In this webinar, Greg Nielsen discusses donor advised funds, how they differ from private foundations, tips for engagement, critiques and potential reforms.

Full Transcript:

Steven: All right. Greg, my watch just struck 2:00. Is it okay if I go ahead and get this party started?

Greg: Let’s do it.

Steven: Okay. Awesome. Well, good afternoon, everyone, if you’re on the East Coast, I should say. Good morning if you’re out in the West Coast. Thanks for being here for today’s Bloomerang webinar, “Demystifying Donor Advised Funds.” I love it because I don’t really understand donor advised funds. That’s why we’re here today. So I hope you all are in the same boat because we’ve got a great session planned for you. Thank you all for being here. My name is Steven Shattuck, and I’m the Chief Engagement Officer over here at Bloomerang. And I’ll be moderating today’s discussion as always.

And just a couple of housekeeping items. Just want to let you all know that we are recording this session and I’ll be sending out the slides as well as the recording later on this afternoon. So, if you didn’t already get the slides or maybe you want to watch the recording later on or if you have to leave early, no worries, we’ll get all that good stuff in your hands this afternoon. Just look for an email from me with all those goodies.

And most importantly, as you’re listening today, please feel free to use that chat box right there on your webinar screen. We’re going to try to save some time for Q&A at the end of the session. So don’t be shy. Send in your questions and comments along the way. We’ll keep an eye on those and we will try to answer just as many as we can before the 3:00 Eastern hour. You can also do that on Twitter. I’ll keep an eye on the Twitter feed for questions and comments as well. And yeah, so don’t be shy about that because we’d love to answer your questions live.

And if this is your first Bloomerang webinar, just want to stay an extra special welcome to all you folks, all you first-timers. We do these webinars just about every Thursday throughout the year. Sometimes we do a couple of webinars per week. We love it. It’s one of our favorite things we do here at Bloomerang. You can see our entire archive of a past sessions on our blog. But in addition to these great webinars, what we are most known for is our donor management software. That’s what Bloomerang is. That’s what we do. And if you are interested in that or maybe thinking about switching software sometime soon, maybe you’re shopping, check us out, keep us in your mix of vendors you’re considering. You can even watch a quick video demo and see the software in action if you want to take a look. So just check out our website you’ll find that there.

Don’t do that now because we got a great presentation planned for you. My good friend Greg from beautiful Louisville joining us today. Greg, how are you doing? You’re doing okay?

Greg: I’m doing great. I’m excited to be here.

Steven: Yeah, this is awesome. I feel bad. I was just in Louisville yesterday. Our paths didn’t cross, but that’s okay.

Greg: No, we should’ve grabbed lunch.

Steven: Yeah. We should have. I did not plan that very well, but we’re making up for it now. We’ve got you on the line. Tell us all about donor advised funds. I love Greg. He’s just a great guy. He’s a wealth of knowledge. If you all don’t know him, check him out. He’s down at Nielsen Training & Consulting. He does a lot of really cool facilitations of board retreats, and strategic retreats, and things like that. He’s on the road a lot, so he very graciously fit this into his schedule amongst all of his client work. But he is also on the road speaking at conferences. So, if you see him at a conference, make sure you pop into that session. You’re going to want to have to hear this one.

He was the CEO previously of a great association of nonprofits down in Louisville, the CNPE. And has a lot of cool programs that he’s helped launch down there. And yeah, I just can’t wait to hear all about donor advised funds because I am a little mystified about them. So, hopefully, Greg can demystify and I’m sure he will. So, Greg, I’m going to go ahead and give you the controls or let you go ahead and share, so you can bring your slides up. And the floor is yours.

Greg: Absolutely. Thank you, Steven. I appreciate the introduction and just give me one second. I’m going to bring up the slides here.

Steven: It looks like it’s working.

Greg: Okay. And we’re ready to go. So we are going to be talking today about donor advised funds. Just a quick agenda. This is a really quick webinar. So we’re going to be flying at the 30,000-foot level. There is obviously a lot more that we could be talking about with donor advised funds, but I’m not going to go down the rabbit hole with financial or accounting rules and regulations. So we’ll be talking at a high level about, what are donor advised funds, so defining them. Differentiating between donor advised funds and private foundations. So what are the rules governing each? Why would a donor look to set up a donor advised fund versus a private foundation and vice versa?

Who are the players? So, as we think about these fast-growing financial philanthropic vehicles, who are those who are promoting them? Who are those who are housing them? How do we get in touch with them? How do they work? Tips for engagement. And then at the end we are going to talk about current critiques and potential legislation related to donor advised funds because if you haven’t been paying attention recently, they have been in the news quite a bit lately and there is actually pending legislation . . . along with a number of . . . highlighting the Giving USA 2018 highlights.

And I put this at the front end of the webinar just because you’ll see when we talk about the growth of donor advised funds, it’s against the landscape of relatively flat charitable giving. So we had $427.71 billion of charitable giving according to Giving USA 2018. While total charitable giving rose .7%, when you adjust that for inflation, total giving actually declined by 1.7%. Individual giving declined from 70% in 2017 to 68% in 2018. And then you see down at the last bullet point on that slide, how that breaks down with different subcategories or types of organizations.

I share that with you not as a test or a quiz on what’s going on in charitable giving. You all probably see that far better than I do every single day in your work. But it’s rather to show you that while we are going to talk about the tremendous and skyrocketing growth of donor advised funds and the use of donor advised funds as a giving vehicle, it’s against a backdrop of relatively flat charitable giving overall.

So, as we go through, I welcome any questions that you have. Steven’s going to pop in and he is going to remind me of any questions that come through in the chat feature and we’ll also leave some time at the end to address your questions also. So please, as we go, if you have questions or things you want to talk more about relative to donor advised funds, let’s do it.

