Donor-advised funds are growing in popularity as a way for individuals and corporations to give to charities.
Broad-sweeping changes to the tax code at the end of 2017 sent nonprofits into a state of panic. The doubling of the standard deduction for charitable giving caused some sector experts to worry that donations to nonprofits would plummet. But the changes have had an unexpected twist: A little-known financial vehicle called a donor-advised fund is on the rise as it streamlines the process for donors to still receive tax breaks on charitable contributions.
The increased use of these funds means nonprofits may have more of a consistent flow of donated money to rely on, since the funds are easy to set up and the payments can be automated. But many nonprofits are still in the dark about how to use these funds for their benefit. Some misunderstand how they work and even consider them a threat to traditional sources of giving.
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Donor-advised funds are also changing the competitive dynamics of fundraising between commercial charities that have honed in on these funds, such as Fidelity Charitablrean and Renaissance Charitable Foundation, and traditional regional foundations like the Oregon Community Foundation, which has administered such funds for decades.
Donor-advised funds, which are set up at a public charity, allow donors to make a charitable contribution of personal assets, including cash, stock and real estate. Donors receive a tax deduction on the contribution. They can specify which charities the funds should go to and make grants to beneficiaries whenever they want. The funds are invested and can grow tax free.
The Oregon Community Foundation, the state’s largest charitable foundation by assets, has administered donor-advised funds for 45 years. But their use at national charities has shot up in the past four years, and they have become the fastest-growing charitable vehicle. Grants from donor-advised funds to charities reached a new high of $19.08 billion in 2017, a 20% increase from 2016, according to a National Philanthropic Trust report.
The number of donor-advised funds has also increased — an astonishing 60% in 2017 from the previous year. Most of the growth has been at commercial charities, where the number of funds more than doubled in 2017 to 338,141.
The 2017 Tax Cuts and Jobs Act is the biggest driver of increased adoption of the funds, say experts. Donors like them because they can pool assets in one account, making it easier to meet the new standard deduction threshold to receive a tax break.
“We are hearing from a lot of nonprofits that donors are bunching gifts through a donor-advised fund, where they can get the tax benefit while contributing,” says Jim White, executive director of the Nonprofit Association of Oregon.
The association recently surveyed Oregon nonprofits to understand the impacts of the new tax law on charitable giving. Despite assumptions that the new tax legislation would lower charitable contributions, most survey respondents reported a moderate to large increase in donations in 2018. Although many respondents said donors are setting up donor-advised funds, it is too early to tell whether the funds will result in increased contributions to nonprofits in the future.
Data from the National Philanthropic Trust show that the average size of donor-advised funds declined by 36% in 2017 compared with the previous year, an indication that the donors setting up these funds are not necessarily the super rich.
Users of these funds “extend beyond wealthy people,” says White. “Boomers are aging; this is a vehicle through which they can give.”
Donors that have accounts at commercial charities can make contributions from their funds with as little as $5,000. This is in contrast to the Oregon Community Foundation, where donors must have at least $25,000 in their account to make grants. Commercial charities also typically charge lower administration fees than community foundations.
Johanna Thoeresz, chief development officer at Oregon Community Foundation, says the foundation is seeing more competition for donor-advised funds than in the past. “Donor-advised funds have become a household word,” says Thoeresz. “We never used to compete with large commercial houses.”
A big way the foundation differs in its management of funds compared with commercial charities is that it plays an active part in working with the donor to distribute funds. Commercial charities do not typically advise donors on which charities their clients should give to. “Our goal is to see charitable gifts go to the community,” says Thoeresz. “We have a team to choreograph donor interest with nonprofits’ needs.”
She adds the foundation plans to market its donor-advised funds more to corporations, which can also use these funds for charitable giving.
The rise of donor-advised funds could be a boon to nonprofits that take advantage of this growing source of giving. But many nonprofits have yet to tap the funds.
“A lot of nonprofits don’t understand donor-advised funds and actually see them as competition. But they are not; they are a tool,” says Ted Grigsby, director of endowments and foundations advisory at Human Investing, a Lake Oswego financial planning firm.
One way he says nonprofits can attract this new source of funding is to make sure their online donation tools are set up to receive money from the funds rather than just from credit card contributions. He also encourages nonprofits to work with commercial charities and the Oregon Community Foundation to set up infrastructure so they can receive donations from this type of charitable-giving vehicle.
“If nonprofits can figure out how to address donor-advised funds, they could be a significant and consistent source of giving,” says Grigsby.
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