EA could benefit from a general-purpose nonprofit entity that offers donor-advised funds and fiscal sponsorship

post by Brendon_Wong · 2020-06-27T00:16:58.808Z · score: 50 (22 votes) · EA · GW · 14 comments

Contents

  Donor-Advised Funds
  Fiscal Sponsorship
None
14 comments

Many EA Forum posts have been written about community proposals like providing community members with the financial stability to make an impact (1 [EA · GW], 2 [EA · GW]), improving the state of early-stage project funding in EA (1 [EA · GW], 2 [EA · GW], 3 [EA · GW], 4 [EA · GW]), and increasing the adoption of donor-advised funds within EA (1 [EA · GW], 2 [EA · GW]). EA community members would be empowered to experiment with approaches to address these bottlenecks and create value in other ways if the infrastructure exists for them to do so—namely a nonprofit entity that explicitly focuses on providing donor-advised funds (DAFs) and fiscal sponsorship (FS) to the EA community.

Donor-advised funds and fiscal sponsorship can be offered by any 501(c)(3) charity, ideally with the appropriate supporting paperwork. Donor-advised funds allow people to donate money or assets to a charity that provides donor-advised funds, receive an immediate tax deduction, and control how those funds are subsequently distributed to other charities and social impact projects with the option of investing the funds indefinitely prior to distribution. DAFs provide donors with considerable tax benefits like deducting the full amount of donated assets instead of selling appreciated assets, paying capital gains tax, and donating the after-tax remainder. They also provide logistical benefits like only getting a single donation receipt from the DAF rather than receiving one from all of the charities funded through the DAF. Fiscal sponsorship is a related concept to DAFs that enables any person or organization to accept tax-deductible donations at a charity that provides fiscal sponsorship. This has the benefit of eliminating the need to create a new charity and handle the associated logistics for every single new charitable project unless it makes sense to start a separate organization.

There are standard benefits of donor-advised funds and fiscal sponsorship seen in the charitable sector, such as providing donors with considerable tax advantages and reducing the time for people to launch/test new social impact projects. There are also creative approaches that might be able to create value in new ways. This post covers both standard and creative ways DAFs and fiscal sponsorship might be able to benefit the EA community, and all of them would be made possible and be easily testable by setting up a single organization.

Donor-Advised Funds

Fiscal Sponsorship

I estimate the cost of setting up such an entity in the U.S. at $15,000–$25,000 based on a quote I received from a reputable legal firm. I believe the tangible (additional money to charity) and intangible EV (helping people launch their own EA funds) if just one of the many ideas I mentioned above is implemented greatly exceeds the costs of setting such an entity up. If anyone is interested in funding this project, contributing to this project, or founding/running this project, please let me know!

14 comments

Comments sorted by top scores.

comment by Tee · 2020-06-29T09:40:18.993Z · score: 25 (8 votes) · EA(p) · GW(p)

Hey Brendon, in 2020 Rethink Charity pivoted to provide fiscal sponsorships to select value-aligned projects in EA and adjacent communities. As many might know, we helped kickstart Rethink Priorities with a more in-house FS arrangement. We've just completed our first external FS arrangement with Dao Foods. For you or anyone who has seen this post, please do let me know if you know of any projects who could use this service!

comment by Brendon_Wong · 2020-07-01T05:28:15.872Z · score: 8 (3 votes) · EA(p) · GW(p)

That's great, I'm happy fiscal sponsorship exists within EA now! I'll definitely refer any projects I'm aware of. Now I'm wondering how long it'll take for DAFs to pop up!

comment by Larks · 2020-06-28T15:40:50.891Z · score: 8 (2 votes) · EA(p) · GW(p)

Isn't this what CEA was created to do - provide central services like accounting and tax registration for smaller EA (though they weren't called 'EA' in those days) organisations in order to benefit from economies of scale?

comment by Brendon_Wong · 2020-06-28T18:50:52.283Z · score: 8 (3 votes) · EA(p) · GW(p)

Regarding fiscal sponsorship, some EA organizations like CEA and CFAR have done something similar, albeit to a highly limited extent. CEA and CFAR have occasionally hosted efforts seen as independent initiatives under their legal entity. I think this demonstrates the value fiscal sponsorship can bring to the community.

