Assignment 6: Donor Advised Funds and the Organizations Offering Them Flashcards
1
Q
Donor Advised Funds
A
- Donor makes irrevocable contribution to a nonprofit org that administers a “donor advised fund”
- Receives an immediate income tax deduction (qualifies for public charity deduction limits)
- Donor or a donor-appointed adviso advises on the investment and/or distribution of the assets in the account
- Some charities will allow named beneficiaries to assume an advisory role after the death of the donor
- Donor recommends charitable grants based on his/her timetable
- Grants support 501c3 ors; the fund sponsor checks make sure recipients are on the IRS list of approved charities
- Sponsoring org generally follows the donor’s recommendations, but is not legally required to do so
2
Q
DAF contributions growing
A
Giving to donor advised funds increased to 12.7% total giving in 2018 and is still growing
3
Q
DAF Sponsors
A
- Community Foundation
- National Gift Funds (offered through financial firms like Fidelity, Schwab, Vanguard, etc.)
- Single-Issue (National Jewish Federation, Catholic community foundations, hospitals, universities, similar institutions)
4
Q
Comparison by Sponsor Types
A
- Even though there are far more community foundations than other sponsor types, national charities hold the lion’s share of number of DAFs (593,356) and represent the largest total charitable assets ($72B)
- Community foundations average DAF size far exceeds other sponsor types: $438,561-CF; $121,937-NC; $262,075 SI
- All sponsor types far exceed payout rate as compared to that of private foundation 5% requirement: 16.6% CF; 22.2% NC; 28.2% SI
5
Q
DAF vs. PF
A
- 9 times more DAFs than PF (2017: 469,331 DAFs v. 80,000 PFs)
- PF have more assets than DAFs (2017: $112B DAF v. $823B PF)
- PFs also have more total grant dollars (2017: $19.7B DAF v. $49.5B PF)
6
Q
Average vs. Median
A
- Average size of a DAF account: $166,653
- Median size of Fidelity DAF account: $20,707
- 54% less than $25,000
- 37% between $25,000-$250,000
- 9% $250,000+
7
Q
Noncash Donations at Fidelity
A
63% of Fidelity charitable donor contributions were made with noncash assets in 2018
- 16% non-publicly traded assets
- 47% publicly traded assets
- 37% cash
60% in 2019
- More than half in publicly traded securities
8
Q
DAF Advantages
A
- Easy to establish
- Avoid the legal work to set up a foundation and the administrative work of running one
- Sponsoring org can accept a range of asset types: cash, publicly traded stock, real estate, etc.
- Donor receives immediate tax deduction
- Min. required to set up a DAF is low–many times $10,000
- Donor can give in relatively small amounts
9
Q
DAF Privacy
A
- Foundations require public disclosure of grants, but with a DAF, givign can be done anonymously (gifts to controversial causes, need for privacy for donors who want to stay off lists, avoid public attention, etc)
- Privacy and confidentiality are so important for some wealthy families that a family foundation is ruled out in favor of a DAF
10
Q
DAF Uses
A
- Can be considered like a family foundation for those of more modest means
- Can serve at “training wheels” for a future private family foundation
- Good way to engage children in giving
- Can be used in high-income years to set money aside for future gifts
- May be used in business transition planning
11
Q
DAF When to Consider
A
- If the donor has assets other than cash or publicly traded stock, the fund will accept:
- Closely held business interests
- Raw land
- Commodities
- Patents
- Timber
- Other such complex assets
12
Q
Donors Approaching Retirement
A
- More than half of donors establish a DAF in their 50s
- The average age for establishing a DAF is 55
13
Q
Conversion from PF to DAF
A
- This is a trend
- Asset size
- Changing goals
- Fewer administrative responsibilities
- DAF permits anonymous giving
14
Q
DAF Caveats
A
- DAF may not be used for quid pro quo donations (gala, events, etc.)
