The 800 Pound Gorilla of Philanthropy

Gorillas are Bigger Than They Appear.

Earlier this year I wrote an article entitled “Donor Advised Funds: Your $85 Billion Dollar Best Friend”. It reviewed the data behind the multi-billion dollar donor-advised fund business. Well, it’s a new year and, frankly, Donor Advised Funds are bigger now than I think most of us ever expected. According to the National Philanthropic Trust 2018 DAF Report, they grew by 23.7% from $85 Billion to $110 Billion in assets in one year! That’s huge – gorilla huge!

Every key indicator of donor-advised funds grew. More contributions in and more grants out!

Recently, I’ve been speaking to several groups about Donor Advised Funds – how they work, why they’re popular, and how to take advantage of them.

As I travel around and talk to different groups about this hot topic, I hear the same set of questions over and over.

• Why don’t donors just give directly to charities?
• How does money get OUT of a DAF?
• What are the rules and requirements for a DAF?
• Why the rapid growth?

The answers are pretty simple. Let’s take a look.

Why Don’t Donors Just Give Directly to Charities?

First, donors are giving complex assets because that’s where 95% of their wealth lies. It’s not cash. Many charities aren’t equipped to receive complex assets such as real estate, virtual currency, livestock, or hedge fund interests. Donor Advised Funds are equipped to do so and do it well. They receive the asset, liquidate it tax-free, and then the donor requests distributions to their favorite charities.

Second, they want to benefit multiple charities with one large asset. As we all know, generous people give to a variety of causes. It’s nearly impossible to give one large asset (i.e. real estate) to multiple organizations. The easier route is to transfer it to a DAF, receive the same tax benefits, and then request grants to the organizations after the asset is liquidated.

How Does Money Get OUT of a DAF?

It’s pretty simple. Most DAF providers now have online grant request capabilities. Their donors just log in to their DAF account on-line, request a distribution to their favorite organization and BOOM! It happens. Of course, the DAF provider must first verify the organization is a public charity in good standing with the IRS. Sometimes a donor will place restrictions on the grant, such as – “it must be used for nursing scholarships”. The DAF provider will communicate that to the receiving charity and sometimes request a report back about how the grant was spent.

What Are the Rules and Requirements for a DAF?

There aren’t many. First, there is not currently a legal requirement for a DAF to distribute a certain amount each year. That being said, many DAF providers do require donors to request grants at least once per year, or once every three years. DAF providers are nonprofits and their purpose is to facilitate grant-making. They WANT to make grants. According to the NPT 2018 DAF Report, in 2017 DAFs distributed over 22% of their value! That number has been steadily growing over the years.

Why the Rapid Growth?

First, financial planners have started talking to their clients about DAFs. They realize that these are powerful tax planning tools AND philanthropic planning raises their relationship with the client to a new level. They get high-quality referrals because of these deeper client relationships and they can easily link them with the next generation of the family.

Second, recent tax law changes have given rise to “bunching” or “clustering” of charitable gifts. Most Americans will no longer itemize their income tax deductions (i.e. charitable deductions). This is because the standard deduction has basically doubled for most people. Their itemized deductions won’t exceed the standard deduction so they won’t itemize. If they want to see a direct link from charitable gift to income tax deduction they will have to give more in a particular year.

Many people are “bunching” up 3-5 years of charitable gifts in one year and then not giving as much over the next 3-5 years. This increases their total itemized deductions above the standard deduction and in some cases actually provides greater tax savings over time. (Talk to an experienced tax planner for advice on this.) Fidelity Charitable has created an easy-to-use calculator to help you determine the potential benefits of bunching charitable contributions.

Donor Advised Funds make it really easy to bunch contributions – especially when giving a large asset that will benefit multiple charities.

My advice to you.

Charities, ask your donors if they have a Donor Advised Fund. If they say YES, let them know how they can make a grant to your organization. They’ve already put that money aside for charitable purposes and received the tax benefits. Now you get to help them experience the joy of that gift.

Consider mentioning DAF grants in your print and digital communications materials as well. It’s all about awareness-building. Remind donors frequently that they can request a grant to your org.

Encourage asset giving. Even if your charity can’t accept complex assets, encourage your donors to give them. Partner up with your favorite DAF provider. Get to know them and develop a relationship. That way, they can quickly and easily help your donors give valuable, complex assets to benefit your organization.

Check out DAF Direct. It’s a widget you can embed into your website to make it even easier for a donor to give directly from their DAF at one of the big providers right to your organization. With just a couple of clicks they can request a grant to your charity.

Advisors, if you haven’t already – start talking to your clients about charitable planning. It leads to better and deeper client relationships, better referrals, and a link to the next generation. Don’t take my word for it. The 2018 US Trust Study on Philanthropy found out just that when they interviewed advisors who already help clients with charitable planning.

Join your local planned giving council. You’d be surprised what kinds of valuable charitable planning expertise and connections you can gain at meetings and workshops. Development professionals and advisors are both in the relationship business. They both rub elbows with wealthy, influential people who need a team of advisors to assist them. Get together and see what magic happens.

Take a Gorilla for a Friendly Stroll.

Donor Advised Funds aren’t as scary as they seem. Think of them as simpler alternatives to Private Foundations. They are making giving easier for donors. Whether you’re a fundraiser or a professional advisor, they should play a key role in your work. Learn to walk with the gorilla and I think you’ll find it to be very friendly.