Demystifying Donor Advised Funds (DAFs)

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

Greg Nielsen: Let’s do it.

Steven Shattuck: Awesome. Well, good afternoon, everyone, if you’re on the East Coast. Good morning if you’re out on 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’re all in the same boat, because we’ve got a great session planned for you. My name is Steven Shattuck, and I’m the Chief Engagement Officer over here at Bloomerang. I’ll be moderating today’s discussion, as always.

Just a couple of housekeeping items. We are recording this session, and I’ll be sending out the slides as well as the recording later this afternoon. So if you didn’t already get the slides, or you want to watch the recording later, or 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.

Most importantly, as you’re listening today, please feel free to use the 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 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. We’d love to answer your questions live.

If this is your first Bloomerang webinar, I want to say an extra special welcome to 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 past sessions on our blog. 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. If you are interested in that, or maybe thinking about switching software sometime soon, check us out and keep us in your mix of vendors you’re considering. You can even watch a quick video demo and see the software in action. Just check out our website and you’ll find that there.

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

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

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

Greg Nielsen: No, we should’ve grabbed lunch.

Steven Shattuck: 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 and a wealth of knowledge. If you 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. 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 hear this one.

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

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

Steven Shattuck: It looks like it’s working.

Greg Nielsen: Okay, we’re ready to go. We are going to be talking today about donor advised funds. 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 we could talk about with donor advised funds, but I’m not going to go down the rabbit hole of financial or accounting rules and regulations.

We’ll be talking at a high level about what donor advised funds are, so defining them. We’ll differentiate between donor advised funds and private foundations: 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? Then, who are the players? As we think about these fast-growing financial philanthropic vehicles, who is promoting them, and who is housing them? How do we get in touch with them? How do they work? We’ll cover tips for engagement. And at the end, we’re 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.

I’m starting with some highlights from Giving USA 2018, and I put this at the front end of the webinar because, as you’ll see when we talk about the growth of donor advised funds, it’s against a landscape of relatively flat charitable giving. We had $427.71 billion of charitable giving according to Giving USA 2018. While total charitable giving rose 0.7%, when you adjust that for inflation, total giving actually declined by 1.7%. Individual giving declined from 70% in 2017 to 68% in 2018. At the last bullet point on that slide, you can see how that breaks down across 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. It’s to show you that while we are going to talk about the tremendous, skyrocketing growth of donor advised funds as a giving vehicle, it’s against a backdrop of relatively flat charitable giving overall.

As we go through, I welcome any questions you have. Steven is going to pop in and 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. 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.

Donor advised funds are a giving vehicle that is established at a public charity. It allows donors to make a charitable contribution, receive an immediate tax deduction, and then recommend grants from the fund over time. I’m going to use Steven as my example throughout the presentation. 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 he has is to set up what we call a donor advised fund. It’s a giving vehicle. It’s a fund, just like you might have with a T. Rowe Price, or a Fidelity, or a Vanguard, that allows you to make a contribution to that fund. You, as the donor, receive an immediate tax deduction as though you were giving directly to charity. Then, over a period of time, you can recommend grants from the fund.

You see the graphic at the bottom. At a really simple level, donors contribute to the fund, theoretically the assets grow as they’re invested over time, and charities benefit as donors recommend grants from the fund. It’s obviously much more complicated than that, but at a high level, keep in mind those three things: donors contributing to a fund, assets growing over time, and donors recommending gifts and grants from the fund to qualified charities.

A lot of times when we think about a donor advised fund, we think just about cash. But donor advised fund assets can include cash, stock, real estate, and any number of other securities and financial vehicles deposited into a public charity.

A brief history: donor advised funds were first created in the 1930s. A lot of times we think of DAFs as a recent institution, as something that just showed up on our radar recently. But they were first created in the 1930s, and they were recognized with the Tax Reform Act of 1969. Where we really started to see growth in donor advised funds was in the 1990s. Today they are philanthropy’s fastest-growing vehicle. They account for 3% of all charitable giving, and that number continues to rise year over year, as you’ll see with some of the data coming up.