- May not support lobbying political campaigns, or other political activities
- Generally, DAF sponsors will not allow grants to foreign charities, but some will try and may charge accordingly
15
Q
DAF and Pledges
A
- Basically, pledges can be paid from a DAF as long as the sponsoring organization and the donor don’t refer to it as a pledge
“Certain distributions from a DAF that the recipient charity treats as fulfilling a pledge made by a donor or donor advisor would not result in a more than incidental benefit under section 4967, provided that the sponsoring org made no reference to the existence of any individual’s pledge when making the DAF distribution.”
16
Q
DAF concerns to industry
A
- Sometimes, because of privacy, it’s difficult for a charity to identify the donor(s) when a gift comes from a DAF.
- Stewardship of a donor can be a challenge
- However, 88% of Fidelity’s grants in 2019 included names and addresses of donors on grants; 9% include giving account name only; 3% remain anonymous
- Concern about hoarding money in a DAF and never granting from it (but the pay out rate from a DAF continues to be higher than the 5% min. payout rate of a PF–21% in 2018 from DAFs)
- Hoarding funds in DAFs continues to be controversiala
17
Q
DAF Funds flow out
A
- Three-quarters of grant dollars are distributed within five years
- 74% of grants went to charities donors had previously supported (new grant: 26%; regrant: 48%; scheduled grant: 26%)
18
Q
Outlook for DAFs after Tax Reform
A
- Number of itemizers fell from 46M to 19M
- Charitable donations estimated to be reduced by 5%
- Individual giving declined by 1.1% in 2018
- Gifts of $1,000+ increased by 2.6%
- Gifts between $250 and $999 fell by 4%
- Gifts under $250 dropped by more than 4%
19
Q
Charitable Bunching
A
DAFs could be a good vehicle to use for charitable bunching as a result of tax reform
- Instead of $5,000 a year, give $50,000 to a DAF, then give the usual $5,000 a year in charitable gifts out of the DAF.
- May be beneficial for those bunching their gifts, who also want to maintain their annual giving
20
Q
Community Foundations
A
- Tax exempt public charities serving people who share a common interest
- Often are “area foundations” that are geographically centered, with their focus being to improving the quality of life in a specific geographic area
- Individuals, families, businesses, orgs create permanent charitable funds that help their region meet the challenges of changing times.
- The foundation invests and administers the funds
- All community foundations are overseen by a volunteer board of leading citizens and run by professionals with expertise in identifying their communities’ needs
21
Q
CF Stats
A
- 763 community foundations in the US
- 2018 data:
- $86B in assets
- $10.5B in gifts
- $9B in grants
22
Q
CF Offerings/Services
A
Funds:
- Donor Advised Funds
- Scholarship Funds
- Designated Funds
- Field of Interest Funds
- Unrestricted endowments
- Endowments held for other nonprofits
Other tools:
- Supporting orgs
Services:
- Donor education
- Donor networks
- Grant assistance
- Scholarship administration
- Vetting nonprofits
- Family philanthropy support
- Fiscal agency (back office) for nonprofits
23
Q
Advisor Referrals
A
- Mature community foundations may get 40-80% of new funds from advisor referrals
- Much of the balance comes from referrals from donors who were referred by advisors
- Can advisors get paid on funds they bring to the CF? Depends on CF policy and on amount
- Advisors should check with compliance if possible
24
Q
DAFs at CF
A
- Beneficial to donors who want advice about grantmaking
- Donors like being able to see the bricks and mortar locally and meet with the staff
25
Unrestricted Funds
- Established so that the CF staff can grant the money in accordance with their best judgement. "Donors may choose to benefit our community as a whole, leaving their grants to Foundation's board and our expert staff..."
