People who give through the country’s largest donor-advised funds allocate twice as much of their giving to education and about one-third as much to religion as donors overall, according to a study, released Wednesday, produced by the Giving USA Foundation.
Those disparities could widen, and congregations could see donated funds siphoned off to other priorities as a result of the recent changes in tax law, suggested Una Osili, associate dean for research at Indiana University’s Lilly Family School of Philanthropy, which produced the report.
Wealthier donors, who have a greater tax incentive to give under the new law, are more likely to turn to donor-advised funds, which advertise their ability to turn illiquid assets, such privately held companies, stock, and property, into charitable dollars.
“Grant patterns from donor-advised funds don’t align closely with overall giving patterns of everyday Americans, where religion is the single most important destination of those dollars,” Osili said. “The donor-advised fund landscape looks similar to high-net-worth giving patterns.”
Donor-advised funds allow people to create an account for money they intend to donate to charity. When they do so, they can claim an immediate tax deduction. The money is managed by a supporting organization, often a community foundation or a national fund created by a commercial investing company, that technically controls the assets in the account. The donor can advise the sponsoring organization on which charities should get money and how much, and those requests are almost always followed.
The study was supported by a grant from the Fidelity Charitable Trustee’s Initiative, a grant-making program associated with Fidelity Charitable. Created in 1991 by the mutual fund giant with the same name, Fidelity Charitable in 2017 topped the Philanthropy 400 ranking of charities when measured by their fundraising.
Uncertainty About Motives
Using Internal Revenue Service filings, the Indiana researchers estimated that in 2014, the most recent year complete data was available, donor-advised fund accounts held about $76 billion designated for charity. An estimate released last year from the National Philanthropic Trust based on 2016 data put that figure at $85 billion.
Although individual donor-advised fund organizations provide information about the types of grantees their donors prefer, less is known about the motivations of account holders as a broader donor class, especially when compared with private foundations, said Brian Mittendorf, chairman of the accounting department at Ohio State University.
“Both the money coming in and coming out is more opaque,” said Mittendorf, who had not seen the Indiana study. “There’s a lot of uncertainty about both funding sources and funding uses.”
To compare giving priorities between account holders of donor-advised funds and all other donors, the Indiana researchers measured donation allocations from fewer than 15 of the largest donor-advised funds, which controlled more than half of the assets held in funds nationally.
In 2015, 31 percent of all donations went to religious organizations and 15 percent went to education. But among donor-advised fund donors, those allocations were almost flipped, with 11 percent of donations headed to congregations and 29 percent going to schools.
Tax Changes
Changes in the tax code could encourage the trend.
By raising the standard deduction taxpayers can take when they file, relatively few people — perhaps 5 percent of households, according to many estimates — are expected to itemize their taxes. Those itemizers will largely be in the upper income brackets.
Donor-advised funds are likely to become more attractive in the new tax regime, Osili said, because many donors will decide year by year whether to itemize. Sometimes a big medical expense or an unexpected windfall will influence itemizing and whether writing off charitable donations makes sense, she said.
A donor-advised fund will accommodate charitable “bunching” — when a person selling off assets makes a big one-time contribution to a fund from the windfall and claims a tax deduction. Over the next several years, such taxpayers may not itemize their taxes but instead, parcel out money annually from their donor-advised fund.
Hope for Religious Giving
Despite the trends in giving from donor-advised funds, both Osili and Mittendorf said religious organizations won’t necessarily see their donations evaporate.
“Church groups have historically gotten their donations directly,” Mittendorf noted, so they should figure out how to tap money from donor-advised funds, as education groups apparently have done.
Other types of nonprofits, including those that promote arts and culture, got double the proportion of gifts from donor-advised funds when compared with donors overall.
Groups called “public-society benefit” organizations did too, receiving 14 percent of donor-advised fund gifts and 7 percent of gifts from the broader population. Those groups include United Ways, Jewish Federations, and veterans organizations.
Fund-to-Fund Transfers
More than 4 percent of donor-advised fund grants were to other donor-advised funds, according to the study, which characterized those grants as going to “public-society benefit” groups, accounting for some of the growth in that area.
The phenomenon of fund-to-fund transfers was highlighted in a report last year by the Economist, which found that the largest recipient of gifts from Fidelity, Schwab Charitable, and Vanguard, three of the largest donor-advised fund sponsors, was Fidelity itself.
Donor-advised-fund organizations have attracted critics who suggest that they don’t show how much money flows from those accounts to charities, and they question statistics showing that the payout rate from donor-advised funds is higher than the rate for foundations.
When the Economist report was published, nonprofit consultant Alan Cantor wrote in the Chronicle that the money moving between funds introduced a “new dimension of distortion and speciousness into the donor-advised-fund industry’s claims of high distribution rates.”
Osili sees other explanations. Sometimes, she said, financial advisers change firms and their clients follow them. Or donors move money into a more specialized fund, such as one that promotes giving to certain religious or ideological causes or to nonprofits in their community.
“Often donors are guided by a particular objective they’re trying to accomplish,” Osili said, “and the donor-advised fund is helping them achieve their philanthropic priorities.”
Correction: A previous version of this article neglected to identify the Giving USA Foundation as the study’s publisher.
