Back in the summer of 2019, I received an intriguing and unexpected email from a woman I know named Ray Madoff, a professor at Boston College Law School. Madoff, who bears no relation to the disgraced Ponzi-scheming financier, had spent the better part of a decade developing a reputation in academic circles as the country’s most fervent critic of a once-arcane financial vehicle known as the donor-advised fund, or D.A.F.
On their face, D.A.Fs are merely plug-and-play vessels that make it easy for the wealthy to donate their money to charity. They offer what is essentially a charitable checking account—a place to deposit bulk contributions in stock or cryptocurrency, before a tax year ends, that can then be doled out gradually to nonprofits, much like the way you can use a debit card to spend proceeds from your paycheck. In theory, D.A.Fs increase the total money set aside for charity over the long run.
But during the decade since Madoff first inveighed against D.A.Fs, a new generation of rich founders and investors, encouraged by their lawyers and accountants, were overwhelming this tax-planning tool. A staggering $140 billion now fills the coffers of these instruments. Unlike traditional philanthropies, after all, D.A.Fs offered the same extraordinary tax benefits but operated outside existing law governing foundations. In particular, D.A.Fs imposed no payout requirement, meaning that if managed a certain way, an account could potentially sit on billions ad infinitum, as a tax shelter.
They also required little in the way of transparency. Both MacKenzie Scott and Jack Dorsey, like almost every serious billionaire philanthropist these days, use D.A.Fs at least in part to manage their charitable giving. The only information we have about their financials comes electively, via Scott’s regular posts on Medium or Dorsey’s real-time Google Doc detailing grantees. And they’re also the exception—most others offer nothing.
Madoff watched as, in her view, more and more members of the ultra-rich had the opportunity to essentially escape the tax system. But ensconced in the Ivory Tower, Madoff, for all of her influence, was also clearly losing the public debate. So she decided to reach out to me when she stumbled upon an interview I had published that summer with a maverick in the philanthropy world, John Arnold.
Two decades ago, at the ripe old age of 27, Arnold made a killing in the heyday of Enron, betting on natural gas in his home state of Texas. Then he opened a legendary energy-trading hedge fund and became the youngest billionaire in the country, before suddenly shutting it all down shy of his 40th birthday. In “retirement,” Arnold has flocked to opportunities to tussle with esoteric special-interest groups, and he had found a new bear to poke: the D.A.F. industry, which he thought advantaged the rich guys he talked with all the time, but screwed over nonprofits. And in Arnold, or at least the version of the mysterious guy she was reading about on the screen, Madoff saw a high-powered, quick-witted, and highly unlikely ally. She emailed me for an introduction—I’ll connect anyone with anyone, whether I agree with them or not—and so I passed along a contact for their team, never thinking twice about it.
What I didn’t expect was that two years later, these strange bedfellows would have made such a ruckus by pushing the most sweeping change to the rules surrounding nonprofit funding in a half-century. The Boston professor and Houston billionaire are the brains and brawn respectively behind new legislation introduced in Congress this summer to crack down on D.A.Fs and impose new payout requirements that would strip away tax benefits from those that sit on millions without making contributions. The fight has rattled the normally staid nonprofit industry. Both sides have hired lobbyists to pressure congressmen, secure endorsements, and win a classic Washington brawl. “When it was a couple academics writing about it, it was easy for the opponents to ignore,” Arnold told me.
The political fight to come is also the first tangible test of the budding backlash to billionaire philanthropy that has taken hold on the far-left over the last five years. Reforming D.A.Fs might seem like a small and wonky political battle, but it unfolds against the backdrop of both a populist backlash against the widening wealth gap in this country, along with a broader reckoning about how the wealthiest wield quiet influence in America—and whether too few rules have been placed on that philanthropic beneficence. “The billionaires get to say: ‘I’m not going to support the regular work of the government. Instead, I am going to spend money in whatever way I think is good’—and this is totally condoned by our tax system,” Madoff told me last week. “The levels of absurdity about it are almost unbelievable. We have a system that allows the wealthy to opt out of the Plan A tax system, and then the Plan B tax system asks practically nothing of them. This is completely untenable in an age that supposedly cares about wealth inequality.”
