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

Brendon_Wong

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

Brendon_Wong

4 min read · Jun 27, 2020

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Tee

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!

Brendon_Wong

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!

Larks

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?

Brendon_Wong

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."

Sanjay

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

Brendon_Wong

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.

Sanjay

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.

Brendon_Wong

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.

Thomas Kwa🔹

Brendon_Wong

It's interesting you mention that! In my post I link to the article Long-term investment fund at Founders Pledge which relates to patient philanthropy, and I also left a comment 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.

Sanjay

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.

Brendon_Wong

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, 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?

Sanjay

" 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, 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.

Roddy MacSween

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

Could you elaborate on this? I'm interested in setting up a trust to do microgrants, taking advantage of the fact that I can tolerate greater risks with my own money than an EA org (I'd also be happy to let other people use the trust as a vehicle for that). The main disadvantage of trusts I'm aware of is that trustees are personally liable, but that doesn't seem like a big risk if it's just making grants.

Sanjay

Trustees being personally liable was the thing I was thinking of.

If you fund individuals (i.e. people working who aren't part of an incorporated entity) then I'm not sure how exposed you would be to the risk that the law would treat you as a de facto employer of that person. (It may be fine, it's just something that I don't know).

The Charity Commission is generally nervous about charitable entities sending money to non-charities, but does not forbid it. There is a Charity Commission guidance note about this somewhere on the internet.

Roddy MacSween

Thanks! For anyone else reading this, this guidance seems relevant.

Brendon_Wong

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.

Comments

Brendon_Wong

Donor-Advised Funds

Enabling EAs to access the standard benefits of DAFs, namely increasing the amount that ends up being donated by a considerable multiplier

Donor-advised funds from non-EA providers have accessibility problems including high minimums to create a DAF, high annual fees, high minimum grant amounts, high minimum maintenance amounts, and limited investment options
DAFs also have problems with regards to how funds can be disbursed; for example, funding individuals doing charitable work or social impact startups is not possible with most providers, although it is legally possible

Making it easier to invest intended donations for the short-term and the long-term, increasing the amount being donated by a considerable multiplier

It may be challenging for donors to implement investment best practices on their own, plus those investments would be subject to taxes outside a DAF
An EA DAF would make it very easy to gain the benefits of investing (or simply keeping money in high-interest accounts) prior to donating whether that time range is 3 months or 30 years

Enabling EAs to fund their own future charitable work or projects (or those of others) in a manner that has the tax benefits of a retirement account (including tax deductible contributions and no capital gains tax) while allowing for disbursements at any time (rather than after someone retires or reaches a certain age), and those disbursements can even be distributed tax free if directly spent on charitable expenses (rather than being distributed as salary)

Making it possible to guarantee funding for one or more nonprofits or causes for an extended period of time (say one or more decades), or even into perpetuity, by donating an X% safe withdrawal rate from a DAF every year

Guaranteeing a stream of income for a charity every year rather than simply providing a lump sum allows charities to hire additional staff members or pursue projects without financial uncertainty about being able to afford related expenses in the future

Allowing people to explore creating funds to address a variety of community needs like providing forgivable loans to explore/enter an EA career path (AI safety, for example) and covering basic living expenses for EA entrepreneurs that other EA community members can fund

Allowing people to explore creating funds to fund different cause areas and projects, such as those mentioned in Kerry Vaughan's article

Enabling people to easily get a tax deduction by donating to charities in other countries by setting up DAF entities in different countries, providing a better alternative to donation swapping

Fiscal Sponsorship

Making it possible for people to get a tax deduction for their personal spending on small, temporary, or early-stage projects, like distributing EA books to people

Making it possible for people to easily fundraise for small, temporary, or early-stage projects and offer tax deductions for funders

Allowing EA entrepreneurs to easily validate and scale new ventures by eliminating the need to set up a new organization and deal with operations (incorporating, creating a bank account, etc) for the new venture

Decreasing operation time and costs for early-start EA startups by having operations (accounting, payroll, processing tax deductions) in one place

Allowing existing EA projects and companies to set up a nonprofit branch if they did not have one before, or if they need one in a different country than the one they are located in

Enabling crowdfunding for EA projects and ventures

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!