In defining donor advised funds, donor advised funds are a giving vehicle that is established at a public charity and it allows donors to make a charitable contribution, receive an immediate tax deduction, and then recommend grants from the fund over time. So let’s just say Steven is . . . and I’m going to use Steven throughout the presentation as my example. Let’s say Steven is a budding philanthropist and he is looking to give to charity significantly over the next couple of years. One of the options that he has is to set up what we call it donor advised fund. And it’s a giving vehicle. It’s a fund just like you might have with a T. Rowe Price, or with a Fidelity, or with a Vanguard that allows you to make a make a contribution to that fund. You as the donor receive an immediate tax deduction for that fund as though you were giving it directly to charity. And then, over a period of time, you can recommend grants from the fund.

So you see the graphic on the bottom, at a really simple level, donors contribute to the fund. Theoretically, the assets grow as they’re invested over time. Charities benefit as donors recommend funds from the grant. It’s obviously much more complicated than that. But at a high level, if you keep in mind those three things, donors contributing to a fund, assets growing over time, donors recommending gifts and grants from the fund to qualified charities.

So what’s included? A lot of times when we think about a donor advised fund, we think just about cash. But actually, it’s important to note that donor advised fund assets can include cash, they can include stock, they can include real estate, and any number of other securities and financial vehicles to deposit that money into a public charity.

A brief history of donor advised funds. They were first created in the 1930s. A lot of times we think about DAFs, donor advised funds, we think about them as a recent institution. We think about them as just showing up on our radar on our landscape recently. But it’s important to note they were first created in the 1930s. It was recognized with the Tax Reform Act of 1969. Where we really started to see growth in donor advised funds was in the 1990s. They now today are philanthropy’s fastest growing vehicle. They account for 3% of all charitable giving and that number is continuing to rise year over year. And you’ll see that with some of the data coming up.

There are three different categories of donor advised funds. There’s commercial. Another word for that or another phrase that you’ll see in the literature is national charities. There’s community foundations and then there’s single-issue charities. Let’s take each of them briefly individually.

So, if you think about the first category of donor advised funds, commercial donor advised funds, that’s the vehicles that you see most prominently, such as Fidelity Charitable, or Goldman Sachs Charitable Gift Fund, or Schwab Charitable, Vanguard Charitable. These were started by national financial services firms. And although they are separate organizations, so even though they say they are Fidelity Charitable or Vanguard Charitable and they are, they are actually established as nonprofit organizations.

The assets in these funds are managed by the related investment company. So, if you are donor advised fund is held by Fidelity, Fidelity is managing those assets. And these funds are responsible for much of the explosions in donor advised funds over the past few years. Their main selling points to donors include low investment fees relative to other funds, sponsors and the ease of use for donors. So, because they are institutions that are used to managing money like Fidelity and Vanguard, they are familiar to donors from their other investments and they make it easy for donors to set up those donor advised funds.

The second category is community foundations. So, even though donor advised funds may seem like new arrivals to us, they were actually conceived by community foundations decades ago. They remain a key donation vehicle for most regional grantmakers and many donors open accounts at community foundations because the grantmakers have a good understanding of the areas nonprofits and they offer services such as family philanthropic consulting.

So, as we said, the first vehicle is the commercial vehicle. The second is community foundations. And for many nonprofits, particularly small-to-midsize nonprofits, this may have been your first exposure to donor advised funds. It may have come through a community foundation, whether it was an anonymous gift from a donor or a gift from a board member that was routed through your local community foundation.

The third category is relatively new in terms of its growth and development and that’s what we call single-issue donor advised funds. These are sponsoring organizations that focus on a single issue and encourage giving to a particular cause or organization. So, whereas your commercial donor advised funds tend to be agnostic in terms of where the funds go or what types of organizations are the beneficiaries of those gifts, same with community foundations, single-issue donor advised funds encourage those who house their funds there to give to a particular cause or organization. So, for example, we’re thinking here about schools or faith-based organizations such as Cornell University has a donor advised fund. The Jewish Federation of Cleveland is another one. Sometimes sponsors of these funds will stipulate that donors must steer or recommend a certain percentage of their gifts to an institution such as the university.

I mentioned earlier that donor advised funds were our fastest growing philanthropic vehicles. So many of my clients, many of the nonprofits that I work with, as I talked to their development directors, as I talked to their CEOs, there’s a robust conversation in the boardroom and in the development staff about, how do we get to understand the growth in donor advised funds? So a couple of metrics here for you. In 2018, donor advised funds reach new highs in all four of these dollars distributed, dollars contributed. So that’s dollars in the door at any of those institutions, dollars distributed out the door. Third is value of assets under management and number of accounts. So, by all metrics that you would want to review, donor advised funds are growing in popularity year over year.

You see on this slide the growth just from 2017 to 2018. So, in terms of contributions, that’s donations made to donor advised funds at any of those three categories that we talked about was $30 billion in 2017 up to $37 billion. So an increase of $7 billion in contributions just in the one-year span from 2017 to 2018. There’s also obviously an increase in the grants going out the door. So from donor advised funds to nonprofit organizations such as yours, across the community, that increased from $19 billion in 2017 to $23 billion in 2018.

A term that you may hear thrown around a lot when you’re talking about the growth of donor advised funds is a term called bunching. Many of you may be familiar with this term. Bunching, by definition, is consolidating tax deductible charitable contributions that would normally be made over multiple years into a single tax year.