There are three categories of donor advised funds. There’s commercial, which you’ll also see referred to in the literature as national charities. There are community foundations, and there are single-issue charities. Let’s take each of them briefly.

The first category is commercial donor advised funds. These are the vehicles you see most prominently, such as Fidelity Charitable, Goldman Sachs Charitable Gift Fund, Schwab Charitable, and Vanguard Charitable. These were started by national financial services firms. Although they are separate organizations, even though they say Fidelity Charitable or Vanguard Charitable, they are actually established as nonprofit organizations. The assets in these funds are managed by the related investment company. So if your donor advised fund is held by Fidelity, Fidelity is managing those assets. These funds are responsible for much of the explosion in donor advised funds over the past few years. Their main selling points to donors include low investment fees relative to other sponsors and ease of use. Because they are institutions 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 donor advised funds.

The second category is community foundations. 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 those grantmakers have a good understanding of the area’s nonprofits, and they offer services such as family philanthropic consulting. 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. Whereas commercial donor advised funds tend to be agnostic about where the funds go, as do community foundations, single-issue donor advised funds encourage those who house their funds there to give to a particular cause or organization. We’re thinking here about schools or faith-based organizations. Cornell University has a donor advised fund, for example. The Jewish Federation of Cleveland is another one. Sometimes sponsors of these funds will stipulate that donors must steer a certain percentage of their gifts to an institution such as the university.

I mentioned earlier that donor advised funds are our fastest-growing philanthropic vehicle. With many of the nonprofits I work with, as I talk to their development directors and their CEOs, there’s a robust conversation in the boardroom and among the development staff about how to understand the growth in donor advised funds. Here are a couple of metrics. In 2018, donor advised funds reached new highs in all four of these measures: dollars contributed, which is dollars in the door at any of those institutions; dollars distributed, which is dollars out the door; value of assets under management; and number of accounts. By all the metrics you would want to review, donor advised funds are growing in popularity year over year.

You see on this slide the growth from 2017 to 2018. Contributions, which are donations made to donor advised funds at any of those three categories, were $30 billion in 2017, up to $37 billion. That’s an increase of $7 billion in contributions in just the one-year span from 2017 to 2018. There’s also an increase in the grants going out the door, 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 you may hear thrown around a lot when you’re talking about the growth of donor advised funds is “bunching.” Bunching, by definition, is consolidating tax-deductible charitable contributions that would normally be made over multiple years into a single tax year. Take, as an example, the tax reform that was passed in 2017, which, among other things, significantly elevated the threshold for the standard deduction. That reduced the number of itemizing taxpayers across the country. One strategy for people to still take advantage of the charitable deduction is what we call bunching.

Let’s go back to our example of Steven. If Steven is contemplating making $10,000 in charitable gifts over the next five years, and he does that as $2,000 a year, he may not be able to itemize his deductions. That may not push him into a tax bracket or a threshold where he can itemize. 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 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 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 used by both donors and financial institutions.

The next several slides show us in graph form exactly what we mean by the growing impact of donor advised funds. All of this data comes from the National Philanthropic Trust 2019 Donor-Advised Fund Report, which you can download for free right off their website. I encourage you to check out their site. On this first graph, you see contributions to donor advised funds expressed as a percentage of total individual giving. As recently as 2010, which for me feels like yesterday, but I recognize it was 10 years ago at this point, donor advised funds were down at 4.4% of total giving. Fast forward to 2018, and it has risen all the way to 12.7% of individual charitable giving. That’s a dramatic rise in the use of donor advised funds in carrying out philanthropic giving.

Another metric is charitable assets. In just that one-year window from 2017 to 2018, donor advised funds went from $112 billion in assets in 2017 to $121 billion in 2018, an 8% increase. Think back to our first slide, where we started with Giving USA and overall philanthropic giving being relatively flat. You see assets under management at donor advised funds going up by 8.3%, total contributions going up 20%, and total grant dollars going up 18.9%. Then you see the grant payout percentage. When you hear the term grant payout, that’s the percentage of assets under management at donor advised funds that is then working its way out into the community. You see that actually went down from 22.8% to 20.9% in 2018. That forms the basis of one of the critiques we’ll talk about in a little bit.