Mega-philanthropy has become a big business. The wealthiest individuals and families do not merely park their winnings into the stock market, luxury properties or sports teams. Many of the most ambitious increasingly try to tackle social problems that government has botched or is too divided to conquer: the pandemic, homelessness, space exploration, access to abortion rights, the list goes on. And today’s ultra-rich can take advantage of a complex web of charitable vehicles that allow them to retain their assets and deploy their money into a form of influence, akin to their political contributions.
Many set up sprawling philanthropic portfolios not just to do what they genuinely see as good deeds, but also to steer policy debates, burnish their public profiles and, sure, reduce their tax bills. That’s all a potent reminder that the line between a wealthy person’s family office and a convoluted asset management firm has thinned considerably.
Donor-advised funds have emerged as something like the shadow banking system of this high-altitude philanthropic world. One out of every eight dollars dedicated for charity now sits in a D.A.F.. Powered both by a booming stock market and by their increasingly mainstream appeal to upper middle-class people, D.A.Fs have more than tripled in total assets over the last ten years. In Silicon Valley in particular, they have exploded in popularity, so much so that people like Elon Musk and Larry Page have essentially turned their foundations into pass-through entities for their D.A.Fs. And the sponsors that host these D.A.Fs—be it the Silicon Valley Community Foundation, or Wall Street titans like Fidelity, Charles Schwab and Goldman Sachs—rake in management fees, which can create an incentive to not actually draw down the money at all, and perhaps pass the accounts down to heirs.
But in reality, how often does some ultra-rich person actually choose to do this, turning their D.A.F. into another asset seeking alpha? The short answer is that we don’t know. It is certainly legally possible, and the ragtag group of activists led by Madoff point out that there is some evidence it happened even last year, when nonprofits needed every dollar they could get. The philanthropy industry, meanwhile, argues that this is a “solution in search of a problem” that could actually backfire and reduce disbursements: They believe requiring a minimum payout would make D.A.Fs resemble traditional foundations, many of which spend just about 5 percent of their assets a year—a rate four times smaller than the average D.A.F.—because that’s the bare minimum that the law requires.
The fundamental lack of national data has made the battle over D.A.Fs feel like ships passing in the night, the sort of ponderous debate largely relegated to conferences and philanthropy Twitter. But that all changed with the arrival of John Arnold two years ago. The Arnolds have not always been universally loved, with one longtime philanthropy leader telling me he found the prior CEO of Arnold’s philanthropy, who has since been convicted of federal crimes, to have a “disdain for everyone who’s been doing philanthropy for more than five minutes.” But Arnold Ventures is now seen as much more collaborative, and these days Arnold commands enormous respect. That’s true in Houston, where I started my career and where he is a one-of-a-kind figure among the mansion-dwellers of River Oaks, part of a lineage of the oil town’s swaggering patrons—like Richard Kinder, just nerdier and younger. And it’s true in philanthropy nationally, where Arnold has not quite neared Bill Gates-level admiration, but he is nevertheless widely seen as choosing his words—and his targets—carefully.
That’s crucial. One of the most meaningful questions for the wealthiest Americans is where they decide to spend their time. And so when I spoke with Arnold on the phone on Monday, my first question was, in short: D.A.Fs, really? “Had we not done it, nobody else was going to,” Arnold explained to me. “It needed some of the resources that we could provide—not only the financial resources, but also some of the oomph that we can do.”
That oomph includes Arnold’s own elbow-grease: He told me he spends a not inconsiderable amount of time—three to five hours a week—on the push, taking part in weekly war-room calls to plot strategy with his coalition, pitching nonprofits on endorsements, and occasionally talking up politicians himself. Part of that oomph is also the irresistible, counterintuitive narrative he offers up: Arnold, who has a D.A.F. himself and fits in among the Chamber of Commerce crowd, is being something of a traitor to his class by seeking to clamp down on billionaire philanthropists’ privileges.
