Demystifying Donor Advised Funds (DAFs)
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https://bloomerang.co/resources/webinars/ Greg Nielsen will discuss donor advised funds, how they differ from private foundations, tips for engagement, critiques and potential reforms.
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Demystifying Donor Advised Funds (DAFs)
- 1. DEMYSTIFYING DONOR ADVISED FUNDS Gregory Nielsen President and CEO www.nielsenconsults.com Email: gregory@nielsenconsults.com Twitter: @gregory_nielsen
- 2. INTRODUCTION
- 3. AGENDA ● Donor Advised Funds (DAF) Defined ● DAF v. Private Foundation ● Who are the players? ● How they work ● Tips for engagement ● Current critiques and potential legislation
- 4. GIVING USA 2018 HIGHLIGHTS ● $427.71 billion ● While total charitable giving rose 0.7%, when adjusted for inflation, total giving declined 1.7%. ● Individual giving declined from 70% in 2017 to 68% in 2018. ● While giving to international affairs and environment/animal organizations increased (9.6% and 3.6% respectively), giving decreased to religion (1.5%), education (1.3%), and public-society benefit organizations (3.7%).
- 5. DAF DEFINITION ● Giving vehicle established at a public charity ● Allows donors to make a charitable contribution, receive an immediate tax deduction and then recommend grants from the fund over time Source: National Philanthropic Trust
- 6. WHAT’S INCLUDED? ● Contributions may include cash, stock, real estate, etc.
- 7. HISTORY ● First created in the 1930s ● Recognized with Tax Reform Act of 1969 ● Began to grow in popularity in 1990s ● Now philanthropy’s fastest growing vehicle, accounting for 3% of all giving
- 8. CATEGORIES OF DAFS ● Commercial (National Charities) ● Community Foundation ● Single Issue
- 9. FASTEST GROWING VEHICLE ● In 2018, DAFs reached new highs in: ○ Dollars distributed ○ Dollars contributed ○ Value of assets under management ○ Number of accounts
- 10. GROWING IMPACT OF DAFS 2017 2018 Contributions $30 B $37 B Grants $19 B $23 B
- 11. “BUNCHING” ● Consolidating tax-deductible charitable contributions that would normally be made over multiple years into a single tax year
- 12. GROWING IMPACT OF DAFS Source: National Philanthropic Trust 2019 DAF Report
- 13. GROWING IMPACT OF DAFS Source: National Philanthropic Trust 2019 DAF Report
- 14. GROWING IMPACT OF DAFS Source: National Philanthropic Trust 2019 DAF Report
- 15. GROWING IMPACT OF DAFS Source: National Philanthropic Trust 2019 DAF Report
- 16. GROWING IMPACT OF DAFS Source: National Philanthropic Trust 2019 DAF Report
- 17. GROWING IMPACT OF DAFS Source: National Philanthropic Trust 2019 DAF Report
- 18. GROWING IMPACT OF DAFS Source: National Philanthropic Trust 2019 DAF Report
- 19. WHO CONTROLS THE MONEY? ● Sponsoring organization! ○ Donor makes gift and receives tax benefit ■ and ○ Donor gives up control of the funds
- 20. DAFS v. FOUNDATIONSDAF FOUNDATION ● Immediate startup; little to no cost ● Months; legal costs ● NO required distribution ● 5% of net asset value annually ● Ability for anonymous gifts ● Detailed annual disclosures ● Few administrative tasks ● Significant administration
- 21. DAF FACTS AND FIGURES ● 55 years: ○ Avg. donor age at opening ● 79%: ○ Volunteer time to charity Source: 2016 Fidelity Charitable Giving Report Fidelity Charitable, Time and Money: The Role of Volunteering in Philanthropy, 2014
- 22. DAF MOTIVATIONS ● 62% sustain giving through retirement ● 76% to donate appreciated assets ● 68% to allow time to decide where to give ● 24% because of year end bonus ● 26% to include family in giving Source: 2016 Fidelity Charitable Giving Report Fidelity Charitable, Time and Money: The Role of Volunteering in Philanthropy, 2014
- 23. NONPROFIT PERSPECTIVE ● Center for Effective Philanthropy (CEP): ○ Preferences between the types of DAF-sponsoring organizations? ○ Biggest advantages of receiving funding through DAFs? ○ Biggest disadvantages of receiving funding through DAFs? ○ Debates surrounding DAFs
- 24. TIPS FOR ENGAGEMENT ● Recognize the Donor not the DAF ● Invite deeper engagement ● Remember planned giving! ○ 42% of DAF holders have a bequest or legacy giving vehicle
- 25. TIPS FOR ENGAGEMENT ● Include options in all marketing materials ○ DAF Direct ● Ensure your information is correct ● Register with commercial DAFs
- 26. TIPS FOR ENGAGEMENT ● Build relationships with DAF sponsors ○ ⅓ of DAF holders ask advice of their sponsor when making recommendations
- 27. KNOW YOUR NONPROFIT ● What is your most successful program and why? ● What are areas of opportunity for your organization? ● Where does most of your funding come from? ● What are your most urgent needs? ● How do you keep your supporters up to date about your work? Source: Fidelity
- 28. CAUTION! ● Can DAF assets be used to fulfill a pledge?
- 29. CAUTION! ● Can DAF assets pay for a table at the gala?