So let’s take just as an example of the tax reform that was passed in 2017 that, among other things, significantly elevated the threshold for the standard deduction. So it reduced the number of itemizing donors or itemizing taxpayers across the country. One strategy for people to still be able to take advantage of the charitable deduction is to do what we call here as bunching.

So, if I am a . . . so let’s go back to our example of Steven. If Steven is contemplating making $10,000 in charitable gifts over the next five years, if he were to do that as $2,000 a year over the next five years, he may not be able to itemize his deductions. That may not push him up into a tax bracket or a threshold where he can itemize those deductions.

By contrast, if Steven makes a $10,000-gift in year one to his donor advised fund, he receives the immediate tax deduction, the immediate benefit of that $10,000 and can then recommend gifts over those same $2,000 gifts over the next five years. The only difference is they would be paid out of his donor advised fund rather than out of Steven writing a check directly to those organizations. So, when you think about donor advised funds, the term bunching gets thrown around often and it’s a common term that’s used by both donors and also financial institutions.

We talked about the growing impact of donor advised funds. The next several slides are going to show us in graph form exactly what we mean there. So, if you see here on the slide and all of this data comes to us from the National Philanthropic Trust 2019 Donor-Advised Fund Report, which you can download for free right off of their website. I encourage you to check out their site. You see on this first graph, contributions to donor advised funds expressed as a percentage of total individual giving. So, if you see even as recently as 2010, so, you know, for me, that feels like it was just yesterday, but I recognize that it was 10 years ago at this point. But expressed as a percentage of total giving, donor advised funds were down at 4.4% in 2010. Fast forward to 2018, it has risen all the way to 12.7% as a percentage of individual charitable giving. So you see a dramatic rise there just in terms of the use of donor advised funds in carrying out philanthropic giving.

Another metric here is charitable assets. So you see, just again in that one-year window from 2017 to 2018 donor advised funds had $112 billion in assets in 2017 up to $121 billion in 2018, so an 8% increase there. So think back again to our first slide where we started with Giving USA and overall philanthropic giving being relatively flat, but you see an increase in the assets under management at donor advised funds going up by 8.3%. Total contributions to donor advised funds going up 20%. Total grant dollars, 18.9%. And then what you see as a grant payout percentage. So, when you hear of the term grant payout, that’s, of the assets under management at donor advised funds, what is the percentage of those assets that are then working their way out into the community? So you see that actually went down from 22.8% to 20.9% in 2018. That actually forms the basis of one of the critiques that we’ll talk about in a little bit.

The next slide shows the total assets in donor advised funds. So you see 2014, they were $70 billion in assets in donor advised funds all the way up to $121 billion in 2018. So, again, a relatively short snapshot, a relatively short window of time from 2014 to 2018, you see the dramatic rise in the total assets that are in donor advised funds.

Next slide. Total number of donor advised fund accounts. So these are the actual number of donor advised funds that exist around the country. Again, went from 241,000 in 2014 all the way up to 728,000 in 2018. So you see the largest jump there. It was relatively flat, 2014, ’15, ’16. ’17 took a jump and then the jump between 2017 and 2018. So, again, what happened during that period of time? That’s the period of time when tax reform was passed and donor advised funds became a significantly more advantageous way for individuals and families to carry out their charitable giving. So that’s largely responsible for that big jump that you see from 469,000 in ’17 all the way up to 728,000 in 2018.

The next set of slides talks about, well, where has that growth come from? So we talked about how there are three different categories of donor advised funds. There’s the Fidelitys . . . you know, the commercial folks, there’s the community foundations, and then there’s the single-issue charities. You’ll see in the next couple of slides that most of that growth has come in the commercial space with those folks like the Vanguards that we’ve talked about. You see here in terms of community foundations and growth, relatively flat from 2014 to 2018, from 66,000 to 77,000. The next, single-issue charities. Again, relatively flat from 46,000 in 2014 to 57,000 in 2018. Next though, you see these are our national charities. So these are the commercial folks that we talked about. Look at that dramatic growth from 2014 at 129,000 up to 2018 with 593,000.

So a lot of times when we think of donor advised funds and how they have exploded in the past several years, we can fall into the trap where some nonprofits think that that growth is relatively evenly spread out among community foundations and among single-issue charities when in fact it’s really been the commercial charities, the national charities that have really invested in building their portfolio of donor advised funds.

Next topic is, it’s important to understand in donor advised fund, who controls the money? A lot of times we talk about donor advised funds and we talk about donors to donor advised funds as though they are the sole force or the sole factor in making that decision. In reality, legally and otherwise, the sponsoring organization controls the money. So once the donor, once Steven makes his gift, and opens up a donor advised fund, in order to receive the tax benefit, in order to receive his charitable deduction, he has to give up control of those funds.

So even though Steven may name the fund, it may be the Steven Shattuck Donor-Advised Fund held at the community foundation, Steven does not directly control the money. He can make suggestions to the community foundation. He can make recommendations of grants from his donor advised fund account, but ultimately, it is the sponsoring institution, the sponsoring organization that controls those funds. In theory, even if they don’t often do so, they can refuse to make a gift out of that fund and more and more there is becoming pressure on sponsoring organizations to do so. And we’ll talk a little bit about that in the critiques.

I told you at the beginning that we would differentiate at a high level between donor advised funds and foundations. And I want to spend a few minutes on that. So, if you look at the chart on that page with donor advised funds, one of the benefits to donors is it’s an immediate startup. There is little to no cost. I can go to my community foundation or I can go to my commercial institution and set up a donor advised fund if not within a day. If not, then certainly, within a short period of time. If I were to establish a traditional family foundation for myself, that could take months. There could be legal costs in terms of setting up the foundation and its infrastructure. So, again, if I’m a donor that is looking to avoid administrative costs, the donor advised fund may make more sense for me.

