Charitable Gifts May Not Actually Be Gifts ...Yet

Much is made of large charitable gifts, and sometimes rightly so. But often philanthropists can claim to be giving much more than they actually are. Due to a quirk in the tax laws, they can claim their charitable tax deduction long before the funds are distributed to any charity. In some cases, years - or even decades - can pass before a single dollar of a large charitable donation makes its way to a charity. That often gives philanthropists much more credit than they deserve.

To understand this, we need to understand private foundations and their sometimes smaller sisters, donor-advised funds. These are like warehouses for funds that a donor is not ready to give directly to charities. When donors set up or make payments to these warehouses, they get an immediate tax deduction. And, if they make a public announcement, the press release can claim credit for a charitable gift. But in actuality, the funds can stay in the warehouse for years, decades and, sometimes, forever.

That disconnect between payments made to a warehouse vehicle and direct donations to charities is why Forbes changed its methodology for how it calculates charitable giving of the individuals it profiles. For example, here is Forbes's description of its methodology for its January 2021 list of The 25 Most Philanthropic Billionaires:

Our estimates factor in the total lifetime giving of American billionaires, measured in dollars given out the door to charitable recipients--meaning we are not including money parked in a foundation that has yet to do any good. To that end, we also do not include gifts that have been pledged but not yet paid out, or money given to donor-advised funds--opaque tax advantaged accounts that have neither disclosure nor distribution requirements--unless the giver shared details about the grants that were actually paid.

Contrast that with the methodology used by the Chronicle of Philanthropy to create its list, The Philanthropy 50.

A quick glance at the biggest "gifts" the Chronicle counts to establish the philanthropists' standing on this list shows how distorted that standing really is. Instead of counting money that reached charities on the ground in 2020, it counts pledges or money that the donors have stashed away into their own foundations and accounts. And in case after case these enormous pledges or deposits - not direct donations to charity - represent by far the largest contributions the donors made in 2020.

For example, #1 on the Chronicle of Philanthropy list is Jeff Bezos, who gets credit for $10,150,000,000 in 2020 giving, based on his pledge of $10 billion to establish the Bezos Earth Fund. Yet the Chronicle itself notes that of that $10 billion, the fund gave out only around $790 million so far.

In a nod to full disclosure, the Chronicle is upfront about this in describing its methodology. It says its list is based on:

Gifts and pledges of cash, stock, land, and real estate to nonprofit organizations in 2020.... Gifts made to donors' family foundations and donor-advised funds were counted; however, disbursements from those grant-making vehicles were not included in our rankings to avoid double-counting.

But double-counting is not the problem. Over-counting is the problem. Media consumers who don't understand the functions of family (or private) foundations and donor-advised funds will be misled by this methodology into thinking that a payment of $10 billion to a foundation was actually made to charity. The fact that only eight percent actually went to charities will be lost on them.

Does it matter? When media consumers see headlines about millions or billions in "gifts" to charity, the philanthropists may be rewarded with much more praise than they deserve. In an economy with extreme economic inequality, that's not good.

Worse, misleading reporting can cloud the way voters view efforts to reform laws to discourage the warehousing of charitable dollars in vehicles like private foundations and donor-advised funds. When voters are asked about changing these laws, they could well be operating from a false sense of just how charitable donors are who use such vehicles. In the end, consumers may be less critical and less likely to understand that they, as taxpayers, have given the philanthropists a tax deduction without the funds actually going to a charity.

Professional journalists can help by explaining these distinctions and using methodology like Forbes's, not like the Chronicle's. Headline writers could use words like "pledge" and "set aside" for payments made to warehousing vehicles, and reserve words like "gift" and "donation" for actual, direct payments to charities.