The next slide shows the total assets in donor advised funds. In 2014, there were $70 billion in assets, and that rose all the way to $121 billion in 2018. It’s a relatively short window of time, from 2014 to 2018, but you see the dramatic rise in total assets in donor advised funds.

Next slide: the total number of donor advised fund accounts. These are the actual number of donor advised funds that exist around the country. It went from 241,000 in 2014 all the way up to 728,000 in 2018. It was relatively flat in 2014, ‘15, and ‘16. Then ‘17 took a jump, and there was another jump between 2017 and 2018. What happened during that period? That’s 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. That’s largely responsible for the big jump you see from 469,000 in ‘17 all the way up to 728,000 in 2018.

The next set of slides talks about where that growth has come from. We talked about the three categories: the commercial folks, the community foundations, and the single-issue charities. You’ll see in the next couple of slides that most of the growth has come in the commercial space, from folks like the Vanguards that we’ve talked about. Community foundations were relatively flat from 2014 to 2018, from 66,000 to 77,000 accounts. Single-issue charities were also relatively flat, from 46,000 in 2014 to 57,000 in 2018. Next, though, you see the national charities, the commercial folks we talked about. Look at that dramatic growth from 129,000 in 2014 to 593,000 in 2018.

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

The next topic is understanding who controls the money in a donor advised fund. A lot of times we talk about donors to donor advised funds as though they are the sole factor in making that decision. In reality, legally and otherwise, the sponsoring organization controls the money. Once Steven makes his gift and opens a donor advised fund, in order to receive the tax benefit and the charitable deduction, he has to give up control of those funds. 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, the sponsoring organization 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 there is more and more pressure on sponsoring organizations to do so. We’ll talk a little 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. If you look at the chart on that page, one of the benefits of a donor advised fund to donors is an immediate startup with little to no cost. I can go to my community foundation or my commercial institution and set up a donor advised fund, if not within a day, then certainly within a short period of time. If I were to establish a traditional family foundation for myself, that could take months, and there could be legal costs in setting up the foundation and its infrastructure. So if I’m a donor 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. 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 are regulations that 5% of the net asset value of the foundation must be distributed annually. So that’s another difference: no required distribution from DAFs, versus 5% of net assets that must be distributed from a foundation annually.

Third, with a donor advised fund, I have the ability to make an anonymous gift. 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, I can make my gift completely anonymous with a donor advised fund. I cannot do so with a philanthropic foundation, which has detailed annual disclosures. If you’re dealing with a donor who has a strong desire for anonymity, that tends to push people toward the donor advised fund route rather than establishing a foundation.

Finally, with a donor advised fund, there tend to be few administrative tasks. With foundations, there are significant administrative tasks. One of the benefits of housing your donor advised fund at a community foundation, a single-issue charity, or a national commercial institution is that 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 require you to set up that infrastructure yourself and have someone to manage it. So these are the four key distinguishing factors at a really high level: for donor advised funds, an immediate startup, no required minimum distributions, the ability to have anonymity, and fewer administrative tasks.

A couple of other facts and figures are 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. As you’re thinking about who in your network, or in your nonprofit’s donor base, may have a donor advised fund, think of your volunteers. According to the data, 79% of donor advised fund holders also volunteer at a charity. There’s not necessarily a connection between where they recommend their funds be distributed and where they volunteer. But you can extrapolate that if they are devoting their time to an organization, they may also be willing to devote their philanthropic assets and gifts.

Now, motivations. This also comes from the Fidelity Charitable Giving Report, which surveyed thousands of donor advised fund holders. When they asked about motivations for creating a donor advised fund, 62% stated it was to sustain their giving through retirement. For example, during their working years, they were making annual charitable contributions to an organization, and they wanted to sustain that level of philanthropic giving through their retirement years. The donor advised fund provided a vehicle to do that.

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

Sixty-eight percent wanted time to decide where to give. Another advantage of a donor advised fund is that I can open that fund with $20,000 or $25,000 this year, and perhaps I don’t know where I want to direct those funds. It gives me time as a philanthropist and donor to investigate different organizations, to spread out my contributions over time, and to take a period of reflection to see where I want to put my money. Twenty-four percent had received a year-end bonus, and 26% wanted to include family in giving.

