Last week in “The Giving Trend,” we highlighted seven trends shaping charitable giving in the U.S. Today, we focus on an eighth trend no less important in reshaping how some Americans think about charitable giving, as well as tax planning, generational legacies, and even investments. In this article, we consider the economic trend and many benefits—along with a few potential landmines—of donor-advised funds.
The largest charity in the United States for decades, The United Way ranked #1 for 24 out of 25 years. But times are a-changing. A younger, lesser-known non-profit that trailed the United Way in second place leap-frogged to the top in 2016—with a 20 percent increase in one year! In 2017, this same organization pulled far ahead of the field with an astounding increase of donations of an additional 50 percent.
The non-profit that now ranks as the largest charity is Fidelity Charitable, a relative newcomer to the world of giving, and not a traditional charity. Founded in 1991, Fidelity Charitable is a “Giving Fund” that now serves well over 100,000 donors, temporarily holding their donations and disbursing monies to “destination” charities according to donor wishes. In its 25 years, Fidelity has granted $25 billion to more than 200,000 charities. In 2016, it became the largest grant-maker behind the Bill & Melinda Gates Foundation when its 100,000+ donors recommended $3.5 billion in grants.
Other sizable non-profits that comprised of donor-advised funds include Goldman Sachs Philanthropy Fund (now ranked the third largest charity, behind the United Way) Schwab Charitable, National Christian Foundation (NCF), Vanguard Charitable, and the National Philanthropic Trust (NPT). There are over 1,000 such organizations in the U.S., some which started (or still operate) as community foundations and/or are mission-driven organizations serving Christian, Jewish, or other religious communities. While traditional legacy charities such as the United Way, Red Cross, and Salvation Army have plateaued or lost ground, donor-advised funds are growing rapidly and steadily. Now representing nearly 10% of individual charitable donations in the U.S., they are quietly revolutionizing how many Americans give.
According to a 2014 study by U.S. Trust and Indiana University, high net worth donors list philanthropy as their third most important priority. The primary source of giving is personal assets and income, however, a growing number (57%) of high net worth donors use or plan to use a giving vehicle—charitable trust, private foundation or donor-advised fund—to make their gifts. And donor-advised funds have become the most popular giving vehicle. In 2013, 16% of donors gave to a donor-advised fund, 8% percent donated to a private foundation and 4% gave to a charitable trust.
Donor Advised Funds 101
Donor-advised funds (DAFs) function much like a temporary holding place for individual donations that have left their donor’s hands but have yet to reach their destination charities. The sponsoring organizations are section 501(c)(3) organizations that act as middlemen for charitable contributions. Donors receive a tax break upon donating to their DAF, where it may sit for a few days, a few months, or several years. Growth in the fund is tax-free until the clients instruct (“advise”) the sponsoring organizations to distribute to operating charities.
The donor-advised fund is typically funded with cash and securities, but most DAFs also help donors turn cars, boats, real estate, life insurance policies and other assets into charitable gifts. The fund is then managed by the sponsoring organization on behalf of the donating individual, family, or other entity. Legally, the donor surrenders both ownership and control of the assets, but as “advisor” of the fund, they retain influence over how the fund is invested and when and how monies are distributed to charities, ministries, or other non-profits.
Is a Donor Advised Fund for You?
See if a few of the following points apply to you. If you—
- give regularly to charities
- wish to maximize the tax savings from charitable giving
- have non-liquid assets, appreciated assets or an unusually large windfall
- would like to give on behalf of an entity other than yourself (a family, a business, or even anonymously)
- and would like to streamline all of the record-keeping that comes with charitable giving
—then donor-advised funds just might change how you give, too.
