Thousands of New IPO Millionaires are About to Create a Lot of Donor-Advised Funds (DAFs)
In this weekend’s Style section of the New York Times, Nellie Bowles proclaims that “Thousands of new millionaires are about to eat San Francisco alive.” Because we live in a digital age, that article has already landed online, generating tremors in the city housing market. And while IPOs from Airbnb, Uber, Lyft, and Pinterest will leave thousands of newly-wealthy San Francisco residents in their wake, the influx of capital can go beyond real estate, wealth consultants, luxury goods, parties, and fancy e-bikes. The real question: Will the nonprofit sector be one of the many industries set to benefit from these IPO millionaires?
The real(istic) answer: Yes, but not necessarily in the way they’ll expect. Here’s why — and why it matters.
What does the year of the IPO mean for nonprofits?
What the Times misses is how these new millionaires will spend their philanthropic dollars. This is particularly relevant as the taxes on these stock options will be top-of-mind for employees. This is also where nonprofits might stand to benefit as tax advice service sites like Visor note:
“Donating your employer stock can be very beneficial if done correctly. You get a double benefit: 1) an itemized deduction on your tax return equal to the market value of the stock, and 2) the avoidance of recognizing the capital gain and paying all those taxes.”
Given that the Trump administration is planning to allocate tax dollars towards border walls, this advice may be especially timely for a newly-wealthy west coast audience in one of the most liberal metro areas of the country.
IPOs have changed the Bay Area — but they’ve also changed how philanthropic giving works
While the thought of millions in stock options being sent to nonprofits is an exciting thought, however, there is a big catch: the growing role that donor-advised Funds (DAFs) play in managing individual giving.
The very same Visor article that recommends donating employer stock offers an alternative to its readers:
“If you do want to give a portion away to charity, a Donor Advised Fund might be the best vehicle. This is because you can often get all the same tax benefits but you don’t yet have to actually direct the money to a particular charity. The funds get invested first, and you can donate the money over time. It’s a favorite of a lot of our clients, and setting one up is relatively easy as can often be accomplished via a simple phone call to your brokerage firm.”
In a recent Whole Whale podcast, family philanthropic expert, Sue Schwartzman shares her insight into donor-advised funds. This market, which currently controls over $100 billion in assets that are earmarked for charities, will likely be growing quickly this year due to these IPOs.
Donor-advised funds may be the tortoise of the nonprofit sector
For those working at cash-strapped nonprofits, the idea that this much money (and more) is going to continue to sit in market funds, helping for-profit companies grow, is maddening — especially if you glance through the S&P 500 companies that market-tracking mutual funds like Vanguard bundle. How much does it matter if you donated $100k to GreenPeace when you have millions in oil and gas stocks? While some may choose clean money investing options, the default is to diversify across the market.
The upside of this new money being held in DAFs is that it will allow for more thoughtful investments to be made in nonprofits. This is more than a silver-lining as sudden large, one-time windfalls can actually hurt a small nonprofit. This is why many foundations think about multi-year support that accompanies diversified funding sources.
While this IPO boom may hit the housing market far more than the nonprofit world, the sector’s future may be more funded than it was before. In the meantime, Schwartzman points out the way nonprofits should start to message new wealthy donors and work to show up on the radar of philanthropic fund advisors such as herself. And, if your donation page doesn’t have a call-to-action on how to donate stock, now might be a smart time to add this (like, right now: Check out this stock donation guide).
