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

by Brendon_Wong 3 min read27th Jun 202014 comments

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Many EA Forum posts have been written about community proposals like providing community members with the financial stability to make an impact (1, 2), improving the state of early-stage project funding in EA (1, 2, 3, 4), and increasing the adoption of donor-advised funds within EA (1, 2). 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

  • 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!

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