By Lynn Sygiel, editor, Charitable Advisors
Michele Thomas Dole has spent her career helping others realize their philanthropic dreams.
During the day, she is a senior trust officer at Fifth Third Private Bank. She advises clients about trust administration and estate planning, and builds client relationships to help accomplish their financial goals. For the past 15 years, outside of work, she has been an adjunct faculty member at the Lilly School of Philanthropy and has helped design curriculum for both the school and the Women’s Philanthropy Institute.
She admits much has changed in the field of philanthropy, and her daily work experience keeps her teaching relevant. Among the most striking change during her tenure is the ubiquity of donor-advised funds (DAF).
Last year, the number of donor-advised funds in the U.S. rose to nearly a half million. Some predict that in the next five years, donor-advised funds will be among the top five U.S. charities. Given this growth, she believes nonprofit staffs and boards should be well versed in the nuances of this tool.
“It is astonishing to me how pervasive donor-advised funds are. It feels like they are touching every aspect of charities. They’re just so much more commonplace than they were 10 years ago,” said Dole. And her students have kept pace. She finds that they are wholly aware of donor-advised funds and many have stewarded donations made with these grants.
Established and managed mainly through community foundations and Jewish Federations in the mid-1930s, for decades they were typically known as community trusts. It wasn’t until some 60 years later that national sponsors emerged. Fidelity Charitable was the first, according to Tony Oommen, a planning consultant for the company. He is one of 12 professional advisers for the company and is based in Chicago.
With the advent of national charity sponsors, donors everywhere had access to this tool, however, it wasn’t until 2006 that it burgeoned.
“Prior to the last 10 years, donor-advised funds weren’t really on the radar of most people. This was in part because there was no actual definition of a donor-advised fund in the IRS code until 2006 with the enactment of the Pension Protection Act.
“Before that it was really just a program within a public charity, where a donor contributed and then recommended where those grants were going,” said Oommen, who has been a financial adviser for over two decades.
“I think that’s where it really picked up. People became more aware that this could be something that could simplify charitable giving. In Fidelity’s case, it was based on the idea of democratizing charitable giving. And Fidelity, as a private company, could take company capital and sink it into a nonprofit to provide resources to develop a program.”
Nationally, contributions to donor-advised funds have increased as a share of total giving over the past decade. For 2017, donors contributed $29.23 billion, or the equivalent of 10.2 percent of individual giving.
The 2006 IRS definition is a legal statute, specifically defining an account or program. The Treasury Department followed with a study to determine if there were abuses or potential abuses in order to craft future legislation and regulations. The study results released in 2011 found no major infractions, Oommen said.
Since then, what donor-advised fund sponsors have been waiting for are potential regulations. The most meaningful IRS guidance, according to Oommen, came last December when the IRS released a notice, known as 2017-73. The notice sought public comments on excise taxes in certain situations. Actual regulations, however, have not yet been released.
Interestingly, Indiana the 17th largest state by population, ranks fourth in the U.S. for donor-advised fund charitable sponsors, according to the National Philanthropic Trust report. There are 58 in the state.
In Indiana, the Lilly Endowment began its GIFT Initiative in 1990 to launch and develop community foundations across Indiana, which contributed heavily to the number. Community foundation program officers can be eyes and ears on the ground.
Dole cited a recent family that was in process of establishing a donor-advised fund. They hadn’t determined their primary areas of interest nor the charities they wanted to support. She recommended the community foundation establish the fund because as a local foundation it would know the family’s ‘backyard.’ A program officer would know whom to call at the local charities if the family wanted to tour to learn more. She also recommended that the family prepare questions before the tour.
“For people who want an opportunity to teach and impart their family’s values on the next generation, donor-advised funds are another tool that can bring families together to do the kind of thoughtful philanthropy they want to.”
According to Oommen, the main reason this vehicle has become more popular is that it cuts down on the red tape and makes charitable giving simpler. It provides one receipt for all annual gifts and reduces the barriers for people who want to make a difference and execute their good intentions. But he sees it as more than that.
“It’s easy and tax efficient,” Oommen said. “The vast majority of people that give money to charity give cash. But cash is the most expensive asset to give to charity because in almost all cases, the donor has had to realize taxable income or just ordinary income or capital gains tax to free up cash to give.”
With a donor-advised fund, contributors can choose appreciated long-term capital asset instead. The charity sponsor can sell it and then liquid assets are available for grant making.
“A lot of people don’t get good advice, and they never really run through the math of what a difference that makes,” he said.
The second reason, according to Oommen, is that an individual can give more in years when it’s tax advantageous to do so and set aside money for future giving. Some people, too, can set aside a retirement distribution by giving income that is being taxed higher while they are still working and set aside for future distributions.
“So the implication of that is that you can give more in a year when it’s advantageous to you to do so from a tax perspective and set aside money for future distributions to charities,” he said. “The whole idea is simplicity.”
In that vein, Fidelity banded together with three other donor-advised fund sponsors – Schwab Charitable, Kansas City Community Foundation and BNY Mellon Charitable — to create a widget. A nonprofit can add it to its website. Called DAF direct http://dafdirect.org/, when hyperlinked, it preloads the charity’s information for the donor and all the donor has to do is key stroke the dollar amount.
Oommen believes this trend of donor-advised funds is going to continue and will increase overall giving. During an economic recession, he said, charitable giving dips. So when times are good, donors can set aside money that can be distributed and help to offset that dip.
But even as popular as these funds are, donors don’t necessarily understand the potential.
“I would say that it is the charity’s duty to understand how to raise funds from people who have these DAFs or will be setting them up. Get educated about it and how the process works. Talk to your donors about why they are using them. Understand the language of those professional advisers.
“Track donors who are making grants from donor-advised funds separately. Somebody who has set up a donor-advised fund account has put some thought in and probably is getting some advice and setting aside money strategically and intentionally for a future distribution.”
It is important, he said, to talk about testamentary transfers using a will or trust. Often he said that gift officers and estate planning attorneys miss donor-advised funds because they aren’t included in the intake questionnaire for a new client.
“It’s just not part of the taxable estate that’s governed.”
But the bottom line is it’s good all around. Oommen emphasizes that Fidelity’s goal is to help increase overall the amount that’s given in the U.S. The percent of GDP – 2.1 percent — has been roughly the same for the past 20 years.
“If that could just move from 2.1 to 2.5 percent of GDP that would be about another $80 million for charitable giving and that’s the concept of growing the pie rather than just slicing up a finite pie.”