The Growth of Donor-Advised Funds and their Impact on Philanthropy

This is a copy of a webinar presentation that was made by Stephen C. Ragan, Senior Vice President for Development & External Relations at Southwest Solutions, to the Midwest and Northeast Resource Development Committees of NeighborWorks America on November 26, 2018. This presentation is an introduction to donor-advised funds and their explosive growth in recent years. Mr. Ragan also discusses the implications of this growth on nonprofits and fundraising strategies to better respond to the growth of donor-advised funds.

Transcript

1. Donor-Advised Funds November 26, 2018 Stephen C. Ragan
2. Steve Ragan  Currently Senior Vice President for Development & External Relations, Southwest Solutions  Advisor to Brad Pitt’s Make It Right Foundation  Chief Development & External Relations Officer, Focus: HOPE  Vice President for Development & Community Relations, Detroit Symphony Orchestra  Senior Vice President, Lawrence Technological University  Consulted for Michigan State University, Wayne State University, University of Memphis, Detroit Institute of Arts, Project Lead the Way  Successfully directed two $100 M + campaigns
3. “Without a doubt, the most noteworthy story affecting the charitable sector over the past twenty-five years has been the meteoric rise of donor-advised funds.” -Ray Madoff, cofounder and director of the Boston College Law School Forum on Philanthropy and the Public Good
4. Emerging Trends Shaping Non Traditional Funding Sources • Movement away from permanent legacy – time limited foundations Examples: Ralph Wilson, Bronfman, Atlantic Philanthropies, Danforth, Donald Reynolds, Bill and Melinda Gates (including Buffett) • “Pro-active or programs driven” grant making (versus reactive) – foundations are taking the leadership role in driving social change and impact • Foundations are increasingly willing to fund capacity building and consider larger administrative costs • Growth of DAFs • Skills based volunteerism at companies • Mission Related Investments (not “grant” from the “other 95%) • Program Related Investments (grant) • Social Ventures • Social Impact Investing • Social Impact Bonds • Tax Reform of 2017
5. What is a Donor Advised Fund? A donor-advised fund, or DAF, is a philanthropic vehicle established at a public charity. It allows donors to make a charitable contribution, receive an immediate tax benefit and then recommend grants from the fund over time. An easy way to think about a donor- advised fund is like a charitable savings account: a donor contributes to the fund as frequently as they like and then recommends grants to their favorite charity when they are ready. Three Types of DAFS: -Community Foundation: Greater Kansas City Community Foundation, Silicon Valley Community Foundation -Charitable Sponsor: Fidelity Charitable, Schwab Charitable -Single Issue Charities: Stanford University, Cornell University Foundation, Greater Miami Jewish Federation
6. Establishing a DAF 1. You make an irrevocable contribution of personal assets. 2. You immediately receive the maximum tax deduction that the IRS allows. 3. You name your donor-advised fund account, advisors, and any successors or charitable beneficiaries. 4. Your contribution is placed into a donor-advised fund account where it can be invested and grow tax free. 5. At any time afterward, you can recommend grants from your account to qualified charities. 6. DAF accounts may be opened for as little as $5,000.
7. What can be used to fund a DAF? 1. Cash equivalents 2. Publicly traded stock 3. Restricted, controlled or lock-up stock. 4. Mutual fund shares 5. Bitcoin 6. Private equity and hedge fund interests 7. Real estate or interest in real estate 8. Certain complex assets, such as C-Corp and privately held S-Corp shares
9. Are DAFs new? • No. The first ones were established in the 1930s but Congress didn’t create a formal standard legal structure until 1969. • They began to grow substantially in the 1990s. • In 2016, 3% of all charitable giving was to DAFs. • In 2017, 10.2% of all individual giving was to DAFs. • Recent tax law changes have led to a further expansion of DAFs at the lower level, as donors may choose to bundle multiple years’ giving for tax benefit.
10. Growth of DAFs • In 2016 DAFs received $23.27 B in gifts from Americans. • In 2017 Americans donated $29.23 B to DAFs. • DAFs distributed grants totaling $15.75 B (an increase of 10.4% from the previous year). • In 2017 DAFs distributed grants totaling $19.08 B (and increase of $19.9 B from 2016). • Some of this growth may have been exceptional due to concerns about 2016 election and tax changes in 2017.
