Donor-advised funds keep growing in assets
The amount of total assets under management in donor-advised funds grew 9.7 percent to more than $85 billion last year, as an 80-year-old vehicle for philanthropy and charitable giving continues to grow in popularity.
The 2017 Donor-Advised Fund Report, the 11th annual report from the National Philanthropic Trust, found that grants from DAFs to qualified nonprofits grew 10.4 percent to a record level of $15.75 billion. DAFs remain the fastest-growing giving vehicle in the U.S., with 285,000 individual donor-advised fund accounts, a 6.9 percent increase from the prior year.
“The popularity is continuing to grow,” National Philanthropic Trust CEO Eileen Heisman told Accounting Today. “The grants went up over 10 percent. The AUM is up almost 10 percent. If you just looked at any growth of any industry, you wouldn’t expect to see double digits forever. Even though this vehicle has been around for over 80 years, the popularity in the last few years is continuing to skyrocket. It’s been meteoric growth. Ten or 12 years ago, we weren’t seeing anywhere near these kinds of numbers. I think technology helps and financial service companies being involved in distributing it helps.”
California, Massachusetts and Pennsylvania had the most DAF accounts, while Nebraska experienced the most significant growth in accounts.
“It’s because Fidelity is headquartered in Massachusetts, and Vanguard and NPT are headquartered in Pennsylvania, and Schwab is headquartered in California, as is the Silicon Valley Community Foundation, so some of the largest providers are concentrated in those states,” said Heisman. “I think that’s how the state growth gets explained. It’s really dictated by where the national programs are residing and the largest community foundations in California.”
Millennials are beginning to get involved with donor-advised funds but still aren’t heavily invested in them. “The oldest millennials are starting to become donors,” said Heisman. “We’re not seeing them in large numbers yet, but we’re certainly seeing their effect on philanthropy in general. We expect that as they start accumulating more wealth than they need to live, they’re going to start adopting donor-advised funds as a really easy to use tool. Most donor-advised funds, you can actually manage on your phone or your tablet. For the millennials it’s a really well suited tool. While they’re still a little bit young to have that level of excess wealth, we’re seeing more and more of them come in, and they’re certainly excited about philanthropy. I think that generation is going to be really engaged, and I’d say 10 years from now, we’ll probably have a large number.”
The Giving Tuesday philanthropic campaign is attracting more attention to charities, as a follow-up to yearly shopping staples like Black Friday, Small Business Saturday and Cyber Monday.
“I think Giving Tuesday is going to become a part of the fabric of giving, and then people aren’t going to remember what it was like not to have it,” said Heisman. “We’ve really seen a lot of activity with online giving in general on Giving Tuesday, and we often see a little bit of a spike of donor-advised fund grant requests. I think charities have gotten really smart about how to use Giving Tuesday to launch giving season for their year-end campaigns, so it’s a nice very concrete starting point. If you’re a Girl Scout troop or a community group or a boys or girls club, it’s a nice way to get kids to think about what it means to be living in America at this moment in time. It’s not all about buying things for the holidays. It’s also about giving back.”
Three years ago, the Ice Bucket Challenge helped raise millions of dollars for the ALS Association and other charities helping victims of amyotrophic lateral sclerosis, also known as Lou Gehrig’s disease. Heisman doesn’t see a similar trend this year, though crowdfunding campaigns are growing in popularity.
“There’s been a lot of use of crowdfunding and online giving of small amounts by different people,” she said. “Universities have deployed it. Single-issue health care like the American Heart Association has deployed it. What we’ve seen is a lot of short work bursts of crowdfunding for different kinds of projects. A museum in Philadelphia used it to try to get the Volkswagen bus that was used by the Grateful Dead because they had a history of rock and roll exhibit, and they did a crowdfunding project for that. Crowdfunding has become really popular if you have a single very attractive fun thing, so you’ll go online and you can raise $100,000 in a week. Nothing has captured the imagination like the Ice Bucket, but some of these small or medium-size campaigns have been very effective.”
GoFundMe and Omaze have also been helping raise funds for various causes.
