For the past 10 to 15 years, there have been various unsuccessful efforts to impose restrictions on donor-advised funds (DAFs) and private foundations, and we’re seeing this again today. Critics fail to acknowledge the generosity, importance and impact of donors who established these charitable vehicles. These efforts would have the opposite effect of what they intend, by creating levels of complexity and regulations that would increase the cost of giving and ultimately reduce the amount of wealth that’s allocated to philanthropy now and later.
As DAFs have become more and more popular, they’ve had a significant positive impact on numerous charities that have received grants recommended by DAF donors. This was especially true during 2020 when charities struggled to survive because of the COVID-19 pandemic and subsequent economic upheaval.
Grants from DAF donors increased by 30 to 40% last year and are again up by a similar amount this year. These grants helped keep the doors open at many charities as fundraisers were canceled, demand for their services increased and bills and salaries still needed to be paid. Society benefited as well as the nonprofit sector was able to step in and support communities and people in dire straits.
Benefits to Charities
Whereas many non-profit organizations used to be wary of DAFs when they were just becoming popular, most now understand the benefits of DAFs, embrace them and are opposed to efforts to regulate them further. They understand that DAFs can be helpful in a multitude of ways:
- Charities are able to receive consistent funding from their donors’ DAF accounts every year, even if their donors’ income decreases or their other investments drop in value in a particular year;
- Their donors’ grants from their DAF accounts are larger than cash or stock donations, largely because the assets in these accounts have already been donated to the DAF sponsor and can only be used for charitable purposes. They’re aware that DAF donors are very active and grant out on average 20% or more of the assets in their accounts every year, far higher than other charitable vehicles;
- Many charities can’t accept donations of complex assets such as privately-held company stock, real estate, insurance and cryptocurrencies. Many DAF sponsors can accept these and then, once liquidated, DAF donors can recommend grants to the charities that will then receive cash from the DAF sponsors;
- Charities incur no expenses when receiving grants from DAF accounts. Aside from their staff’s time and salaries when accepting some donations, many charities would also have to pay outside legal fees when accepting certain assets or pay transaction fees when accepting donations of publicly traded stock or credit card donations;
- They understand that the simplicity, appeal and ease-of-use of DAFs enables professional advisors to proactively talk about, encourage and facilitate charitable giving. While these conversations may lead to the establishment of DAFs or foundations, many will lead instead to direct donations or planned gifts. In addition to granting from their DAFs, many DAF donors leave bequests or establish other planned gifts with the charities;
- For various reasons, some donors are reluctant to make one large grant at one time to a charity and feel more comfortable establishing a DAF from which they can make grants over time. For the last several years, DAFs have been able to fulfill non-binding letters of intent or pledges to charities as long as the DAF sponsor doesn’t reference the pledge in the grant letter to the charity;
- Organizations appreciate that DAF donors are able to go online immediately to recommend grants to them in response to a request or in advance of a year-end deadline. Donors thus don’t need to call their wealth advisor later to donate stock to a charity, which can result in donor delay or change of mind; and
- Though charities prefer to know who their donors are, they understand that some donors need to remain anonymous for privacy or security reasons and wouldn’t make a donation otherwise. Only DAFs can guarantee that a grant will be anonymous if desired, though only 3-5% of DAF grants are, in fact, anonymous. Many of these donors will nevertheless later divulge to the grant recipient that they’re the “anonymous” donors.
While charities benefit, so too do the donors who have established DAFs. A few of the many donor benefits include:
- DAFs are simple to establish and use and inexpensive, and their assets grow tax-free;
- They often learn from their advisors that they can donate numerous types of assets to a DAF instead of just cash or appreciated stock;
- It’s much simpler for donors and their advisors to donate stock to just one DAF sponsor than to numerous charities, and donors only need to keep the one tax receipt for their donation to the DAF sponsor instead of multiple letters from various charities;
- Donors have highly appreciated assets that they wish to donate so they can receive a tax deduction for the fair market value of these assets (vs. cost basis for donations of some assets to foundations);
- Donors can make a significant donation to a DAF and aren’t forced to give it all to a charity at one time, thereby alleviating their concern that the charity may not be able to use it efficiently at one time or that the mission or leadership may change;
- Clients who are approaching retirement often donate to a DAF while working so they can receive a bigger tax deduction and can make grants during many years of retirement when their income will be less;
- DAF accounts enable many donors to include other family members in their charitable giving decisions, continue the family’s philanthropy after their death and pass down family values; and
- Creating a DAF can help families formalize their charitable plans and help them develop a mission and goal. Many DAF sponsors strive to educate their donors so they can be impactful and strategic with their giving.
Donors, especially those with DAF accounts, have been and will continue to be very generous with their grants to charities. Nearly all want to give now, and some plan to give later, but they’re motivated to support the causes and charities that are important to them. It’s very rare when DAF sponsors need to enforce their policies about giving within a certain timeframe, but these do exist to ensure donors remain active.
The fear in the charitable sector is that if donors are forced to give a certain amount by a certain time, they won’t allocate those dollars for charitable purpose. If the rules for giving become even more complex, fewer advisors will engage in the charitable conversation with clients, and again, charities and society will suffer.
Fortunately, nearly all individuals with wealth are charitable and will continue to be generous, especially when they donate assets to a DAF for giving both now and in the future. This past year has helped to demonstrate that DAF donors respond both during crises and on an ongoing basis, and charities were very thankful that these DAF donors gave when it was most needed.
Ken Nopar is the vice president and senior philanthropic advisor for the American Endowment Foundation (AEF) donor-advised fund.