporting parents and educators working to address the negative impact on the schools and students.
Our donors have been at the forefront of our community response not only to disasters but in support of the day-to-day operations of thousands of local, national, and even international nonprofits. On an annual basis, our donors provide $70-90 million in grants to qualified nonprofits, offering a lifeline to many organizations that would struggle to make ends meet otherwise.
Simply put, our donors make our region a better place for its residents. This is why we are so concerned about the unintended consequences that the proposed regulations on donor-advised funds will bring.
“As place-based, community-led hubs for philanthropy, community foundations form the backbone of our nation’s regional response to an almost infinitely broad set of issues and priorities.
We represent and support communities of givers that would be irreparably harmed by these regulations, putting solutions to community problems out of reach for many donors. ”
The Repercussions of Redefining Donor Advisors
One of the proposed shifts in regulations includes re-categorizing wealth advisors who help advise our fundholders with Separately Managed Accounts as Fund Advisors. The Greater Washington Community Foundation offers fundholders with $500,000 or more in charitable assets in their fund to hold these assets in a separately managed investment account. We offer this service to donors who wish to be more actively involved in the investment strategy that oversees their funds.
As Fund Advisors cannot be paid from donor-advised funds as a matter of law, this proposed regulatory shift would mean that a donor’s personal investment advisor and The Community Foundation would likely incur significant excise taxes in a Separately Managed Account arrangement.
As a public charity, we take our responsibility seriously to our donors and the community we seek to serve. We hold active conversations with donors at all levels to encourage them to give through their donor-advised funds. We host learning opportunities, site visits to community-based organizations, and manage significant projects seeking to tackle issues ranging from homelessness to maternal health.
We also offer Philanthropic Advisory Services, where our staff serve as in-house consultants or advisors to fundholders, including our Separately Managed Account holders, to encourage more giving around the issues that matter to the donor with a high potential for impact in the community. This community connection and orientation toward giving back to the region is unique to community foundations which is not always feasible for our for-profit or private foundation peers.
At the Greater Washington Community Foundation, our Separately Managed Funds represent 46% of our assets that, in our most recently completed fiscal year, had an effective payout rate of 19.5%, granting more than $48 million to qualified grantees.
Should the proposed rules come into effect, these funds would be irreparably harmed, making it likely that they may elect to become private foundations with a minimum 5% payout rate, equating to a loss of $36 million in grantmaking to the community.
Reclassification of Fund Types as Donor-Advised Funds
The second major proposed regulatory shift in our advocacy with the IRS is related to reclassifying various fund types as donor-advised funds. The Community Foundation offers our donors a wide array of fund types, each with unique attributes supporting different charitable objectives.
Field-of-interest funds would potentially be reclassified as donor-advised funds under the proposed rule change. Our family of more than 130 field-of-interest funds support a wide array of programs and initiatives, from community wealth building, housing and homelessness to disaster relief for victims of natural disasters.
These funds, all backed by community-based advisory committees that help to ensure all investments through the fund go toward the stated field-of-interest, are a vital part of The Community Foundation’s and our donor’s impact in the community. More critically, field-of-interest funds can support a more comprehensive array of services that cannot be sustained through traditional DAFs, such as funds that can directly support individual persons within the field-of-interest.
Taking disaster relief as an example, our donors have historically been at the forefront of our region’s response to COVID-19, the 9/11 attack on the Pentagon and rural Pennsylvania, and the Navy Yard mass shooting that claimed the lives of 12 people in the District in 2013. Currently, we house several employee disaster and emergency hardship funds on behalf of corporations. Our three most significant funds alone collectively provided $12.7 million to individuals in need over the past five years to support hardships due to COVID-19 and various natural disasters, including major hurricanes.
If these funds were re-categorized as DAFs, making grants to individuals in need would be much more challenging. Under IRS regulations, DAFs cannot be earmarked to benefit any specifically designated individual. Subjecting field-of-interest funds to the same substantiation requirements as DAFs would require significantly greater oversight from The Community Foundation -- a process that would ultimately make many of these programs untenable due to the cost of implementation.
Our foundation also hosts more than 30 fiscal sponsorships, which could be reclassified as DAFs under the proposed rule change. Fiscal sponsorships are a vehicle for programs and donors who want to do good in the community but lack the infrastructure to do so, and work with The Community Foundation to provide this infrastructure to help facilitate community impact. Our fiscal sponsorship funds support programs including maternal health, food justice, and work to combat violence in Washington, DC. Only a handful of organizations in our region offer this service.
These funds also support youth enrichment through opportunities for students from around the country to support internship opportunities in Washington, DC, exposing students to global careers. The fund pays for their stipend, travel expenses, and housing. If the fund were reclassified as a DAF, the fund would potentially no longer be able to pay for programmatic expenses, severely limiting the opportunity for students who would unlikely be able to afford such an opportunity otherwise.
In Conclusion
In her testimony offered at the IRS hearing, our President and CEO Tonia Wellons urged the Treasury and the IRS to consider the unintended negative consequences that these regulations would create. As place-based, community-led hubs for philanthropy, community foundations form the backbone of our nation’s regional response to an almost infinitely broad set of issues and priorities. We represent and support communities of givers that would be irreparably harmed by these regulations, putting solutions to community problems out of reach for many donors.
As more than 40 organizations testified at the hearing, there is universal need to better understand how community foundations work before changing the regulatory environment in which we exist. We are encouraged to know that the Treasury and the IRS are listening and receptive to our input. We will keep our community of donors and fundholders in the loop as these conversations proceed.