Fiscal sponsorship generally refers to the service of hosting independent efforts under the same legal entity with the associated expectations: (1) explicitly offered as a service, (2) allows independent efforts to remain under the umbrella organization for an indefinite period of time, (3) allows independent efforts to migrate their assets to another organization at any point in time, (4) allows independent efforts to independently fundraise under their own brand name, (5) offers an administrative portal, tools (such as expense reporting and fundraising portals), and procedures to reduce the administrative overhead of offering such a service, (6) accepts applications to use the service on an ongoing basis, (7) accepts a significant number of applications onto the service to fulfill the service's goal of making it easier to people to launch social impact efforts, (8) offers the service at scale to a large number of independent efforts, (9) tracks the finances of each independent effort separately from other independent efforts, (10) financed based on flat monthly fees and/or a percentage fee charged on incoming donations.

CEA may have offered something similar at some point in time, but it doesn't seem like they are currently focused on doing fiscal sponsorship. It is not my understanding that CEA is advertising or accepting applications for such a service, and is only hosting a very small number of efforts that could be seen as independent, which are the most important distinctions. CEA probably offers at most expectations 2, 3, 4, 5, and 9.

Also, CEA does not look like it's in the business of offering DAFs (I can provide an enumerated list of DAF provider expectations if that would help clarify), although the EA Funds are vaguely reminiscent of "collective DAFs."

comment by Sanjay · 2020-06-27T11:54:03.467Z · score: 5 (3 votes) · EA(p) · GW(p)

I think there are real benefits to having an entity which can provide fiscal sponsorship.

For the Donor Advised Fund (DAF) side of things, I'm less convinced.

  • I doubt that there are many people who would benefit from having a DAF who can't already get the benefits that they need from existing DAF providers (i.e. I suspect it's not worthwhile to invest the c $15k to set this up for such a small number of people)
  • If there's more demand than I realise, then I think if we take evidence of that demand to an existing DAF provider, I believe they would be more than happy to provide those people with that service
comment by Brendon_Wong · 2020-06-27T22:48:54.130Z · score: 1 (1 votes) · EA(p) · GW(p)

Thanks for sharing your thoughts! Which of the applications of fiscal sponsorship seem most promising to you?

Regarding DAFs, I'd have to do the math, but I think that the benefit of the $15,000–$25,000 could be realized extremely quickly. For example:

  • If just $200,000 in intended donations for 2022 or later were counterfactually invested at a 7.5% ROI rather than held in cash, the initial investment would be recouped in a year ($200,000 * 0.075 = $15,000)
  • If someone in California was earning $250,000 a year and saved $50,000 in a DAF in both 2020 and 2021 to do direct work in 2022 and 2023 by $50,000 a year from their DAF, they would pay a tax rate of 19.46% in 2022 and 2023 on the $50,000 per year instead of paying a marginal tax rate of 46.65% if they saved $50,000 in 2020 and 2021 without depositing it into a DAF, leading to a $27,190 tax reduction ($100,000 * (0.4665-0.1946) = $27,190)

I think it's highly unlikely an existing DAF provider will customize their offerings (for example by offering to pay individuals a salary directly to do charitable work instead of just regranting to 501(c)(3)s) because their expected benefit from doing so is simply too low to justify the time investment.

comment by Sanjay · 2020-06-28T00:16:34.741Z · score: 3 (2 votes) · EA(p) · GW(p)

I think the benefits of fiscal sponsorship were fairly clear from your post.

  • For the example in your first bullet point, it may be that there are enough donors to warrant creating a DAF, but that still wouldn't mean the option outperforms dealing with an existing DAF provider.
  • For your second bullet point, I hadn't appreciated this element of your post on first reading. I expect an existing DAF provider probably would be nervous about providing this service. And I could imagine people in the EA community benefiting from this. However it would make me nervous too -- it sounds like the sort of scheme that could be made to look really bad in the hands of the right (or wrong!) journalist. But maybe these risks are more surmountable than I realise.
comment by Brendon_Wong · 2020-06-28T19:21:37.451Z · score: 1 (1 votes) · EA(p) · GW(p)

I agree that the second bullet point is likely more novel/compelling. Regarding the first point, I think that barriers like "high minimums to create a DAF, high annual fees, high minimum grant amounts, high minimum maintenance amounts, and limited investment options" mentioned in my post may reduce the counterfactual amount that would otherwise go to DAFs from EA by a considerable degree exceeding the $200,000 figure mentioned. For example, the minimum to create a DAF at Vanguard Charitable is $25,000, which is a somewhat large amount of capital for some people just to invest their money in something safe like a 2% savings account or money market fund prior to donation.

I think that some DAF applications I mentioned are more novel/compelling than others, such as allowing people to easily invest intended donations, fund their own future charitable work in a tax-deductible manner, and create additional "EA funds" offering a wider range of cause areas and methodologies beyond what the existing EA Funds offer.

