October 28, 2014

Donor-Advised Funds Are a Boon to Savvy Charities

The spectacular rise of organizations that offer donor-advised funds on The Chronicle’s rankings of the 400 charities that raise the most money has renewed the scrutiny over such funds. Some critics see them primarily as a way for wealthy people to receive tax benefits and claim that they divert contributions from nonprofit organizations and the people and causes they serve.

The truth is very far from this assertion. Nearly all families and individuals who establish donor-advised funds have a strong desire to support their favorite charities and causes, and DAFs have enabled them to do so both now and in the future.

The amounts granted to nonprofit organizations from donor-advised funds continue to grow. Recent reports have shown substantial increases in amounts granted from Schwab Charitable (36 percent), American Endowment Foundation (40 percent), Fidelity Charitable (27 percent), and many community foundations and other DAF sponsors.

While much of the attention is on the contributions to the DAFs each year, critics of the funds often miss an important point: The existence of funds at sponsors including Fidelity, Schwab, and AEF has made it easier for financial, tax, and legal advisers to talk to their clients about philanthropy—and that is leading to more giving now and in the future.

Before DAFs became so popular, many advisers were reluctant to initiate the charitable discussion for fear that their clients would think that they were trying to impose their own values or recommend their favorite causes or charities to the clients. DAFs largely eliminate these concerns and allow the advisers to be comfortable and confident to begin the charitable conversation. Often these discussions, which may not have happened without a DAF option, lead directly to gifts or bequests to specific charities and do not lead to the establishment of DAFs.

Though some DAFs enable wealth advisers to manage the investments that clients have contributed, most advisers have their clients’ best interests in mind even when they cannot manage this money. The fees that the advisers may earn from managing the investments in DAFs are insignificant compared with the amount they earn from managing the rest of their clients’ investments. Even so, if advisers are helping to expand investments so their clients have more to donate, they should be compensated for doing so.

Another reason donor-advised funds are so helpful is that some of them can accept gifts of privately held stock, real estate, collectibles, and other complex assets that many charities aren’t equipped to handle. Donors are often unaware that they are able to use these assets as sources for their charitable giving until they have discussions with their advisers. As a result, charities will receive a bigger share of a donor’s wealth in many cases from their donor’s DAF account, without adding the burden of new administrative expenses.

What many charities may not realize is that donors often use the funds to make up for variations in their own income. Instead of decreasing the amount they give to a charity in years when they don’t earn so much, they can continue to grant consistent amounts every year through their DAF account, which may have been established during a year in which their income was high.

Furthermore, contributions from donor-advised funds are typically larger than check or credit-card contributions. It is more likely that donors will contribute larger amounts once that money has already been allocated for charitable giving instead of dipping into savings or even selling appreciated securities. Two-thirds of Fidelity’s DAF holders state that they are more generous with their grants than if they did not have a DAF, and their average grant is just over $4,000.

Very few DAF accounts fail to distribute money to charities, and often the organizations that sponsor the funds contact account holders who have not made any recent distributions to encourage that person to grant the money or determine if the organization can be helpful. Private foundations are still very relevant and important, but on average 16 percent is granted every year out of DAF accounts compared with just 5 to 6 percent from private foundations.

Some DAF critics have wanted to require that a minimum percentage of DAF assets be distributed each year, similar to the 5-percent requirement for private foundations. This required distribution, however, could significantly limit the amounts distributed if some DAF holders felt that they were expected to give away only 5 percent

Nonprofit organizations could take some simple steps to encourage more DAF holders to support their organizations. Very few charities indicate on their "how to donate" pages on their websites, or in their emailed or mailed solicitations, that they can accept contributions from DAFs. When meeting with prospective or existing donors, tactfully asking the donors how they typically give, whether they have an existing charitable vehicle, or what types of assets they usually donate can open the door to even bigger contributions than the nonprofit would have otherwise received.

Some donors appreciate that they can give anonymously from their advised funds. They may do so because they want to support a cause or organization that is outside of the stated mission of their private foundation, they do not want their fellow volunteers at an organization to know that they are significant supporters of the charity, or they do not want to be solicited by other similar charities if their donation is part of a public record. However, most donors who have DAFs want to make their contributions public, and many proudly name their donor-advised fund "The (family name) Foundation." Only 8 percent of Fidelity Charitable grants are anonymous.

Many donor-advised fund organizations strive to help their account holders feel a greater sense of pride, satisfaction, and confidence in knowing that their generosity is having an impact on the causes and organizations that are most important to them. Community foundations can meet with their donors to help them plan their giving or facilitate site visits to local nonprofits, and national sponsors are increasingly providing content that helps their donors make wise giving decisions.

Nonprofit organizations should view DAFs as friends, not enemies. Because of the ease of use and benefits of DAFs, there were 50,000 more DAFs in 2012 than in 2008. These were established by donors at many levels of wealth for multiple reasons, including their desire to distribute more of their assets to charities and less in taxes to the government.

Everybody in the nonprofit world should support any technique that creates more opportunities for charitable giving. Without DAFs, the charitable conversation between advisers and clients would occur less often, and fewer assets would be allocated for charitable purposes. And if new and more onerous restrictions are applied, that situation will grow even worse. That doesn’t benefit government, charity, or donors.

Ken Nopar advises nonprofits on how to work more effectively with wealth and legal advisers to donors and helps financial advisers and others lean how to talk about charity with their clients.