Another part of that oomph is more traditional muscle. Arnold has hired lobbyists from Finsbury Glover Hering to press the flesh in the Capitol. But Big Philanthropy is not going down quietly. Powerhouses like The Philanthropy Roundtable have their own lobbyists focused on whipping on this issue—the group’s Joanne Florino said the industry is “very concerned”—and a group of community foundations are currently aligned with the bill’s critics. Both sides tell me they see the community foundations, which compete with Wall Street to sponsor D.A.Fs, as the key swing group—because when a congressman is deciding how to vote on an obscure nonprofit bill, you can be sure they’re going to ask the C.E.O. of the community foundation in their district what they think of it.
Arnold’s legwork also points to a surprising omission: his lack of a foil across the table. Despite the number of well-known wealthy holders of D.A.Fs in the Valley, I’m told none of them are campaigning against the bill. One top Bay Area philanthropy consultant told me her clients aren’t bringing it up, either. Shouldn’t they be? I asked, wondering if it was a matter of optics or something else. “Yeah, but all the policy makers are funded by the donor advisors. They don’t want to get in the way of their money or their philanthropy. Even if they’re Dems. There’s so many other fish to fry. Also, if they do something, it’ll probably be performative with not much teeth. Maybe I’m jaded,” she texted. “I can see a face-saving solution for progressives that doesn’t alienate their donors too much.”
What exactly that looks like is unknown, but the passage of a watered-down version of this bill, eventually, does feel realistic to me. Under the current proposal, donors would only get an immediate tax deduction if the donation to the D.A.F. was sent to nonprofits within 15 years. I do expect the philanthropists’ aides to eventually engage, even if not the principals themselves. (Not exactly great politics to have a billionaire publicly blasting a bill to make them donate their money faster.) “I imagine that if they thought it would pass, the billionaires would be working hard against it,” one prominent D.A.F. critic told me.
Arnold was naturally more optimistic when I pressed him on his quixotic quest: “When I have conversations with high net worth individuals, the two most common responses are either ‘That sounds reasonable. 15 years? Yeah, I could do that.’ Or sometimes I talk to the people who have money sitting in D.A.Fs and haven’t been active with it, and then they kind of get very silent,” Arnold said with a laugh. “They start thinking—’Oh, gosh, I have this money sitting here.’ And they just get quiet.”
I’m only surprised this all took until now. In fact, I’ve long been curious why a savvy left-wing politician hasn’t yet jumped onto the critique of Big Philanthropy more explicitly. The backlash to billionaire philanthropy may have been trendy for years, led by voices like Anand Giridharadas, but it has not yet taken hold among Democratic officeholders. Despite liberals’ thirst for attacking the rich, none of them brought up philanthropy at all during the 2020 primary, for instance. It’s somewhat unexpected that a bipartisan pair of elderly white guys, Angus King of Maine and Chuck Grassley of Iowa, are this bill’s sponsors, rather than, say, Alexandria Ocasio-Cortez and Elizabeth Warren.
But that also makes sense. Working against the left here is the reality that while America may be uneasy about inequality, the concept of charity is still pretty popular with regular people, especially after the pandemic. And even if the vox populi has an inchoate anger against the wealthy reflected in rhetoric to “abolish billionaires” or in audacious proposals like a wealth tax, it is natural that the first policy manifestations of this fervor would be a narrower, surgical attack. “Ray was able to catch a wave here that she wasn’t able to catch prior to this,” said Florino,who holds some hard-fought respect for her longtime sparring partner. I don’t know when that wave will crash—it could be years from now before the Arnold-Madoff measure, or anything like it, becomes law. But I do know that this is but the beginning, not the end, of the story.