The Implications of Donor Advised Funds on the Charity You Love

Donor Advised Funds (DAFs) were created to be a charitable option for those who have or have received a significant influx of funds. They are touted as a way to democratize philanthropy. DAFs have opened up vehicles for giving to midsize donors in a way that family foundations could not. For the first time, donors with sometimes four but more often five-figure gifts to donate could do so, long term.  Of course, they could always do so short term. 

Despite the DAF commercials you may have seen (Wells Fargo wins for the most appalling), it was always possible to donate a significant gift straight to the nonprofit of your choosing.  What wasn’t available was a long-term option, other than a family foundation, which is expensive to start and has significant compliance obligations.

The introduction of DAFs allow a donor to get an immediate tax deduction, while they – in theory – can research where they want to spend their philanthropic dollars, later.

To be clear, it’s called Donor ADVISED Funds for a reason.  The donor can advise the DAF sponsor on where they want the gift to go.  The DAF sponsor usually sends it to the intended destination but reserves the right not to based on the law, the mission of the recipient organization and the sponsor’s internal policies. For example, your local Jewish Foundation will likely grant your recommendation to send a gift to your local Jewish Community Center, but not likely to your local hate group. 

There are a few requirements of the donor.  DAF funds cannot be used to pay a pledge.  In fact, the donor can‘t receive any benefit from the gift – this is standard for any gift you want to deduct. It’s why you can’t deduct the full cost of the gala you went to last weekend but can deduct the cost of the ticket minus the expenses to the charity.  In the case of DAFs, you can’t buy the ticket with those funds at all, since you received a benefit (gala tickets) for your gift.

DAFs can be named for your family, or whatever or whomever you’d like.  You can name it your initials, or for your dog. That makes it difficult for charities to prospect, thank or steward gifts received from those who have DAFs, or even to know from whom their most recent donation arrived. 

Another challenge for our field is that there’s no requirement that money be given out. There’s also no requirement that the name of the donor be released. In fact, there are rules against their names being released. You read that right: a donor can park significant resources in a donor advised fund, which is then owned by the DAF sponsor, to be given out without attribution to the donor, at the donor’s leisure or not at all.  In all cases, the donor gets an immediate tax benefit.

Actual charities may get nothing. The government definitely gets nothing because it goes in and continues to grow tax free. No taxes get paid. The data  suggests that donor-advised funds have a net negative effect.

The only ones who consistently benefit is the donor and the fund owner, which may not actually be a charity at all, and likely will be a for profit company managing a “nonprofit spin off.”  Here’s the Chronicle’s explanation “Much of the criticism is directed at Fidelity Charitable and other sponsors of donor-advised funds that are nonprofit spinoffs of financial-service firms. These organizations typically pay their for-profit parent to manage the money in the funds, which means they have a financial incentive to accumulate assets and hold onto them.”

How it works is this: A donor sets up a donor advised fund, either at a community foundation, or at a for-profit company that manages “a charitable institution.” The word charity is used in the loosest way, meaning under the law it’s a charity, but in reality it provides no services other than as a vehicle to house funds which will be given out at a later date, maybe. It will generate annual fees for the sponsoring institution, often but not exclusively a for profit entity, in perpetuity.

That’s part of the challenge for the nonprofit field, and the government. DAFs take huge amounts of money out of the economy, and out of the charity designation pot each year that actual charities providing real services may never see. Unlike foundations, there’s no distribution rules. Even the DAFs housed in foundations have no distribution requirement.

In other words, you could sell a business for $100 million today and put some portion of that money in a donor advised fund.  You would get an immediate tax deduction and the donation could sit there … in perpetuity.

Those who are fans of Donor Advised Funds will argue that money is given out. They say that even more money is given out because of DAFs. But because most of the giving, the “owning” and the management of donor advised funds is done in secrecy, we don’t really know. The only thing that is reported is the amount of aggregate gifts given to actual charities by the institution. So it’s possible – and even likely – that one DAF giving significant (and actual) gifts is providing cover for the other funds providing no benefit to the community, and only benefit to the donor and the institution managing the DAFs.

A smaller challenge is that many agencies don’t know how to properly thank donors who send gifts from donor-advised funds.  Because they may not understand that the gift came from a DAF, meaning the deduction has already been granted, they may send a letter with tax deductible language. The donor may not notice when the letter comes in but totally notices when they’re trying to figure out their taxes at the end of the year.

To be clear, there is a fairly significant section of nonprofit leaders who like Donor Advised Funds and many leaders do not care from whom the money comes or by what vehicle it arrives, as long as it comes.  Some will say, and they will be right, that if you know your donors, you know who has a DAF and this is not a problem.  Is that true? Sometimes. 

It’s critical nonprofits know from whom they’re receiving gifts.  There are too many instance of charities taking money from people or companies who later embarrassed them, or publicly compromised their principles or values. If you don’t know, you can’t protect your organization.

Still, some leaders love DAFs.  Of course, leaders of community foundations love them.  Community Foundations are a huge holder of DAFs.  I appreciate that and if you insist on starting one, please consider the community foundation in your area. 