Donor-advised funds do not have a required minimum distribution. So, again, we’ll talk about this in the critiques. But I could theoretically take $25,000 and open a donor advised fund tomorrow and those funds could sit there for a period of years or forever under current law. In the foundation world, there is regulations that 5% of the net asset value of the foundation must be distributed annually. So again, another difference between donor advised funds and foundations, no required distribution from DAFs, 5% of net assets must be distributed from the foundation annually.

Third is with a donor advised fund, I have the ability to make an anonymous gift. So, if I’m a donor who wants to make a gift to a nonprofit organization, but for some reason I don’t want that organization or the public to have access to my name. If I want to make my gift completely anonymous, I can do so with a donor advised fund. I cannot do so with a philanthropic foundation. So philanthropic foundations have detailed annual disclosures. So, again, if you’re dealing with a donor who has the strong desire for anonymity for some reason, that has pushed and tends to push people more towards the donor advised fund route rather than establishing a foundation.

And then finally, with a donor advised fund, there tend to be few administrative tasks. With foundations, there are significant administrative tasks. So one of the benefits of housing your donor advised fund at a community foundation or a single-issue charity or a national commercial institution is they take on a lot of those administrative tasks. They handle all of the filings. They handle the accounting for the fund. They send the paperwork to organizations related to gifts and grants. Foundations requires you to set up that infrastructure yourself and have someone to manage that. So, again, as we differentiate between donor advised funds and foundations at a really high level, these are the four key distinguishing factors. Again, for donor advised funds, immediate startup, no required minimum distributions, the ability to have anonymity, and then fewer administrative tasks.

A couple of other facts and figures that are often helpful and often useful for development professionals. For donor advised funds, the average donor age at opening is currently 55 years. This data is just a few years old and comes from the Fidelity Charitable Giving Report. Seventy nine percent of donor advised fund holders also volunteer time at a charity. So, again, as you’re thinking about who in your network, who in your nonprofit’s donor base may have a donor advised fund, think of your volunteers. Because again, according to the data, 79% of donor advised fund holders are also volunteering at a charity. There’s not necessarily a connection between where they are recommending their funds be distributed and where they are volunteering. But you can extrapolate from that, that if they are devoting their time to an organization, they may also be willing to devote their philanthropic assets and gifts.

Motivations. Again, this comes from the Fidelity Charitable Giving Report. They surveyed donor advised fund holders. So, again, thousands of individuals participated in this study. When they asked them about their motivations for creating a donor advised fund, 62% stated that it was to sustain their giving through retirement. So, for example, during their working years, they were making annual charitable contributions of X to an organization. They wanted to be able to sustain that level of philanthropic giving through their retirement years. And the donor advised fund provided a mechanism, provided a vehicle to allow them to do that.

Seventy-six percent were motivated to donate appreciated assets. So, there may have been a tax benefit or they may have had appreciated assets that they were looking to move or looking to give through an approved charitable giving vehicle, 76%.

Sixty-eight percent wanted to allow time to decide where to give. So, again, if you think about another advantage of a donor advised fund is that I can make that . . . I can open that fund with 20,000, 25,000 this year and perhaps I don’t know where I want to direct those funds, where I want to recommend those funds be distributed. It gives me time as a philanthropist, as a donor to investigate different organizations to spread out my contributions over time, to take a period of reflection to see where I want to put my money, where I want to donate. Twenty-four percent had received a yearend bonus, 26% wanted to include family in giving.

So, again, as we think about legacy giving, as we think about families passing on charitable giving from one generation to another, the donor advised fund provides a mechanism to do that. So, from parents to children or otherwise, if I want to involve my family in a culture of philanthropy within our family of donor advised fund as an alternative to a family foundation may provide a mechanism to do that.

So, as you are nonprofit leaders, as you are development directors, think about reaching out to donor advised fund holders. I think it’s important to keep these motivations in mind as you’re having those conversations with potential donors and with existing donors.

The nonprofit perspective is one that is often missing from conversations around donor advised funds. If you google donor advised funds or do any level of research, you see a lot of the charts, and graphs, and data that I shared with you earlier in the webinar. A lot of talk about why it makes sense for donors, why it is a good thing for donors, why it may not be a good thing for communities.

What’s missing is the nonprofit perspective. And that’s why I was thrilled to see the Center for Effective Philanthropy, CEP, recently conducted a study to try to capture the nonprofit leaders’ voice associated with the growth of donor advised funds. So, how is this exponential growth impacting nonprofit leaders and organizations?

And they asked four fundamental questions. They asked, what are their preferences between the types of donor advised funds sponsoring organizations? So, between national organizations, commercial institutions, community foundations, and single-issue charities, do nonprofit leaders have a preference between them when it comes to receiving gifts from donor advised funds or interacting with funds? What are the biggest advantages of receiving funding through donor advised funds? Biggest disadvantages of receiving funding through DAFs? And then finally, how aware are nonprofit leaders of debates, the critiques surrounding DAFs?

So, let me go through really briefly, what some of their findings indicated. So, when we think about, do nonprofits have a preference between the types of sponsoring organizations? Most, 80% of nonprofit CEOs indicated that they did not have a preference. But among the 20% who do almost all of those preferred community foundations. So, there was a deeper, more personal relationship between nonprofit leader and the community foundation according to the study.

Second, what are the biggest advantages of receiving funding through donor advised funds? The top advantage that nonprofit CEOs cited, 22% was that donor advised funds involve less of an administrative burden for nonprofits. In their own words, nonprofits said, “That DAF handles all tax related paperwork. There’s less work and cultivation of the donor as they seem to come unsolicited more frequently.”

