Unlocking Donor Advised Funds in 2020
Donor Advised Funds (DAFs), the charitable giving vehicle that allows donors to make tax-deductible contributions to an investment account and distribute grants to nonprofits at a later date, have grown in popularity at an incredible pace. DAFs now represent six of the top ten nonprofits in the US. While they’ve been on the radar of nonprofits, this explosion in DAFs and recent social debate about addressing wealth disparity has brought renewed focus on the ultra wealthy and their ability to exploit complex financial avenues like DAFs.
Now, proposed legislation in California (AB 1712) threatens to bring greater regulation to Donor Advised Funds. It appears that change is on the horizon. But is this a good thing for nonprofits? Here is a quick breakdown of the arguments for and against DAFs
The Good
Proponents of DAFs argue that they simply encourage a greater amount of giving. They make the process more efficient by decreasing the administrative burden on both donors and nonprofits. This is especially true when it comes to more complex assets like stock that might otherwise never be donated. By providing access to a more sophisticated giving vehicle to donors across a broader spectrum of wealth, DAFs help democratize philanthropy. In fact, according to Fidelity’s 2019 giving report, the average DAF account is only $19,000.
More importantly, they can be beneficial to nonprofits. By incentivizing larger, upfront contributions of both cash and non-cash assets, which continue to appreciate tax-free, DAFs can amplify the impact of donations to nonprofits. In an increasingly polarized society, the privacy protections afforded donors encourage more generous giving, especially to potentially divisive causes. Additionally, the accumulated contributions provide nonprofits a more consistent source of funding insulated from the impact of economic fluctuations. In terms of the overall benefit to nonprofits, DAFs have been shown to have payout rates consistently over 20%, which is four times greater than private foundations.
The Bad
Others see major issues with the way Donor Advised Funds operate, reinforcing the need for greater regulation. They are seen by some to violate the spirit of laws intended to encourage charitable giving, since they provide an immediate tax break while never guaranteeing a social benefit. Unlike foundations, which must distribute 5% of their assets annually, DAFs do not have any requirement to make grants of a minimum amount or within a timeframe. Further, because they are administered by financial institutions that generate management and investment fees, there is an incentive to stockpile contributions. That contributions have far outpaced donations and many nonprofits have reported a decline in donations suggest this ‘warehousing’ of wealth is having a negative impact.
Many are especially concerned about the potential for abuse. In one high-profile example, a CEO took his company public, sidestepped a lockup period to contribute $500 million of stock to a DAF. The stock subsequently crashed, yet he took a massive tax break pegged at the peak stock price.
The Future of DAFs
With California leading the way with legislation, it might seem further regulation of DAFs is inevitable. The recent crackdown on abuses of other forms of charitable giving, such as the inflated appraisals of conservation easements, show it’s possible.
However, the failure to pass other regulations like California AB 1181 (aimed at stopping the abuse of gifts-in-kind contributions), show there are significant challenges to actually enacting real changes. AB 1712 has already been pulled twice and revised to remove many of the original regulations, including those that would bring transparency to the identity of individual donors.
What are Nonprofits to Do?
If Donor Advised Funds are to remain a major fixture of the nonprofit landscape, nonprofits will have to adjust their strategies. Many of the suggestions in this regard have focused on building engagement with DAFs, flagging constituents who utilize DAFs whenever possible, and communicating the nonprofit’s ability to accept contributions from DAFs.
Unfortunately, these approaches don’t help to re-engage the donors themselves. A downside of the anonymity enjoyed by DAF contributors is the inability of nonprofits to understand donors’ giving history or capacity, and the difficulty in establishing and fostering a direct relationship with donors. 44% of nonprofits say that DAFs hamper their ability to build relationships with donors.
What nonprofits can do is improve their visibility into all other aspects of their constituents, by broadening the data they use. For instance, DAFs encourage the donation of non-cash assets like stock or real-estate. As a result, more than 60% of contributions to Fidelity DAFs are in the form of stock. By sourcing data on stock or real-estate transactions, a nonprofit can get a sense of whether donors are likely DAF contributors and if they are in a position to make a donation regardless of the method.
DAFs differ from traditional giving in the types of causes that receive funding, with lower distribution to religious organizations and higher contributions toward social benefit and educational organizations. Nonprofits can improve their engagement with donors by understanding related characteristics, such as a donors’ political leanings or their preference towards certain causes (e.g. based on their affiliation and giving history with other nonprofits).
Lastly, due to the tax benefits, ease of contributing complex assets, and ability to spread distributions long into the future, Donor Advised Funds are an attractive vehicle for multi-generational giving. They allow Baby Boomers to donate assets, such as art collections or their interest in a small business, that their heirs may not wish to manage. They also allow donors to pass giving privileges of their accounts to successors. Because DAFs can make giving a family legacy, it’s helpful for non-profits to expand their view beyond the individual donor and think about the entire household. By tapping into the wealth and attributes of the entire household, nonprofits can ensure they maximize the potential for giving and engage DAF-invested donors at the right time with the right message.
About Windfall:
Windfall helps you identify, understand, and engage the affluent. We provide you with precise net worth data on affluent US households, allowing you to make informed data-driven decisions.
For more information about Windfall please visit our website: http://www.windfalldata.com.