Donor-advised funds have surpassed foundations in popularity because of their attractive benefits and flexibility for people who are able to give generously but don’t wish to start a foundation or put all their assets in a trust. According to the National Philanthropic Trust, there are now nearly 300,000 donor-advised funds. The chart below from the National Philanthropic Trust’s 2017 Donor-Advised Fund Report gives a snapshot:
DAFs lie somewhere in between a simple cash gift and more complex strategies using trusts or family foundations. They are efficient, flexible, and bring an immediate tax benefit along with a level of control over how assets are grown and used. As the Wall Street Journal summarized,
“In effect, (donor advised funds) are miniature versions of private foundations—but without the considerable expenses or hassles. They also are a rare example of a tax-favored vehicle that can work equally well for the wealthy and the merely affluent.”
The Pros and Cons of Donor-Advised Funds
Will donor-advised funds work for you? The following points may help you decide.
1. You can donate and deduct now, decide later. DAF’s can provide a way to get a tax deduction now for donations you’ll make to charities in the future, provided that you’re willing to commit those monies into a donor-advised fund now. This feature helps donors who have money and intent to give but who need time to formulate a giving strategy. That’s especially a nice benefit when you’re committed to end-of-year giving, yet you’d rather focus on the holidays and defer your charitable donation decisions to the New Year.
2. Donor-advised funds are structured to support long-term giving. While DAFs are often simply pass-through organizations used to help simplify and consolidate both giving and accounting, they are also used by donors who wish to distribute donations to charities over years, even generations. This can be a benefit for donors who have a large windfall—perhaps from the sale of a business or the liquidation of a property—who wish to support small charities that can benefit more from longer-term support rather than a large lump sum they might not know how to manage.
The Downside? Because of the “gap” between the time when donors donate and when charities receive the money (which can be months or years down the road) donor-advised funds are accused of slowing the flow of money to charities. In 2016, DAFs received $23 billion in contributions yet distributed less than $16 billion in grants to charities. This gap has been called “a bad deal for American society” and criticized as “undermining American charity” by a New York philanthropist Lewis Cullman and Ray Madoff, a Boston College law professor. But maybe this delay has an upside…
3. Grow your gifts to give more. Donor-advised funds tend to grow your donation into more money, creating larger gifts.
The Downside? Cullman and Madoff critique the fact that DAFs can encourage the “endowment effect,” in which psychological ownership of the fund can encourage fund advisors to hoard, rather than distribute funds. They advocate for legislation that will force DAFs to make distributions to prevent this.
The Bottom Line: We don’t think it’s a “bad” thing if DAFs help people ponder the long-term legacies they would like to leave. As traditional charities continue to maintain or grow donations—even if DAFs, which ultimately fund these charities, are growing faster—it’s likely that DAFs are creating a bigger pie, not just taking a bigger slice of the existing pie.
If anything, we see a downside of “typical” DAFs the fact that investment choices are limited to pretty typical options such as mutual funds. If you practice safe Prosperity Economics strategies, donations may be at greater risk once in your DAF—something to be aware of.
4. Maintain a level of control over donations. DAFs allow donors to maintain limited control over how funds are invested as well as specific control over which charities receive how much of the funds and when. Even when investment options are relatively limited, we believe that this engagement and fosters long-term thinking about giving—a good thing!
The Downside? There have been cases of sponsors who did not follow the requests, expectations, or directions of the donor-advisors. An Investopedia article describes a DAF sponsor that went bankrupt and had donations seized as collateral. Another used contributions to provide its employees with very generous compensation, host a golf tournament and pay legal fees to defend themselves from an irate donor. In both cases, the courts sided with the sponsors’ right to choose how to use donated funds.
The Bottom Line: Although control is promised to the donor, legally, donors cede all legal control of their contributions to DAF sponsors in the fine print of their agreements. However, such battles rarely arise. Since organizations that operate against donor wishes will soon find themselves without donors, it’s not a common problem.
5. Increase your giving options. Want to donate the classic car you no longer drive to THREE of your favorite charities? DAFs allow a donor to easily liquidate assets of all kinds while retaining the ability to give it to multiple charities, instead of just one. Turn that boat, empty lot or a life insurance policy that is no longer needed into a future legacy with a donor-advised fund.