As we think about legacy giving, and families passing on charitable giving from one generation to another, the donor advised fund provides a mechanism to do that. If I want to involve my family in a culture of philanthropy, a donor advised fund, as an alternative to a family foundation, may provide a mechanism to do that. So as nonprofit leaders and development directors, think about reaching out to donor advised fund holders, and keep these motivations in mind as you’re having those conversations with potential and existing donors.

The nonprofit perspective 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, graphs, and data I shared with you earlier. There’s a lot of talk about why it makes sense for donors, why it’s a good thing for donors, and why it may not be a good thing for communities. What’s missing is the nonprofit perspective. That’s why I was thrilled to see the Center for Effective Philanthropy, CEP, recently conduct a study to capture nonprofit leaders’ voices on the growth of donor advised funds. How is this exponential growth impacting nonprofit leaders and organizations?

They asked four fundamental questions. What are nonprofits’ preferences between the types of donor advised fund sponsoring organizations? Between national commercial institutions, community foundations, and single-issue charities, do nonprofit leaders have a preference when it comes to receiving gifts from donor advised funds? What are the biggest advantages of receiving funding through donor advised funds? What are the biggest disadvantages? And how aware are nonprofit leaders of the debates and critiques surrounding DAFs?

Let me go through some of their findings really briefly. First, do nonprofits have a preference between the types of sponsoring organizations? Most, 80% of nonprofit CEOs, indicated they did not have a preference. But among the 20% who do, almost all preferred community foundations. According to the study, there was a deeper, more personal relationship between nonprofit leaders and the community foundation.

Second, what are the biggest advantages of receiving funding through donor advised funds? The top advantage nonprofit CEOs cited, at 22%, was that donor advised funds involve less of an administrative burden for nonprofits. In their own words, nonprofits said, “The DAF handles all tax-related paperwork. There’s less work and cultivation of the donor, as they seem to come unsolicited more frequently.” And finally, there’s very little additional administrative reporting burden. With 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. The donor advised fund tends to be simpler in its administration and simpler in its communication with the sponsoring organization.

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

And 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. We’ll talk about what that means.

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

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

Third, remember planned giving. This data is also striking to me: 42% of DAF holders also have a bequest or legacy giving vehicle. Think about it. If they have gone to the effort of creating a donor advised fund, they obviously think heavily about charitable giving, and philanthropic planning is important to them. The data shows that 42% of those account holders already have a remember planned giving vehicle in place, such as a bequest. You’re talking about relatively sophisticated givers, so you can have a conversation with them about planned giving as you deepen engagement.

Other tips include mentioning the option in all of your marketing materials. If you want to appeal to DAF holders, make sure you’re mentioning it as an option in all the marketing materials you have out there. There is also a website called DAF Direct. I have not worked with them directly, and 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. If you want more information, you can google DAF Direct.

Ensure that your information is correct. When you think about the sponsoring organizations in your community, think about the community foundation and some of the commercial institutions. Do 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? If they are thinking of routing an anonymous gift to you, will it actually get to you? Make sure your information is accurate.

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

Next, build relationships with DAF sponsors. As I mentioned a minute ago, a third of DAF holders will ask their sponsor for advice when making recommendations. I talked about the importance of building relationships with the DAF holder, the donor who makes that initial gift. It’s equally important to build relationships with the sponsoring organizations. 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?” you want that sponsoring organization to at least be aware of your nonprofit, the work you’re doing, and the impact you’re having on the community.

Next, it’s important to know your nonprofit. Think about the questions a sponsoring organization is likely to ask in that get-to-know-you phase. 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 from the source listed at the bottom of the slide, Fidelity actually shares these exact questions with its donor advised fund holders as a tool for vetting potential nonprofit organizations they may recommend grants to. 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 vetting them, here are some sample questions you can ask.” 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. First, can DAF assets be used to fulfill a pledge? This question comes up all the time. 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 issued a notice that clarified 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 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.

