Strings Are Attached: Shining a Spotlight on the Hidden Subsidy for Perpetual Donor Limits on Gifts

Abstract

Charitable gifts often come with strings attached. Donors limit their gifts in many ways, typically by restricting an asset’s use or purpose, the timing of spending (as in an endowment), and by securing naming rights. Donors also limit their gifts by giving to a charitable intermediary such as a donor-advised fund or private foundation, thereby retaining effective control over the distribution or investment of the donated asset. Donor limits are perpetual in nature. The Article assesses the law of donor limits. The Article first explains that non-tax legal rules strongly favor donor limits. They are easy for donors to impose and extremely hard for charities to eliminate. Federal tax rules also favor donor limits by treating most donor-limited gifts the same as unrestricted gifts for purposes of the income and estate tax charitable deductions. As a result, donor limits are common, and burden a substantial portion of charitable assets. The Article finds based on a review of Form 990 data that, for 96 of the leading charities in the U.S., 69% of their $474 billion in net assets are subject to donor limits, meaning these charities have full control of only 31% of assets. For the 17 private universities in this group, 68% of the total endowment is donor limited. The Article discusses that this is a tax law subsidy for dead hand control, one that entails many harms, including to the public interest, charitable autonomy, pluralism, the operational funding of charities, and by imposing compliance costs and subsidizing gains to donors. The Article considers tax reform options for donor-limited gifts. These include treating donor limits as retained rights or return benefits, estate tax reform to discourage giving to intermediaries, curtailing donor-limited gifts from donor-advised funds, and taking donor limits into account for purposes of any new giving incentive, such as a nonitemizer deduction or charitable giving credit. Importantly, under any tax reform approach, the power of donors to impose limits would not change. Donors could continue to limit their gifts in perpetuity as they currently do. But charity, and society, would be relieved from some of the costs of the dead hand.

Keywords: Charitable deduction, perpetuity, estate tax, donor advised funds, dafs, private foundations, restricted giving, donor limits, donor control, endowment, naming rights

JEL Classification: H2, H20, H24, H29, K11, K34, L3, L30, L38