And there’s another way that a donor advised fund can increase your giving options, as well as the good your dollars can do. While many brokerage-spinoff DAFs function as little more than “holding tanks” where money stays before going to churches or established charities, some DAFs specialize in helping investors create social change with their dollars. Ellie Winninghoff, an investment analyst and journalist, recommends RSF Social Finance to those who want a DAF focused on socially responsible or impact investing. Their fund supports entrepreneurs and non-profits working towards working toward positive social change such as sustainable and organic farming, solar power, fair-trade cooperatives, and innovative education and leadership development.
6. Giving made simple. It has been said that donor-advised funds make charitable giving as easy as online bill paying with your bank! Many donors value the simplified record keeping which DAFs provide. Donors receive quarterly and annual statements detailing all donations, and they don’t have to keep or track down letters from each organization at tax time. In addition to record-keeping, DAFs also assist with grantmaking, annual audits, tax filing, quarterly statements, insurance and other operational tasks.
The Downside? Although DAFs have a reputation for efficiency, fees are charged (often based on the account balance) to cover the services. And perhaps because of the management and bookkeeping involved, many sponsoring organizations have minimums of $5,000 (Fidelity, Schwab) to $25,000 (Vanguard, NPT, Goldman Sachs Fund) or more.
7. Appreciate non-profits with appreciated assets. A donor with 1,000 shares of Apple with a low-cost basis can donate shares to a DAF and take an immediate deduction for the full value of the donation, subject to IRS limits. Without the DAF, if a shareholder wanted to donate to a small charity not set up to deal with non-cash gifts, the donor would have to sell the shares, pay the capital gains tax, and the charity would receive less.
DAFs can provide a key to the puzzle of how to best consume or gift various assets later in life, as the assets that represent the greatest investment risk or tax burden to heirs may be the better choice for charity gifts.
8. Donate publicly—or with complete privacy. You can donate in any name you choose for your fund. You can even call it a Foundation, perhaps in your family’s name, or named in memory of a loved one. Most donors choose a name that reflects the main purpose of the account such as “The Johnson Family Educational Fund.”
Alternatively, donor-advised funds are also an ideal way to make donations anonymously, if desired. After all, you can’t send cash through the mail, and it’s hard to write an “anonymous” check!
9. Corporate and cooperative giving. Although most DAFs are funded by individuals and families, other entities such as companies, foundations, and organizations can start a donor-advised fund account by contributing assets. Corporate DAFs can allow employees to be involved in choosing charities and can attract quality employees with a mindset for meaningful work and corporate impact.
10. Give generously and generationally. DAFs provide a wonderful vehicle for mentoring children or grandchildren in the art of giving. As “Growing the Family Philanthropy Tree,” an article from Fidelity Charitable explains, some families pool resources for their DAF and discuss together what charities should be funded, even hosting family retreats to discuss the matter. Giving can also continue posthumously, as successor advisors can be named to carry the torch lit by the previous generation.
And while philanthropy alone provides wonderful benefits, there is a valuable additional benefit: giving together brings families closer. As financial planner Johnne Syverson observes, “Philanthropy provides a basis for improved communication within the family… Because it’s a nonconfrontational, feel-good topic, discussions of philanthropy lead to other family discussions that never would have otherwise taken place.”
Next steps: Find out more about donor advised funds here, or contact us for a referral to someone who can help you set up a DAF. You may also wish to engage in The Prosperity Pathway™ process to help you develop a comprehensive financial strategy for your family with big-picture, long-term thinking.
Some of our sources:
The U.S. Trust 2014 Study of High Net Worth Philanthropy
National Philanthropic Trust FAQs
Investopedia: Donor-Advised Funds: Benefits and Drawbacks
Inside Philanthropy on Donor Advised Funds
Forbes: The $80 Billion Dollar Charity Stash
Forbes: Donor Advised Funds: The Good, the Bad and the Ugly
The Non-Profit Times