The next frequent question is, can DAF assets pay for a table at the gala? If Steven wants to attend your gala, can he direct assets from his donor advised fund to pay for a table? The IRS has given us rules on galas and other events to look to. Because donors are receiving something of benefit from the gala, such as food and entertainment, 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 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.

As we wrap up, I want to touch on some critiques of donor advised funds. We’ve talked a lot about the benefits, and I think it’s also important to pay attention to the legitimate critiques that are out there. By far the most prominent critique is the reference to donor advised funds as “the waiting room of philanthropy.” That alludes to what I mentioned earlier: assets that have received favorable tax treatment, because you received a tax deduction for donating them to a donor advised fund, may never reach the community. Because there’s no required minimum distribution from a donor advised fund, assets that I may previously have been directing to nonprofits but am now directing to my donor advised fund can just sit there without ever making their way out into the community. A number of critics have put forth proposals to require minimum distributions or a spend-down of donor advised funds over time.

The second critique is declining payout rates. We talked about how the payout rate has gone from 22% down to 20%. If that trend continues, there is more concern that those funds are being amassed at institutions like community foundations without ever making their way out into the community to benefit your nonprofits.

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

Finally, there are a couple of proposed reforms. They have mainly originated in California, but they are now making their way into the national dialogue. They would require mandatory distribution within a fixed number of years, delay the deduction until the funds are paid out, or change the way management fees are determined.

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

Steven Shattuck: That was awesome, Greg. Thanks for being here and sharing all that knowledge. That was pretty comprehensive. I think it covered everything I had on my checklist. We got quite a few questions, and we’ll try to get to all of them before 3:00. Greg, I’ll roll through these. Here’s a clarifying question from Sharon. DAFs are not actually their own 501(c)(3)s, right? They don’t have that actual designation.

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

Steven Shattuck: Got it. Cool, I thought 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, or should they consult someone up there?

Greg Nielsen: 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 say that if you are in Canada, 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 Shattuck: Okay, cool. Here’s an interesting one from Susan. What happens when the fund donor passes away? Does it stay with the foundation, or what goes on there?

Greg Nielsen: Correct. The foundation still owns the assets. There may be provisions within the donor advised fund agreement that allow the heirs of that donor to continue making recommendations. But again, it’s important to remember who owns and controls the funds, and that’s the sponsoring organization. Even when the original donor passes away, it is still the sponsoring organization that controls those assets.

Steven Shattuck: Until they all get distributed, yeah.

Greg Nielsen: Until they all get distributed. Every institution handles donor advised funds a little differently, so it’s largely going to be a product of the contract between the donor and the sponsoring organization. In many of those contracts that I’ve seen, there are provisions for what happens when the donor passes away. Do those funds get merged into the community foundation’s general assets, or do they remain in the donor advised fund for the heirs to continue making recommendations?

Steven Shattuck: Okay, so it’ll vary. That makes sense. Here’s an interesting one from Mark. Mark has some donors who give outside their donor advised funds and also through the DAF. They’re making direct contributions and also contributing through a DAF, so they get the immediate tax benefits for both. What should Mark do with those people? Should he acknowledge that that’s happening through both ends, or any tips there?

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

Steven Shattuck: What about communicating the tax differences? It seems like one has a different treatment. Should the org do that?

Greg Nielsen: Any gift that comes from the donor’s personal giving, put simply, if the check comes from John Doe, you are certainly sending John Doe the thank you and the tax deduction letter. If it is coming from the sponsoring organization, 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 Shattuck: Yep. Well, I’ve got a lot of questions about that, but we’ll get to them. There was an interesting question about getting on the radar of those organizations that hold the funds and distribute the funds to nonprofits. Is that something nonprofits should aspire to do?

Greg Nielsen: Absolutely.

Steven Shattuck: Okay. And how should they?

Greg Nielsen: I’ll give you some easier tips, because I know it can sound daunting, and no one wants to go on a commercial website and try to figure out how to navigate that landscape. An easy tip is to start local. That’s thinking about community outreach for your nonprofit anyway. You’re already reaching out to corporations and groups in the community, so think about the financial institutions that exist in your community. 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?