“I think the GoFundMe campaigns give people a reason to want to give in short bursts without a lot of commitment in the long run,” said Heisman. “Part of the challenge of a charity is if these donors are around, how do you keep them involved?”
Cryptocurrency and Illiquid Assets
The use of cryptocurrencies such as bitcoin has also been a growing trend in charitable giving.
“If you had asked me three years ago about cryptocurrency, I probably would have said, ‘What’s that?’ But so far this calendar year, we’ve had about $10 million in cryptocurrency gifts, and we’ve gotten more sophisticated tools,” said Heisman. “It seems like somebody absolutely has turned on the light on cryptocurrency giving. It’s still a long time between now and the end of the year. The next six weeks are going to be like living a whole year for us. We suspect that we’ll probably see a few more cryptocurrency gifts.”
Many charities do not feel equipped to handle digital currency, though.
“I think a lot of charities are really nervous about it,” said Heisman. “I was talking to some charities informally in the last month, and a lot of charities get upset at donor-advised funds because they believe that we’re getting in the way between the charities and the donors. But I said to the charity we were talking to, ‘You know, why don’t you use us to accept cryptocurrency? We’ll accept it and pass it along to you. There will be a small fee, but if you don’t want to take the risk and you don’t have expertise in it, we’re more than happy to do that, not just for cryptocurrency but for other illiquid assets.’”
NPT has been handling assets such as donations of artwork and real estate. “In the last couple of years, we’ve seen a lot of gifts of illiquid assets and tangible personal property,” said Heisman. “We just had a piece of art sell at Sotheby’s that was gifted to us, a pretty major piece of art.”
It was a Picasso painting that sold for nearly $20 million. “I went to the auction in New York,” said Heisman. “I’d never seen a professional art auction with that kind of quality and quantity. It was quite an event. It was fascinating to be there.”
NPT has also been dealing with donations of real estate and hedge fund investments. “We’ve had probably five or six pieces of real estate, maybe more, in the last year,” said Heisman. “We see a lot of people are gifting private equity, hedge funds and partnerships of different kinds. We see people, especially the high net worth, really looking at a wide range of assets that they own to see if they are giftable. We liquidate them as quickly and reasonably as possible and practical. We’ll try to maximize the value, and then that asset turns into a liquid asset that they can make grants from.”
Tax Reform Uncertainty
One big question mark hanging over the nonprofit sector has been the tax reform bill, which may end up discouraging charitable donations if write-offs for gifts to charity and other itemized deductions prove to be much smaller than a doubled standard deduction.
“I think the big problem is nobody knows what’s really going to happen,” said Heisman. “There’s so much question about what’s really going to pass. The House passed a pretty aggressive tax law change, but the Senate hopefully is going to come in with some more evenhanded view or a longer view of things. We’re all sitting and waiting on the sidelines about what’s actually going to happen. One of the things we do know is that when there’s a threat or the tax changes, often people will frontload a gift or maybe a couple of years of their giving in anticipation of not knowing what’s going to happen in the following year. In an unusual way, we’ve had a number of donors in the last week or two say they’re going to be giving a gift at the end of ’17 but also in the beginning of ’18. I think they’re anticipating their tax rates going down and they will be able to take a tax benefit for both years. I’m not sure what their tax advisors are telling them, but we’ve had a number of high net worth donors who have told us they may be splitting the gifts between December and January. Usually when we hear something like that, it’s driven by advisors.”
Many donors plan to claim as big a charitable contribution deduction as they can for this year, while hoping they can do the same for next year too. Meanwhile, the prospects for donor-advised funds still look bright as a way to plan charitable giving.
“Philanthropy is such a part of the American way of thinking about life and passing values onto your kids,” said Heisman. “It’s just adopting an easy, very useful tool to do philanthropy, which most people learn about from when they’re very young. One of the great benefits is to have public policy supporting it with a deduction for your gift and appreciate securities to avoid capital gains tax. But I really do think it’s the ease of the product and the way it’s been offered by charities that work closely with financial service companies. Once you put financial service company bankers and financial advisors in the mix, and they start offering a charitable product, now the distribution of that product goes farther and wider than you could ever imagine than if it was just in the charitable sector alone.”