Third, there is less work and cultivation of the donor as they . . . And then finally, there’s very little additional administrative reporting burden. So, if you think of traditional philanthropic foundations, a lot of times we’re talking about grant applications, some of which may be resource-intensive or burdensome for nonprofit leaders. Whereas, the donor advised fund tends to be more simplistic in its administration, more simplistic in its communication with the sponsoring organization.

Third, then, what are the biggest disadvantages of receiving funding through DAFs? The top disadvantage that nonprofit CEOs cite, 44% of them is that DAFs hamper nonprofits ability to build personal relationships with the donor. So, again, if you think about that DAF structure that we mentioned before, the donor is actually making the gift to the sponsoring organization. The nonprofit that receives that gift ultimately, may not have any direct contact with the donor because anonymity is allowed. They may not even know who that donor is. So, nonprofit CEOs report that, that obviously makes it a challenge to identify your donors, to cultivate them, to steward them over time, all of the best practices that we talk about in philanthropic giving.

And then finally, what do nonprofit leaders think about the debates surrounding DAFs? Almost half, 47% say that DAFs delay nonprofits from getting donations. Twenty six percent say that DAFs hamper nonprofits ability to build personal relationships. And 24% say that DAFs are not transparent enough. And we’ll talk about what that means.

Tips for engagement. So, as a nonprofit leader, when I’m coaching nonprofit leaders or when I’m coaching development staffs, so, how do you engage better with donor advised funds, so you can be on the leading edge of this explosion? It’s important to recognize the donor not the DAF. So, a lot of times, the gift itself will come on letterhead from Vanguard or will come on letterhead from the community foundation. It’s important to remember that the giver, the donor, the one who has recommended that gift is not the sponsoring organization, but it’s rather an individual. And to the extent possible, it’s important to identify should they want to be identified, the donor’s details and send them a thank you rather than just the sponsoring organization.

Second is invite deeper engagement. So, if you are receiving gifts from a donor advised fund, whether that’s a community foundation or otherwise, invite deeper engagement. Invite the leaders of that foundation, invite the leaders of that sponsoring organization to take a tour of your organization, to learn more about who you are and what you do.

Third is remember planned giving. And this data is also striking to me. Forty-two percent of DAF holders have a bequest or legacy giving vehicle also. So, think about it. If they have gone to the effort of creating a donor advised fund, they are someone who obviously thinks heavily about charitable giving. Philanthropic giving and planning is important to them. The data shows that 42% of those accountholders also have a giving vehicle, a planned giving vehicle, a bequest giving vehicle already in place. So, you’re talking about relatively sophisticated givers, so you can have a conversation with them as you deepen engagement around planned giving as well.

Other tips for engagement include the options in all of your marketing materials. So, if you want to appeal to DAF holders, make sure that you’re mentioning that as an option in all of your marketing materials that are out there. There is also a website that is out there that is called DAF Direct. I have not worked with them directly, I don’t have any connection with them, but others have brought it to my attention that it can integrate with your website and make it easier for DAF holders to recommend gifts to your organization. So, again, if you want more information about them, you can google DAF Direct.

Ensure that your information is correct. So, when you think about who are the sponsoring organizations in your community, think about the community foundation. Think about some of the commercial institutions. Think about whether they have your information on file. Do you have a preexisting relationship with them? Is your current address and routing information correct with the IRS and in the state database? So, if they are thinking of routing an anonymous gift to you, will it actually get to you? Again, make sure your information is accurate there.

Register with commercial DAFs. So, if you go on the website of many of the commercial DAFs, I know Fidelity does this and Vanguard does this, you can actually register with them as a charity. So that as they are contemplating making gifts or as their fundholders are contemplating making gifts, your name, your organization’s name is already in their database. They’re not having to find from a Google search or from word of mouth.

Next, build relationships with DAF sponsors. I mentioned that a minute ago. A third of DAF holders will ask advice of their sponsor when making recommendations. So, I talked about the importance of building relationships with the DAF holder themselves, so the donor who makes that initial gift, it’s equally important to build relationships with the sponsoring organizations. So that if Steven goes to the community foundation and says, “You know what? I’m ready to make a recommendation from my donor advised fund, have you come across any really impactful organizations in the animal welfare space or in the children’s space that sponsoring organization is at least aware of your nonprofit, aware of the work you’re doing and the impact that you’re having on the community?”

Next, it’s important to know your nonprofit. So, when you think about the questions that are likely to be asked by a sponsoring organization in that get to know you phase, think about, what is your most successful program and why? What are the 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? As you see the source listed on the bottom of the slide there, Fidelity actually shares these exact questions with their donor advised fund holders as a tool for vetting potential nonprofit organizations that they may recommend grants to.

So, if Steven were to open his donor advised fund with Fidelity , they may give him a packet that lists these questions and says, “Over time, as you’re considering making recommendations to different organizations and you’re vetting those organizations, here are some sample questions that you can ask them.” So, again, I share those with you because you want to be prepared with answers to these questions, should Steven show up on your doorstep asking.

A couple of words of caution when it comes to donor advised funds. So, can DAF assets be used to fulfill a pledge? So, I’m asked this question and this question comes up all the time. And then an answer, remember, technically the donor is only an advisor. The assets in a donor advised fund are legally controlled by the sponsoring organization because fulfilling a pledge can be viewed as a benefit to the donor, getting the donor off the hook for a pledge, the IRS could subject that gift to a tax.

In December, 2017, the IRS actually issued a notice that clarified the issue. So, making good on a pledge is fine. The agency said, “As long as the donor or doesn’t attempt to take an additional tax deduction on top of what they received for opening the donor advised fund.” 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.