The same way you reach out to representatives from corporations 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 a tour, or if you just want to sit down over a cup of coffee. Reach out to the local branch and say, “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. You don’t want to go down the rabbit hole of trying to figure out who to talk to at a national level.

Steven Shattuck: That makes sense. Start local. Okay, so acknowledging. Given the rise in popularity that you covered early on, nonprofits should be on the lookout for gifts from financial institutions and from the community foundation. Is that the biggest signal that it might have come from a donor advised fund? Does it always say that it came from a DAF? What should they be looking for?

Greg Nielsen: It doesn’t always say that it comes from a DAF. 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 start receiving gifts from the commercial institutions, a Vanguard, a Fidelity, a Schwab, any of those 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. Many times, though, it does articulate it directly, even if it doesn’t give you the actual name of the fundholder.

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

Greg Nielsen: 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. They’re distributing $23 billion in donor advised fund gifts across the country on an annual basis. They don’t have an interest in receiving $23 billion worth of thank-you notes.

Steven Shattuck: Right.

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

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

Greg Nielsen: Correct. It’s also an opportunity. If there’s local information listed for Fidelity, back to how you get on their radar or 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 Shattuck: Please don’t. That’s a good problem, that culture of thinking.

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

Greg Nielsen: I actually would go the opposite direction. I would [inaudible] that if your organization received a gift from a donor advised fund, there was something about your unique mission that resonated with the institution or with the donor. I don’t think it’s a bad idea to address the thank you 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 follow is that if you’re thanking the donor themselves, so you have access to their information and you’re sending them a thank you, you do not include information about it being tax deductible. 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 Shattuck: Okay, so that’s more technical language. That makes sense. I think that about covers the acknowledgement, but there are 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 Nielsen: I’m calling it out directly. Something like, “Many of our supporters have donor advised funds. If you have a donor advised fund, please list the sponsoring organization and how we may best communicate with you about your donor advised fund.” Or a gift box that says, “I wish to make a gift from my donor advised fund. Please speak with my representative, whose name is X.”

Steven Shattuck: Okay, cool.

Greg Nielsen: The more you can call it out as an option, the better. It’s like 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. When we talk about how it’s important to put a monthly recurring giving option on your website, it plants the seed in someone’s head. It’s the same thing with donor advised funds. 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 Shattuck: Right. They haven’t been asked. That makes sense. Speaking of planned giving, I was really struck by that stat in one of your slides, I think it was 40% or 50% of people with DAFs also have a bequest. What should folks do in light of that statistic? Is there anything actionable? Is it sending bequest marketing materials to people who have made those gifts?

Greg Nielsen: Certainly, 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 planned giving program in any acknowledgement or follow-up communications you have after receiving a donor advised fund gift. That number struck me also. It was much higher than I thought it would be. But it does make sense intuitively. 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 their philanthropic legacy after they pass on.

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

Greg Nielsen: Yes.

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

Greg Nielsen: I think that’s such a personal decision. It also depends on your existing financial relationships. If I already have a retirement account at Fidelity, or I’m already 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 they’re doing, and I believe in the advice they may give me as a philanthropist, that may push me more toward the community foundation. I think it’s an intensely personal decision.

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

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

Steven Shattuck: 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 are a lot of really good ones in here. This Bloomerang crew is usually a smart crew, so this is [crosstalk].

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

Steven Shattuck: They’re awesome. So do 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. Greg, this is awesome. Thanks so much for doing this. I know you’re a busy guy, but thanks for coming on.

Greg Nielsen: Steven, I appreciate it. I appreciate your team at Bloomerang too. You guys do a great job. You make so many resources available and accessible for nonprofits.

Steven Shattuck: It doesn’t feel like work for us, so we love it. No worries. I’m going to pull up what we’ve got coming up next. We have some cool webinars coming up, including next week, when we’re going to talk about peer-to-peer fundraising campaign best practices. My buddy Abby from Bloomerang Fundraising (formerly 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 they didn’t quite go as you wanted, check this one out. Abby’s 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. Hopefully we’ll see you again on that session.

We’ll 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. Have a good rest of your Thursday. Have a good weekend. Stay warm out there. We’ll talk to you again soon. Bye now.