Many wealthy clients have fortunately maintained or increased their donations to charities this year. Their support has been critical since overall contributions to non-profit organizations have decreased, their fundraisers were canceled and the need for their services has substantially increased. In the first half of the year at the onset of the economic and pandemic crises, many donor-advised fund (DAF) sponsors reported that their donors increased their grants between 30% and 50% over the same period a year ago.
With the usual year-end giving season just around the corner, and nearly nine months after COVID-19 appeared and the economy was impacted, some clients are again evaluating how and where they should give. Unfortunately, great need still exists, but fortunately, markets have largely recovered from the significant drop earlier this year. As a result, many clients are in a strong position to donate appreciated assets, but some wonder if they should contribute directly to charities, create a DAF account or donate to their existing DAF accounts so they can continue to give from it.
Previously Established and Funded Accounts
When the crises hit, many donors were thankful that they had previously established and funded their DAFs. As a result, they were able to quickly recommend grants to charities they had previously supported as well as to other organizations that were helping vulnerable populations. For some, it may again be beneficial to donate to their DAF so they can have a pool of assets available and can continue to make grants over time and respond quickly to any future crisis.
No Previously Established Account
For others who hadn’t previously created an account at a DAF sponsor, this may be an ideal time to do so. Though there are now 400,000 DAFs in the country, many clients didn’t listen to the advice of their advisors in prior years and didn’t open DAFs. Earlier in the year, as the markets dropped and the needs of those impacted by the crises increased, many of these clients regretted that they didn’t have DAFs from which they could have easily made grants instead of having to write checks or donate stock that had decreased in value. Because of the recovery of the markets, now may be the right opportunity for these clients to establish a DAF.
For those who are thinking of creating a DAF only to immediately grant out the entire amount, it’s more logical to instead make the donations directly to the charity or charities. If a client wants to recommend grants from the DAF soon and over time, then creating a DAF makes perfect sense, especially since they receive the tax benefit upfront when they donate to the DAF.
Support Over Time
Some clients may want to contribute a significant amount to a particular charity, but aren’t comfortable in providing all of the funding at once. Since leadership, missions or programs at non-profit organizations may change, many DAF donors want to provide support over time instead so they can be assured that their generous gifts are having the impact they intended. Additionally, many charities can only accept cash donations or appreciated stock, so donors are able to donate their more complex assets such as privately held stock, limited partnership interests or real estate to DAF sponsors, which are often more experienced in accepting these. Over time, donors can recommend grants from their DAF accounts so the charities can just receive checks from the DAF sponsors that they can quickly put to use.
Discuss with Clients
Each client situation is different so it’s important to discuss charitable goals with them. Advisors are often able to help their clients have a greater impact than if clients make decisions on their own. If clients have complete confidence in their favorite charity and the charity is able to accept and effectively use large or complex contributions, establishing a DAF or other charitable giving vehicle may not be the best option as they can give directly.
But a DAF could be an ideal solution for clients who: have highly appreciated or complex assets that they can’t or don’t want to give at one time; want to bunch donations this year; want to give to charities now and in the future; want to get their children involved; or want to donate assets so their advisors can invest them and the assets can grow tax-free in a DAF.
Time to Plan
This is the time for clients to start to plan their fourth quarter giving. Some may have waited to donate in past years until November or December, but giving now while assets are at high levels may be most prudent. Some clients may even want to donate a portion of their anticipated giving now and some later to avoid disappointment and frustration if markets drop before year-end. And for those clients who want to create DAFs, they should begin the process soon to avoid being told that they missed the deadline to create the account.
Ken Nopar is the Vice President and Senior Philanthropic Advisor for the American Endowment Foundation donor-advised fund.