Next frequent question that comes up is, can DAF assets pay for a table at the gala? So, if Steven wants to attend your gala, can he direct assets from his donor advised funds to pay for a table at the gala? The IRS has actually given us rules on galas and other events to look to. “Because donors are receiving something of benefit from the gala, food, entertainment, etc., paying through a donor advised fund presents a significant challenge. 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 any personal benefits.

Some sponsors will bifurcate those payments, which means the donor can pay for tickets to an event through their fund, but cover the cost of the dinner and the entertainment out of pocket. Sometimes a donor will pay for a table at a gala, but not attend. This is fine as long as long as the guests at the table are not associated with the donor because hosting one’s friends could be seen as a benefit even if the donor is not personally there.”

And then as we wrap up, I want to touch on, as I mentioned earlier, some critiques of donor advised funds. We’ve talked a lot about the benefits of donor advised funds. I think it’s also important to pay attention to legitimate critiques that are out there. The far most prominent critique that exists is a reference to donor advised funds as the waiting room of philanthropy. And that alludes to what I mentioned earlier, which is that those assets that have received favorable tax treatment, so you have received a tax deduction for donating those to a donor advised fund may not ever reach the community. Because there’s no required minimum distribution from a donor advised fund, the assets that I may have previously been directing to nonprofits, but I’m now directing to my donor advised funds without a required minimum distribution, it can just sit there without ever making its way out into the community. So, there are a number of critics out there that have put forth proposals to require minimum distributions or require a spend-down of donor advised funds over time.

Second critique is declining payout rates. So, we talked about, in the beginning and in those graphs, how the payout rate has actually gone from 22% down to 20%. As that trend continues or if that trend continues, there is more of a concern that those funds are being amassed or being housed at institutions like community foundations without ever making their way out into the community to benefit your nonprofits.

The third is backward sponsor incentives. So, if I am a commercial institution, if I am a community foundation, the way donor advised funds work for them is they typically collect a fee or a percentage of the assets that they manage. And so, therefore, the incentive in the system currently for those commercial holders and community foundations is the more assets I have under my roof, the more I am collecting as a fee from the fundholder. This creates an incentive obviously for me to keep those assets under management and actually a reverse incentive that prevents organizations from recommending gifts out into the community. Again, that’s as the critique goes.

Finally, a couple of proposed reforms. There have been reforms, again, mainly originating in California, but also now making their way into the national dialogue and landscape to require a mandatory distribution in a fixed number of years, to delay the deduction until the funds are paid out, or to change the way management fees are determined.

So, again, as we reach the end here, I want to thank you for joining the webinar today and learning a little bit more about donor advised funds. As Steven mentioned at the beginning, I welcome any questions that you have now. I’m certainly willing to stay on the line and discuss those and also invite you to engage with me offline as well, if you still have questions afterwards.

Steven: Yeah, that was awesome, Greg. Thanks for being here and sharing all that knowledge. That was pretty comprehensive. I think that covered that and everything that I had on my checklist. So, thank you for doing this and for being here. And we got quite a few questions. We’ll try to get to all of them before 3:00. So, Greg, I’ll just kind of roll through these here. Clarifying question from Sharon. So, DAFs, they’re not actually their own 501(c)(3)s, right? They’re more of a . . . they don’t have that actual designation [inaudible 00:42:57].

Greg: No, the sponsoring organization is considered a nonprofit. The DAF just counts as that fund underneath that exists, that nonprofit.

Steven: Got it. Okay, cool. Thought so. So, we have a few neighbors to the north in Canada listening in and I know you’re based here in the States, but any insights into how this works in Canada? Are there any differences there or do you think they should maybe consult someone up there?

Greg: I am going to . . . Steven, I told you from the outset, I’m a lawyer by background and that background prevents me from jumping in as much as I want to here. I would definitely say that if you are in Canada, I would suggest the trends are largely similar, but not the same. The rules would be different though. So, you certainly want to contact your financial advisor or an advisor closer to you.

Steven: Okay, cool. Here’s an interesting one from Susan. What happens when the fund donor passes away? What happens to it? Does it stay with the foundation or what goes on there?

Greg: Correct. The foundation still owns the assets. And so, the foundation may or there may be provisions within the donor advised fund agreement that allow the heirs to that donor to continue making recommendations. But again, it’s important to remember, who owns the funds, who controls the funds? And it’s the sponsoring organization. So, even when the original donor passes away, it is still the sponsoring organization that controls those assets.

Steven: Until they all get distributed, then it must . . . yeah.

Greg: Until they all get distributed. So, you know, every institution handles donor advised funds a little bit differently. And so, you know, it’s largely going to be a product of a contract that exists between the donor and the sponsoring organization. And you know, in many of those contracts that I’ve seen, there are provisions of, you know, what happens when the donor passes away. Did those funds get merged into the community foundations general assets? Or do those funds remain in the donor advised fund for the heirs to continue making recommendations out of them?

Steven: Okay. So, it’ll vary depending on . . . Okay, that makes sense. Here’s an interesting one from Mark. Mark’s got some donors who give outside their donor advised funds and then also through the DAF. So, they’re sort of making direct contributions and then also contributing through a DAF. So, they get the immediate tax benefits for both. So, what should Mark do with those people? Anything different, should maybe acknowledge that that’s happening through both ends or any tips there?

Greg: Correct. I think that that’s a . . . Mark has the advantage of having an existing relationship with that donor. There’s no anonymity concerns there. And so, it’s important to just build and steward that relationship. The manner in which the donor is making those gifts, really doesn’t matter to Mark as much as continuing to build that relationship. Whether it comes from the donor advised fund or comes from the donor’s personal checkbook is simply the vehicle through which they’re making the gifts. So, in that case, the relationship with the individual is far more important than whether it comes from a personal check or whether it comes from the sponsoring institution.