- 30. DAF CRITIQUES ● “The Waiting Room of Philanthropy” ● Declining payout rates ● Backwards Sponsor Incentives
- 31. PROPOSED REFORMS ● Mandatory distribution in fixed # of years ● Delay deduction until funds paid out ● Change the way management fees are determined
- 32. #DIDYOUKNOW ● When fundraising expectations are clearly articulated during recruitment, 52% of CEOs report their boards are actively engaged in the organization’s fundraising efforts. ● When fundraising expectations are not clearly articulated during recruitment, only 12% of executives report that their boards are actively engaged in fundraising efforts.
- 33. #DIDYOUKNOW ● Only 31% of CEOs and 19% of Board Chairs assign a high priority to fundraising responsibilities when recruiting new members ● 72% of CEOs believe that board diversity is very important to increasing fundraising or expanding donor networks, yet the majority of Board Chairs and CEOs do not report demographic diversity as a high priority in board recruitment
- 34. QUESTIONS?
- 35. THANK YOU! The information contained in this presentation has been prepared by Gregory Nielsen and is not intended to constitute legal advice. Gregory Nielsen has used reasonable efforts in collecting, preparing, and providing this information, but does not guarantee its accuracy, completeness, adequacy, or currency. The publication and distribution of this presentation are not intended to create, and receipt does not constitute, an attorney-client relationship. Reproduction of this presentation is expressly prohibited. Gregory Nielsen gregory@nielsenconsults.com www.nielsenconsults.com Twitter: @gregory_nielsen Phone: (502) 472-5367
Editor's Notes
- Meeting/Retreat Facilitation Strategic and Business Planning Organizational and Board Development Leadership Transition/Succession Custom Workshops Keynote and Public Speaking
- Commercial funds, such as Fidelity Charitable, Goldman Sachs Charitable Gift Fund, Schwab Charitable, and Vanguard Charitable, were started by national financial-services firms. Although they are separate nonprofit organizations, the assets in the funds are often managed by the related investment company. These funds are responsible for much of the explosion in donor-advised funds over the past few years. Their main selling points include low investment fees relative to other fund sponsors, and ease of use for donors. Donor-advised funds may seem like new arrivals on the scene, but they were conceived by community foundations decades ago and remain a key donation vehicle for most regional grant makers. Many donors open accounts at community foundations because the grant makers have a good understanding of the area’s nonprofits and offer services such as family philanthropic consulting Sponsoring organizations that focus on a single issue encourage giving to a particular cause or organization. They include schools and faith-based organizations, such as Cornell University and the Jewish Federation of Cleveland. Sometimes sponsors of these funds stipulate that donors must steer a certain percentage of their gifts to an institution, like a university.
- Donors can establish a DAF immediately at a low cost; charitable sponsors require the donors to complete an application and make an initial contribution. Minimum contributions for DAFs can begin around $5,000, although many start at $25,000. This stands in stark contrast to private foundations, which can take months to establish and require significant time and financial investment, due largely to legal fees. Once established, DAF charitable sponsors handle all administrative work, including managing investments, recordkeeping, tax receipting and grant administration. This allows the donor to focus on their charitable goals. A private foundation, by contrast, must hire staff or ask outside advisors to manage the varied administrative work and tax matters for the foundation. They must also form a board, hold board meetings and record minutes, file state and federal tax returns, and perform other governance duties, sometimes at great expense.
- Do nonprofits have preferences between the types of DAF-sponsoring organizations? Most (80 percent) indicate that they do not have a preference, but among the 20 percent who do, almost all prefer community foundations. What are the biggest advantages of receiving funding through DAFs? The top advantage that nonprofit CEOs cite (22 percent) is that DAFs involve less of an administrative burden for nonprofits. In their own words, nonprofit CEOs explain: [The] DAF handles all tax-related paperwork with the donor. There is less work and cultivation of the donor, as they seem to come unsolicited. There is very little additional administrative reporting burden required of our agency — allowing more of [our] work to go toward direct community services instead of administrative functions. What are the biggest disadvantages of receiving funding through DAFs? The top disadvantage that nonprofit CEOs cite (44 percent) is that DAFs hamper nonprofits’ ability to build personal relationships with donors. What do nonprofit CEOs think about the debates surrounding DAFs? almost half (47 percent) say that DAFs delay nonprofits from getting donations; 26 percent say that DAFs hamper nonprofits’ ability to build personal relationships with donors; and 24 percent say that DAFs are not transparent enough.
- Why fundraising training often fails
- Why fundraising training often fails
- Remember, technically the donor is only an adviser; the assets in a donor-advised fund are legally controlled by the sponsoring organization. Because fulfilling a pledge can be viewed as a benefit — getting the donor off the hook for a pledge — the IRS could subject that gift to a tax. But in December 2017, the agency issued a notice that clarifies the issue. Making good on a pledge is fine, the agency said, as long as the donor doesn’t attempt to take an additional tax deduction. And nonprofits be warned: Don’t ask the sponsor whether the gift fulfills a pledge. To comply with the IRS guidance, the sponsoring organization may not mention the pledge when making the gift distribution.
- The IRS has given rules on galas and other events another look, too. Because donors receive something of benefit from a gala (food and entertainment), paying through a donor-advised fund presents challenges. All of the money in a donor-advised fund has already been subject to a tax deduction, so a gift from an account can’t cover personal benefits. Some sponsors will bifurcate payments, which means donors can pay for tickets to an event through their funds but cover the cost of dinner or other benefits out-of-pocket. And sometimes a donor will pay for a table at a gala but not attend. This is fine, as long as the guests at the table are not associated with the donor because hosting one’s friends could be a benefit even if you are not there. Nopar urges caution about accepting DAF money for events until the IRS comes out with a final rule.
- In 2014, the Republican House Ways & Means Chairman, David Camp, proposed a five-year maximum distribution, with remaining assets after that subject to a 20% excise tax.