In 2008, my law school friend, Boston College Law School professor, Ray Madoff, wrote an op-ed article for The New York Times on the topic of Leona Helmsely’s $8 billion bequest to a foundation for dogs. Professor Madoff’s thesis was that $3.6 billion of this bequest came out of our pockets as foregone tax revenue, since the charitable deduction avoided the then 45% federal estate tax. (The federal rate is now 40% but only on the excess over $15 million.)
Professor Madoff further explained that since the foundation is only required to spend 5% of its assets a year, including the administration costs, the foundation may last forever to the greater benefit of the foundation officers than the dogs it is supposed to assist. Professor Madoff called for a limit on the federal charitable deduction so that the taxpayer no longer subsidizes the whims of rich benefactors.
In her new book, The Second Estate: How the Tax Code Made an American Aristocracy, Professor Madoff puts this in the context of the many other was the rich escape taxation allowing their wealth to grow not just tax deferred but tax avoided. With respect to private foundations, not only do we taxpayers support the charitable whims of the truly wealthy, but they and their heirs reap the benefits of their charitable giving — names on buildings and professorships, membership on boards, entry to useful social networks.
Further, the growth of donor advised funds allows people who don’t create private foundations to tax their charitable tax deduction with no benefit going to charities until some future date when they choose to distribute the funds. But unlike private foundations which are required to distribute at least 5% of their holdings each year, there’s no such requirement for donor advised funds. In other words, the taxpayer gets the deduction, but the charity doesn’t necessarily get the funds.
Interestingly, it’s difficult to find out how much donor advised funds hold. Fidelity’s annual report touts the almost $15 billion given away in 2024, but does not disclose how much is sitting in its coffers not having been given away.
Finally, despite the annual year end fund drives by charities, very few people who give money actual get a charitable deduction. This is because only about one in ten taxpayers have total deductions exceeding the standard deduction of $16,100 for single tax filers and $32,200 for married couples filing jointly (in 2026).
Solutions?
How can we make the charitable deduction work better? Here are a few possible reforms:
- Limit the amount an estate may deduct as a charitable contribution. On the income tax side, except for certain qualified charities, taxpayers may deduct no more 60% of their adjusted gross income each year. Perhaps the same limit should apply to the estate tax charitable deduction.
- Make sure the funds set aside are distributed more quickly rather than remaining as a monument to the donor in perpetuity. Require that foundations be limited to a 20-year lifespan or that they distribute 10% of their assets each year, rather than just 5%.
- Apply the same annual distribution rules as donor advised funds.
One of Professor Madoff’s proposals to remedy a number of problems with the current tax code it to treat gifts and inheritances as taxable income. This would subject them to the 60% percent limit on the charitable deduction in my first proposal above.
What do you think?