Steven: What about communicating the tax differences there? Because it seems like one has a different . . . Should the org do that or . . . ?

Greg: Any gift that comes from the donor’s personal giving, so you know, put simply, if the check comes from John Doe, you are certainly sending John Doe the thank you and the tax deduction letter. And if it is coming from the sponsoring organizations, so if it is coming from Vanguard on behalf of John Doe, John Doe does not get a tax letter. He certainly can still get a thank you though.

Steven: Yep. Well, I’ve got a lot of questions about that, but we’ll get to them. There was an interesting question here about kind of getting on the radar of those organizations that hold the funds and distribute the funds to nonprofits. Is that something that nonprofits should aspire to do, is to kind of get on those people’s radars?

Greg: Absolutely.

Steven: Okay. And, how should they?

Greg: And I’ll give you some easier tips to do so. Because I know it can sound daunting and no one wants to go on, you know, any other commercial websites and try to figure out how to navigate that landscape. Some easy tips would be to start local. So, that’s thinking about community outreach for your nonprofit anyway. So, already you know, corporations and groups in the community that you’re reaching out to, think about the financial institutions that exist in your community. So, is there a local office of Schwab? Is there a local office of Vanguard or Fidelity? What is your relationship like with your local community foundation?

So, the same way that you’re reaching out to representatives from corporations in the community or other civic groups in the community, reach out to those local financial institutions as well. Invite them, if you have a breakfast or a lunch and learn. Or if you have a tour, or if you just want to sit down over a cup of coffee, reach out to the local branch and say, “You know what? I’m interested in learning more about donor advised funds and getting on that radar. Who in the local office would be best able to help me with that?” I think the more local you can direct those efforts, the more successful you’ll ultimately be. Because again, you don’t want to go down the rabbit hole of trying to figure out at a national level, who to talk to there.

Steven: That makes sense. Start local. Okay. So, acknowledging. It seems like given the rise in popularity that you kind of covered early on, if that’s the right way to describe it, that nonprofits should maybe just be on the lookout for gifts from these charitable . . . from financial institutions, from the community foundation. Is that kind of the biggest signal that it might’ve come from a donor advised fund? Because it doesn’t always . . . or does it say that it came from a DAF? What should they be kind of looking for?

Greg: It doesn’t always say that it comes from a DAF. I think many times, community foundations will specify that it came from a donor advised fund. I’ve seen that more frequently. But in general, if you restart receiving gifts from . . . you know, we’re really thinking and talking about the commercial institutions here from, a Vanguard, or Fidelity , or a Schwab, you know, any of those more national financial institutions that you don’t already have an existing financial relationship with, that’s a signal that it probably came from a donor advised fund if it doesn’t specify that specifically. Again, many times though, it has specified it. It has articulated it directly, even if it doesn’t give you the actual person’s name of who the fundholder was.

Steven: Makes sense. Okay. So, here’s the specific question of Kristin. Should they thank both entities? Should they thank the donor, which I think is an obvious yes, but they should they also thank the financial institution or the foundation? It seems like the foundation should also get thanked, right? Because that’s probably more of a local institution. But should they thank like Fidelity or any of those guys?

Greg: Definitely thank the donor. That’s a no-brainer for me. When it comes to the sponsoring organization, follow their rules and their guidance. I’ve seen some commercial institutions, I’ve seen Fidelity do this in some locations, that will specifically request that you not send them a thank you. As we said, they’re distributing, you know, $23 billion in donor advised fund gifts across the country on an annual basis. They don’t have an interest in receiving, you know, $23 billion thank you note.

Steven: Right.

Greg: Pay attention to the letter that comes with the gift because a lot of times that will specify any acknowledgement restrictions that they have. If they don’t specify that, it’s never a bad idea to send a general thank you acknowledgement to the address that’s listed in the gift.

Steven: Yeah. Maybe it’ll end up on the refrigerator in the Fidelity break room in there.

Greg: Correct. It’s also an opportunity. So, if there’s local information listed for Fidelity, back to, how do you get on their radar or how do you build a relationship, you can use that as an opportunity, but do pay attention to their restrictions. Because I’ve seen more than a few letters from the commercial institutions that say, “We know you want to thank the sponsoring organization, but we’re begging you, please don’t send it. Please don’t.”

Steven: Please don’t. That’s a good problem that, you know, that culture of thinking.

Greg: [inaudible 00:51:29].

Steven: What about the content of the thank you? Since some of these folks may not have specifically chosen your organization, should they maybe stay broad in the language of the thank you and not assume that, you know, there may actually be a connection between the donor and the organization that the gift ultimately goes towards?

Greg: I actually would go the opposite direction. I would [inaudible 00:51:56] that if your organization received a gift from a donor advised fund, that there was something about your unique mission that resonated with the institution or with the donor. So, I don’t think it’s a bad idea to address the acknowledgement, to address the thank you as though . . . the same way you would for a donor who walked through your doors with a check that there was something about your mission and programs that resonated with them and you’re grateful for that support.

The one guidance you do want to have is that, if you’re thanking the donor themselves, so, if you have access to their information and you’re sending them a thank you, you are not including information about it being tax-deductible. Because if you remember, the donor has already received a tax deduction. The sponsoring organization is handling that acknowledgement for them. The check that you received from the donor advised fund is not deductible for the individual.

Steven: Okay. So, that’s a more technical language. Yeah, that makes sense. Okay, cool. Well, I think that about covers the acknowledgement, but there’s lots of other questions in here. So, I’m going to try to get to some quickly. From Dana, Greg, you mentioned maybe putting the donor advised fund option on pledge cards. What should that look like? What have you seen work there specifically?

