With the first year of the new tax reform behind us, the philanthropic sector is starting to analyze what impacts these changes have had on giving. According to a report by Giving USA, charitable giving was down 1.1% in 2018. While there may be other factors in this decline (instability in the stock market, concerns of a looming recession, etc.), nonprofits are actively seeking to understand how to stabilize their fundraising strategies in this “new normal.”
One area of giving that has remained steady over the last few years is the Donor-advised Fund (DAF). According to the most recent DAF report from the Philanthropic Trust, in 2017, over $29.23 billion was contributed into DAFs. These charitable vehicles have become increasingly popular as a way to aggregate giving for maximum tax benefit, administrative ease and ability to grow charitable investments over time. As popular as DAFs have become, these “giving accounts” are still somewhat mysterious, particularly to nonprofit grantseekers seeking to apply for or receive funding.
A Donor-advised Fund is a charitable vehicle designed to accept charitable investments from a single entity: individual, committee, corporation, or family. The donor gets a charitable deduction, and the balance becomes a “component fund” of the nonprofit entity. The donor then can make grants or distributions from this fund over time. There are usually a variety of investment options, much like an IRA, that are designed to grow the fund over time. And unlike a private foundation where there is a minimum distribution of 5% per year, DAFs on average distribute over 10%.
The first DAF was created in 1931 at the New York Trust. But the true growth came in the 1990’s when investment managers like Fidelity and Vanguard created separate 501c3 nonprofits to house their client’s charitable funds, allowing the donors to efficiently manage all of their assets with one firm. Any nonprofit can create DAFs; in fact, and they also exist at universities and other charitable organizations.
Community foundations are often popular options for donors looking to create DAFs. At Triangle Community Foundation, for example, over 60% of our assets are DAFs, and they represent about 75% of our grantmaking. The appeal for donors seeking to create DAFs at community foundations includes the ability to seek advice from advisors on the best nonprofit “investments” locally learn about trends in giving as well as important community issues, and in many cases co-invest or pool their grant dollars to maximize their charitable impact.
For nonprofit organizations seeking to attract funding from donor-advised funds, we counsel them to get to know the donor as well as the foundation or vehicle. At community foundations in particular, the staff often play a matchmaking role, using valued local expertise to connect nonprofits to the causes or interests of the donor.
Recently there has been some attention paid to the DAF by members of Congress who believe that donors are “hoarding” charitable dollars for maximum tax benefit without redistributing them to a nonprofit in a timely manner. But community foundations and other DAF vehicles apply internal policies that require donors to remain “active” with their grantmaking. In fact, just last year, giving by donors at foundations increased 7.3% to $76 billion — proving that the effort to ensure the dollars are getting back out into the community is a priority.
Donors interested in learning more about the advantages of a Donor-advised fund should speak with their tax or financial advisor or visit their local community foundation to learn more about this efficient and effective tool for their giving.