In the midst of the devastating damage brought by hurricanes Harvey and Irma, congressional leaders in Washington, DC are pushing to overhaul America’s tax structure, creating a unique opportunity for disruptive change.
There is a staggering $865 billion sitting in private foundations in the U.S. today and, given the tragic and historic loss of lives, homes, and businesses in Florida, Texas, Louisiana, and elsewhere, it’s now more important than ever to deploy philanthropic dollars.
Using private foundations to shelter dollars that have been tax deducted is legally made possible thanks to the outdated “five percent rule” that governs America’s foundations. For over three decades, private foundations have been required by the Internal Revenue Service to make eligible charitable expenditures that equal or exceed approximately 5% of the corpus of their respective endowments. This is way too low, because every penny donated to those foundations comes from a tax deduction.
The challenges we face today are far too vast to maintain the status quo. That’s why I urge our lawmakers to double the required charitable expenditure amount to 10%.
The cost of Hurricane Harvey alone—which could be the most expensive natural disaster in U.S. history, costing $190 billion, according to a preliminary estimate from private weather firm AccuWeather—is reason enough to make a change. That amount does not even take into account the impact the massive storm will continue to have on businesses and employment for weeks and months to come.
Plus, when you consider the billions of dollars needed elsewhere around the country, there should be no debate action is needed—and fast. Consider the Piedmont Council for the Arts, a nonprofit organization that announced last month it will close after serving the community in and around Charlottesville, Va. for 37 years; the Carr Center and PuppetArt theaters in downtown Detroit that have both faced eviction this year; and the elimination of the entire middle school sports program for Albuquerque Public Schools, New Mexico’s largest school district. The list goes on.
Philanthropists form foundations to bring resources and results to causes we believe in. Together, we help build better and stronger communities—locally as well as globally. Regretfully, some foundations give the minimum and choose instead to build large organizations. To guard against this, a required contribution of 5% simply doesn’t cut it. The money no longer belongs to the individual donating it after it has been given to their foundation. They have received the benefit of the tax deduction, so it has become public money.
Most foundations manage their assets with a long-term or even perpetual time horizon, and Congress allows this. Needless to say, this should not be tolerated by our elected officials any longer.
I feel so strongly about this that my husband and I have made plans to ensure that within five years of our deaths, any corpus remaining in our foundation is to be spent to zero. The good news is that we are not alone in our thinking.
Consider the Giving Pledge, created in 2010 by Bill and Melinda Gates and Warren Buffett to challenge philanthropists around the world to publicly dedicate the majority of their wealth to charitable activities and causes. As of this year, some 170 of the world’s wealthiest individuals, couples, and families have publicly taken the Giving Pledge. While it’s great to see the progress that has been made to date, the fact remains that so much more needs to be done.
As philanthropists, we all need to commit to giving more, giving sooner, and giving smarter. The stakes are too high to consider anything else. As the president and Congress grapple with competing budget priorities and face shrinking government funding for critical social issues, we need foundations to plug the holes left in the dam. Philanthropists become a critical part of the safety net.
I’m reminded of the gentleman bank robber, Willie Sutton, who’s credited with robbing banks because “that’s where the money was.” Some dub this proposal the “Sutton’s Law” of considering the obvious first. Today, our members of Congress should consider the obvious and double the five percent rule as a means to help meet the numerous needs we face as a country, including in areas such as education, health care, the arts, and social services.
Philanthropists need to look their fellow philanthropists in the eye and say: “This is a stick up.” America’s rules governing private foundations should change to embrace our new challenges as a society. What worked 30 years ago does not work today—and reform is long overdue.
Melanie Lundquist is a philanthropist. Melanie and her husband Richard have made the largest-ever contribution by private individuals to Los Angeles Unified School District public schools and the largest single donor contribution to a non-teaching/research hospital in the U.S.