11. Comparison to Private Foundations 2015 2016 2017 Foundations Total # 79,489 80,988 82,516 Assets $734.10 B $792.62 B $855.81 B Grantmaking $44.13 B $45.16 B $49.50 B DAFs Total # 272,845 289,478 463,622 Assets $77.18 B $86.45 B $110.01 B Grantmaking $14.22 B $15.91 B $44.13 B
12. Growth Continues at Strong Pace – 2018 DAF Report 2015 2016 2017 % Change Charitable Assets $ 77.63 B $ 85.15 B $110.01 B 27.3% Total Contributions $ 21.62 Billion $ 23.27 Billion $29.23 B 16.5% Total Grant Dollars $ 14.26 Billion $ 15.75 Billion $19.08 B 19.9% Grant Payout** 20.4% 20.3% 22.1% Total # of DAF Accounts 266,584 284,965 463,622 60.1% Average Size of DAF*** Account $ 291,203 $ 298,809 $237,280 20.5%
13. What is driving this growth in DAFs?  Concerns about 2016 election results and impact on the economy and personal wealth.  Tax Reform of 2017 – specifically the increase in the standard deduction  Individual deduction increased to $12,000  Head of household increased to $18,000  Married couples filing jointly and surviving spouses increased to $24,000.  Many may choose to “bunch” their donations in one year (skipping giving one year and making a larger donation the next)  But a DAF presents a way to do this and then make the donations at your convenience.
14. What is driving this growth in DAFs?  Increased privacy – no need to report grantmaking publicly  No 5% payout rule  Donor benefits from access to professional investment advisors
15. Example of the growing trend in DAF use by MEGA donors • Steve and Connie Ballmer donated $1.9 B to the Goldman Sachs Philanthropy Fund • Laurene Powell Jobs donated $526 M to GSPF • Jan Koum (founder of WhatsApp) donated $114 M to GSPF • GSPF received $3.7 B in funds in 2016, five times what it did the previous year.
16. But these are only REALLY BIG donors, right? • No, Fidelity’s average DAF grant was only $4,000 last year. • Fidelity’s minimum to open an account is only $5,000. • Their minimum grant distribution is only $50. • Admin fee is only $100 or .6%, plus a typical investment fee. • Tax overhaul drove an unprecedent increase in DAFs.
17. And these are only INDIVIDUALS right? • No, corporations can establish DAFs too. ($25 K minimum at Fidelity for a corporate DAF.) • Some foundations are also using DAF transfers to meet 5% payout requirements.
18. Who manages DAFs?  National Charities  Goldman Sachs  Fidelity  Schwab  Vanguard  National Philanthropic Trust  Single Purpose or Faith Based  National Christian Foundation  Standford University  Community Foundations  Silicon Valley Community Foundation NOTE: The Philanthropy 400, which recognizes the largest non profits based on fundraising revenue, was topped by DAF charities last year. Fidelity held the #1 spot.
19. DAFs at Single Purpose of National Charities • Often, the initial donation may be very large (to establish a DAF at Stanford requires a minimum of $1 M) • The donor may be required to devote a percentage of the distributions to the sponsor charity (50% at Stanford, for example; some sponsors reduce this % for larger gifts). • Sometimes the organization partners with a sponsor like the National Philanthropic Trust to operate the DAF. • Why do this? • Often this is a donor with a close philanthropic relationship to the sponsor • They receive benefit of the sponsor’s endowment management • At least some of their gift is recognized by the sponsor org
20. DAFs at Financial Institutions • Schwab, Fidelity, Goldman Sachs, etc… • Depending on the sponsor, the minimum amount may be very low with low distribution amounts. • Donor recommendations are frequently online. • For profit affiliate is making $ from administration of DAF and management of assets.
21. DAFs at Community Foundations • If it is a smaller community foundation, they will often have lower minimums. DAFs are a strategy to increase community support and grow funds under their management. • Foundation staff may help make recommendations to donors. This is often a marketed service of community foundation DAFs. • Community foundations often have special VIP meetings for funders of DAFs, where investment strategy is presented, expertise on giving is shared. • And, again, community foundations charge for administration and asset management.
22. The Cleveland Community Foundation distributed $28 M in grants from DAFs last year What services does the Cleveland Foundation provide to fund holders? We partner with donors to help them achieve their philanthropic goals by customizing their fund, holding family meetings if desired and crafting philanthropic mission statements. We assist with designating the fund’s advisor and successor advisors and planning for the fund’s impact in perpetuity. We create a customized gift agreement for each donor and provide regular fund updates, grantmaking assistance, nonprofit organization research and site visit coordination, if desired. Our donors receive a variety of different communications throughout the year, and we also hold three to four annual events specifically for our donors, which highlight how deeply invested we are in meeting community needs. -Kaye Ridolfi, Senior VP of Advancement for the Cleveland Community Foundation
23. Special Rules for Donors to DAFs • They cannot use a DAF to satisfy a multi-year pledge. • They cannot receive goods or services in return for their grant (such as tickets to a Gala). • Although they “recommend” the grant, the donor is the sponsor and they receive the receipt. (Be sure to soft credit and acknowledge the donor that made the recommendation.) • Grants may not benefit an individual (such as tuition). • Rules are similar to those for private foundations.