26
Field of Interest Funds
- Donor specifies a field of interest for a fund that the donor can name (You specify the interest area, name it and provide cash or assets to fund)
- Others can give too
- "We at the CF steer the grants to the best organizations in your interest area"
Common FOI funds:
-Aging, AIDS/HIV, Covid-19, Animals, Arts, Basic Human Needs, Children, Education, Community Development, Conservation, Disaster Relief, Historic preservation, Mental Health, Racial and gender equity
27
Designated Funds
- An endowment to hold assets permanently for a named charity
- Income is distributed based on the schedule and criteria established for the fund
"An outsourced endowment for a charity you select; Good for small charities not able to manage their own endowment; If the charity fails, the fund will continue to benefit one like it"--CF variance power
28
Scholarship Funds
- CFs can set up and administer these for a donor, subject to certain minimums/fees
- The donor can name the scholarship
- CF may help publicize the scholarship and manage the application process
- Donors can establish guidelines/critera and an advisory committee to help with the selection
- PFs are required to secure advance approval of their procedures for making scholarship grants to individuals
29
CF Donor Services
- Fund investment statement
- Grant processing
- Briefings and site visits
- Research of topics and nonprofits
- Creation of funding collaboratives/giving circles
- Match funder's interests with nonprofits' capabilities
30
Family Philanthropy Services
- Events for family, friends and colleagues
- Youth education in philanthropy
- Facilitation of family meetings
- Formation of a philanthropic plan
- Referrals to resources in such areas as business succession
31
Supporting Organizations
- Some CFs partner with supporting orgs, sometimes allowing SOs to be established under the CFs wing
- Silicon Valley Community Foundation
Skoll Fund (Ebay founder) is a SO @SVCF ($563M)
Skoll Foundation is a PF ($564M)
32
Four CF operating models
CFs do all of these in differing proportions. Typically influenced by asset size and external environment.
1. Donor Focused (DAFs, Designated Funds)
2. Grant Focused (Unrestricted, Field of Interest)
3. Fiscal Agent (Agency endowment, short-term pass-throughs, Scholarship Funds, Fundraising Funds)
4. Leadership (Community convener, community catalyst)
- CFs differ greatly by community
- 10% of CFs (60) reported a decline in charitable assets. DAFs in those 60 CFs represented 36% of total charitable assets in CFs
33
CF not just geographic
- CFs or "area foundations" as defined by Council on Foundations, serve a particular geographical area
- But there are also variants that serve an identity throughout the country, or an identity within a particular area. Examples include:
* National Christian Foundation
* Presbyterian Foundation
* Astracea Foundation and Horizons Fdn (LGBTQ)
* Latino Community Foundation
* Center for Arab American Philanthropy
* Catholic Community Foundation
34
Note on legal status
- Some are CF per se
- Others are agencies of a public charity, such as a religious org
- Regardless, they provide services like those offered by CFs (legacy planning, DAFs, Advice on grants, Building community, etc.)
35
Trends and Considerations
CFs and Covid-19
- More than 500 CFs created relief funds to support those affected by Covid-19 (Seattle Foundation spearheaded the Covid-19 Response Fund with partners and raised $20M)
- As of June 1, 2020, $882.8M have been mobilized,
$462M granted out
36
Fidelity Charitable and Covid-19
Fidelity survey on Covid-19 and philanthropy
- 25% of donors plan to increase their donations
- 46% of millennials are more likely to step up their donations, compared to 25% of Gen-X and 14% of baby boomers
- 32% of donors say they don't have the information they need to understand where they can direct their support effectively
- As of April 8, 2020, more than $100 million in grants from DAFs were recommended to over 4,500 nonprofits in response to Covid-19
37
DAF vs. PF--Review
Exempt status: DAF--public charity status/PF--private charity
Deduction limits: DAF--60%, 30% of AGI/PF--30%, 20% of AGI; all but public stock limited to basis
Donor Control: DAF--Influence short of control/PF--Significant control
Minimum pay-out: DAF--Non other than those imposed by sponsor/PF--5% of assets each year
Start-up: DAF--As easy as mutual fund/PF--Entity must be established with own tax-exempt status
Minimum size: DAF--Usually $10,000/PF--$1M - $5M
Annual taxes: DAF--None/PF--Excise tax (1.39%) on net investment income
Annual filings: DAF--None/PF--990-PF
Admin: DAF--None/PF--Must secure its own services