I think that the second bullet point is viable so long as all appropriate best practices are followed, such as giving fair compensation for the level of future work (e.g. not paying people $500,000 a year for work that charities normally pay $50,000 a year for) and ensuring that all future work is actually charitable and appropriately documented.

I find it unlikely this will cause any PR issues unless this is actually broadly advertised to the general public, and even if so, it's important to note that this idea requires people to actually do charitable work in the future at a lower pay rate as opposed to simply saving for retirement in a 401(k) which offers similar tax and investing benefits. It only seems amazing to us because we would actually like to work full-time on charitable work in the future at a low pay rate—this is not an idea that seems popular in the mainstream.

comment by Thomas Kwa (tkwa) · 2020-06-27T02:52:26.177Z · score: 4 (3 votes) · EA(p) · GW(p)

Related: 80k podcast on patient philanthropy .

comment by Brendon_Wong · 2020-06-27T03:09:50.337Z · score: 1 (1 votes) · EA(p) · GW(p)

It's interesting you mention that! In my post I link to the article Long-term investment fund at Founders Pledge [EA · GW] which relates to patient philanthropy, and I also left a comment [EA(p) · GW(p)] on that article.

I think one of the many possibilities made possible by an EA DAF provider would be to enable people to set up DAFs that are designed to impact the far future. It might or might not be better to run a centralized fund as a separate entity. A separate entity might be able to focus more on survivability; however, DAF providers are by their very nature designed a last a long time, so offering a long-term fund as part of a DAF provider's offerings might be an even better way to guarantee that the fund lasts into the future. For example, Vanguard Charitable has billions of dollars within it, and is thus very likely to have an outsized impact and last for many years to come.

comment by Sanjay · 2020-06-27T11:45:15.604Z · score: 1 (1 votes) · EA(p) · GW(p)

Speaking about the UK, it would be hard (impossible?) to set up an entity which has broad enough objects to make this work, and which is also incorporated. Options include

  • CEA could provide this service (CEA was set up in the old days when this was easier)
  • A new unincorporated entity (a trust) could serve this purpose

I have tried to do this before, and the application was rejected.

comment by Brendon_Wong · 2020-06-27T22:30:10.089Z · score: 1 (1 votes) · EA(p) · GW(p)

Are you referring to the DAF or FS side of things, or both? My prior was that it would be fairly straightforward because there are UK DAFs in existence [EA · GW], and CEA does both DAF-like and FS-like things to a limited extent (sponsoring EA orgs and running EA funds).

While CEA might have charitable purposes that seem restrictive, it doesn't seem like that's impacting their ability to try to do everything under the sun.

You tried to create a trust to do this before, but it was rejected because the charitable objects were too broad?

comment by Sanjay · 2020-06-28T00:02:26.196Z · score: 1 (1 votes) · EA(p) · GW(p)

" Are you referring to the DAF or FS side of things, or both? " Both

" My prior was that it would be fairly straightforward because there are UK DAFs in existence [EA · GW], and CEA does both DAF-like and FS-like things to a limited extent (sponsoring EA orgs and running EA funds). " This is a very reasonable, but incorrect line of thought. The Charity Commission is very clear about the fact that even if someone else has successfully applied for something in the past, it doesn't mean that someone else applying for exactly the same thing should be allowed it in the future.

" While CEA might have charitable purposes that seem restrictive, it doesn't seem like that's impacting their ability to try to do everything under the sun. " I don't think their purposes do seem restrictive. Under a careful reading, as I remember it, it's fairly clear that their objects are extremely broad. This was why my first bullet suggested that CEA could provide this service.

" You tried to create a trust to do this before, but it was rejected because the charitable objects were too broad? " No, sorry, I may not have been clear on this. The reason why I said that an unincorporated entity (i.e. a trust) could do this was that a trust *would* (I think!) get approved, even with broad objects. However an incorporated charity (a CIO, to use the jargon) was rejected for having too-broad objects, notwithstanding the long list of pre-existing precedents whose pattern I was following.

Note that using a trust has downsides. With a trust, I would recommend only funding individuals and non-charities with extreme caution.

comment by Brendon_Wong · 2020-06-28T03:05:41.959Z · score: 1 (1 votes) · EA(p) · GW(p)

Have you chatted with John Beshir? He mentioned to me that he was working on setting this up as a trust in the UK in mid-2019.

Update: Some difficulties came up, so John is not actively pursuing this right now.