Greg: I’m calling it out directly. So, many of our supporters have donor advised fund. If you have a donor advised fund, please list the sponsoring organization and how we may best communicate with you about your donors-advised fund or a gift box of, “I wish to make a gift from my donor advised fund. Please, speak with my representative whose name is X.”

Steven: Okay, cool. I was . . .

Greg: And just, you know, the more you can call it out as an option, it’s sort of like you know, when we started . . . when websites became popular years ago and we talked about how it was important to put planned giving calls on your website to remind people that that’s not. When we talk about how it’s important to put, you know, a monthly recurring giving option on your website because it plants the seed in someone’s head, it’s the same thing with donor advised funds. You may believe it or not, you may have donors in your network, in your database, who have donor advised funds, but just haven’t thought about making a gift to your organization from that fund.

Steven: Right. They haven’t been asked. Yeah, makes sense. Speaking of planned giving, I was really struck by that stat in one of your slides. I think it was like 40% or 50% of people with DAFs with also have, yeah, the bequest. What should folks do in light of that statistic? Is there anything actionable you think they should be doing? Is it maybe, sending bequest marketing materials to people who have made those gifts or . . . ?

Greg: Certainly, a), I would keep it in mind. If you have personal access to who your givers are that are giving through donor advised funds, I would definitely keep that in mind in your stewardship plan for that person. I would also include information about your plan giving program in any acknowledgement or follow-up communications you have after receiving a donor advised fund gift.

Steven: That makes sense.

Greg: Again, you can link those too. That number struck me also. It was much higher than I thought it would be. But it does make sense intuitively. I mean, if someone is thoughtful enough about their philanthropic giving that they are creating a donor advised fund, they are more likely to also be thinking about what is their philanthropic legacy after they pass on that.

Steven: That makes sense. Plus, the average age. I think that you said the average age is around 54 or 55, right? So, that all is making sense.

Greg: Yes.

Steven: Cool. Well, we’re getting close to the hour and I want to give you the last word here. Maybe one last question. Here’s kind of an interesting one from Jennifer. Greg, any pros and cons between the financial firms and a community foundation as the accountholder or is one better at some things than the other? I know I don’t want to put you on the spot, but . . .

Greg: Right. You know, I think that’s such a personal decision. Also depends on your existing financial relationships. And so, if I already have a retirement account at Fidelity or if I already am invested in mutual funds through them and have a relationship with a broker there, it may be easier for me to house my charitable giving under that roof also. By contrast, if I want to keep my money local, if I already have a relationship with the community foundation, and I like the work that they’re doing, and I believe in the advice that they may give me as a philanthropist, you know, that may push me more towards the community foundation. I think it’s an intensely personal decision.

The one trend that we didn’t talk about as much is the rise of the single-issue charities. So, for some of the large . . . and I’m talking about the mega national nonprofit organizations like, you know, an American Red Cross or a Goodwill you know, they are investigating, should we become sponsoring organizations for donor advised funds, how would that impact our charitable giving efforts?

Steven: That makes sense. Wow. This is cool, Greg. I feel like I could talk to you for hours and hours and just keep digging into this stuff.

Greg: I love it. So, Steven, all of my contact information is on the last slide. It’ll go out I’m sure when you disclose the slides. But I love talking about this stuff. I’ve been talking about this particularly with boards, and executive and development teams a lot lately around the country. And I always love those conversations. So, I welcome people reaching out to me either by email, website, or on any of my social media.

Steven: Yeah, please do reach out. I know we didn’t get to all the questions. I’m so sorry about that. I didn’t mean to play favorites with anyone because there’s a lot of really good ones in here. This Bloomerang crew is usually a smart crew. So, this is [crosstalk 00:57:56].

Greg: It is a smart crew. They’re awesome.

Steven: Yeah. They’re awesome. So, do you reach out to Greg. Obviously, a wealth of knowledge, follow him on Twitter. And if you’ve got any retreat needs, hire him because he’s a really good facilitator as you can see. So, Greg, this is awesome. Thanks so much for doing this. I know you’re a busy guy, but thanks for coming on.

Greg: Steven, I appreciate it. I appreciate your team at Bloomerang too. You guys do a great job.

Steven: Oh, thanks.

Greg: You make so many resources available and accessible for nonprofits.

Steven: It doesn’t feel like work for us, so we love it. No worries. I’m going to pull up kind of what we got coming up next. We got some cool webinars coming up, including next week. We’re going to talk about Peer-to-Peer Fundraising. So, check that out. My buddy, Abby from Qgiv is going to join us. If you’ve never done a peer-to-peer fundraising campaign, or maybe you’re new to it, or you’ve done some, and didn’t quite go as you wanted, check this one out. Abby’s kind of the peer-to-peer queen, so it’s going to be a good one. Same time, same place, next Thursday at 2:00 p.m. Eastern. Totally free, totally educational. It’ll be a good one. So, hopefully, we’ll see you again on that session.

So, we will call it a day there. Look for an email from me with the slides and the recording. I’ll get that out this afternoon. And hopefully, we’ll talk to you again next week. So, have a good rest of your Thursday. Have a good weekend. Stay warm out there. And we will talk to you again soon. Bye now.

Donor Advised Funds

Kristen Hay

Kristen Hay

Marketing Manager at Bloomerang
Kristen Hay is the Marketing Manager at Bloomerang. From 2018 - 2020, she served as the Director of Communications for the Public Relations Society of America's local Hoosier chapter. Prior to that she served on several different committees and in committee chair roles.