24. DAFs have been criticized for a lack of transparency “…donors still benefit from the utter lack of transparency that characterizes donor-advised funds. "We now know that Ballmer put $1.9 billion into the Goldman Sachs Philanthropy Fund, but from that point on we know nothing." -consultant Alan Cantor, a well-known critic of DAFs. Unlike foundations, DAFs aren’t subject to the same level of reporting and transparency about their grantmaking. This makes the fundraiser’s job more challenging. An unlike foundations, there is no 5% rule. Some community foundations are moving to address this with their own policies – The Silicon Valley Community Foundation recently made its DAF grantmaking history available online.
25. Proposed legislative changes to DAFs 1. Create an annual payout requirement 2. Require that all funds be spent within a fixed time period 3. Sponsors should be required to have boards that are inpendent from their for profit corporation 4. Tax benefits should be based on benefit to charity not appraised value 5. End the practice of transfers from foundations (often to achieve a 5% payout)
26. Tips for fundraising from DAFs • Much of your fundraising will look the same, but the donor will make their gift through the DAF. • Become knowledgeable about DAFs and know where you are getting DAF grants from. • Include language about DAFs in your appeals and campaigns. (Ex: include a checkbox to “direct your donor advised grant to us”.) • This is the cheapest way for a donor to contribute appreciated assets like stock or real estate – the charity incurs no brokerage or seller fees. • Although the DAF sponsor is receipted, be sure to soft credit the donor that recommends the grant to your nonprofit. • Technically, a donor cannot pay a pledge or receive benefits for a DAF grant.
27. Tips for fundraising from DAFs • DAF donors are good major and planned gift candidates – they’re already doing gift planning. So get to know them. • DAFs allow for family grantmaking, so there can be some great ways to engage donors. • Get to know local community foundation and other DAF sponsor staff. • Can I market our organization to DAF advisors? • More than 80% of DAF recommendations are self serve and made online. • The Planned Giving Roundtable is one of the best opportunities to meet advisors.
28. DAF Direct Widget • The DAF Diect widget helps donors make a grant recommendation directly from your website. • It is dependent on the DAF sponsor being part of DAF direct – most large for profit sponsor managers are now participating. • It’s free to you. • Visit dafdirect.org
29. An unusual benefit of DAF growth – giving patterns look more like individual giving  2011 Foundation Center survey – 60% of foundations do not accept unsolicited proposals  By 2015, that number had swelled to 72% (58% of foundations with assets over $100 M accept unsolicited proposals, but they frequently caution that the odds of funding are very unlikely)  2009 survey of family foundations – 77% would not consider unsolicited proposals
30. Don’t call us… “The majority of our funding is proactive and made to U.S. tax-exempt organizations that are independently identified by our staff.” - Bill and Melinda Gates Foundation Grants can be applied for after “invitation from a Kresge program officer.” - The Kresge Foundation “Almost all grants are awarded to organizations identified by the Foundation. Only on very rare occasions are grants awarded in response to unsolicited funding inquiries.” - William and Flora Hewlett Foundation “We do not accept unsolicited grant requests.” - The Helmsley Trust
31. “We are a proactive grant making organization. As a result, we seek further information on an extremely small number of requests. Even fewer are funded.” -The Rockefeller Foundation “Bloomberg Philanthropies works with existing partners on all of our key initiatives. Grant proposals are by invitation only.” -Bloomberg Philanthropies “We do not seek, accept or fund unsolicited grant applications.” -Annie E. Casey Foundation
32. Conclusion • DAFs are here to stay, and are expected to grow significantly. • DAF grant making may soon surpass foundations. • In many cases, DAF giving will match that of the source of funds (individuals, foundations, corporations). • There likely will continue to be efforts to increase transparency and, perhaps, require fixed giving from DAFs. • Focus on making DAF giving convenient and understand the rules; working closely with both the sponsor AND the funder.
33. Resources • Your local community foundation • DAF website widget: dafdirect.org • Good analysis of impact on 2018 year end giving by individuals: https://www.freep.com/story/money/personal-finance/susan- tompor/2018/11/26/year-end-giving-after-tax-overhaul/2012542002/ • DAF 2018 Report: https://www.nptrust.org/wp- content/uploads/2018/11/2018-DAF-Report.pdf