There are even some charities who have started managing DAFs themselves.  Many of the big nonprofits have started their own, often aligned with their organizational values and with a requirement that a portion of the funds go to them. Still, the charities and the community foundations don’t come close to the big companies.

As far as charitable recipients, Fidelity Charitable is at the top, coming in at #1 for the second year running and in the second spot for the five preceding years of charitable data. DAFs are so significantly represented that a full 50% of the top 10 recipients of charitable funds in 2017 are sponsors of funds and not community serving, program providing, (actual) charities.  One is a community foundation. 

The six largest recipients of charitable gifts are housing but not spending that money! That money is only benefiting the holder by accruing interest and fees for the institution. It is not immediately, or possibly ever going to an actual charity doing meaningful work in a community.

I fear Donor Advised Funds will eventually preclude our ability to do our work and affect change for our communities.

The DAF debate is happening at the same time that the field and the world is beginning to challenge status quo of philanthropy. 

The following questions are currently being discussed:

When does being donor focused come at the expense of the mission, clients or community?

Should deductions be tied to community need?

Does the current model of philanthropy promote inequity?

How do nonprofits distinguish themselves in a world of social enterprise?

Does big philanthropy reinforce the inequity it purports to address?

What’s your take on DAFS? Are you asking, and how do you answer the questions listed?  I welcome your feedback, insight and experience.  A rising tide raises all boats.

Teachable Moments

This month’s blog carnival is hosted by my friend and colleague Erik Anderson. Its theme: “advice to your younger fund raising self.” As such, and because you know I find most (non-grant related) directions optional, here is both advice I wish someone had given me, and also advice I’d like to give to my students, blog followers and those that I’m privileged to mentor. Please reach out and let me know if any speak to you.

Money is not Dough; It Will Not Raise Itself

If you want to be successful in this field, as either a leader or at any level of a development team, get comfortable asking for things for your organization that you would never request for yourself.

You may be one of those people that other people just give stuff too. I certainly am. Do I want an upgrade on my rental car? “Yes, please.” Would I like an extra scoop of ice cream? “That would be great. Thank you.” If you routinely have people offering you things that you didn’t ask for, or even consider asking for, awesome! This will be a snap!

If you’re not, you will have to cultivate the ability to ask for money and donations to move forward your mission. It’s for the kids, or the dogs, or whom/whatever your agency exists to impact. People who care about your mission will want to be engaged in its success; they may just need the vehicle to get involved. You can offer that entree.

For the CEOs out there: grant writing, event planning and individual giving are different skills sets. You have to know how to do or hire all three. If you go with hire, you will then have to do what the person you hire recommends. Really.

Where to Start is Where You Are

There is no perfect place to start. The first step is just that, one step forward.  Figure out where you want to go. Figure out what it will take to get there.  Plan backwards from your end goal. And start.

Charm is Not Enough, and Neither is Talent

You can be charming for 15 minutes; after that you’d better know something. I love charming people. I also love effective people!  Charm alone is not enough, especially on the development team. Talent alone is not enough for any of our teams. We need both to make our teams work and our organizations successful.

It is not enough to be good, or even great, at your job. You also have to be on the team and moving the organization forward. If you aren’t, I can’t hire you. I can’t train you and you certainly can’t stay.

We are All only as Good as the Stupid Thing we did Yesterday

I’d love to tell you that your life’s work will be a sum total of your accomplishments, but it’s just not true. You can build something great, bring in tons of money and save the day, but if you did something really stupid yesterday, none of those will save you.

Only Write a Policy when you Need One, which will Never be to Avoid a Conversation

I love teachable moments. Tell me a story when something, anything, goes wrong and I’ll ask you the lesson. Teachable moments make us all better and have the added benefit of helping organizations avoid crises. They teach each member of a team to assess every stupid thing that goes wrong, in an effort to not have it repeated.

Crises are where most policies originate. Show me a policy and I can tell you the crisis that created it. Show me a job description and I can sometimes tell you what happened to the person who held that job last. We are all, myself included, much more transparent than we would like to be and when you’re paying attention you can often read what’s not said.

Most polices get written because there wasn’t a policy and that gap either left the agency or its clients open for something bad to happen. That is the perfect time for a new policy!

Having a problem with a staff member? That may be the time for a hard conversation but may not rise to the level of a policy. Never write a policy to avoid having a conversation.

Crisis Management is not Leadership

One my favorite Warren Buffett quotes is “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”

It reminds me to be strategic in how I spend my time. There are a lot of leadership lessons that can be taken from this one statement.

Maybe it applies to staff, in which case the message would be to not spend a majority of your time trying to make a bad hire into a good employee. You should try certainly, but at some point, should your efforts prove fruitless, cut your losses, review your process, learn your lessons, and hire better.

Maybe it applies to how you spend your time. Do you spend your day patching leaks or changing vessels? Most leaders I know spend their days patching leaks, and they stare in wonder at those leaders that spend their energy changing vessels.

It’s a paradox. We have to patch the leaks and put out the fires, yet we also have to carve out the time to think strategically…even while the boat is leaking. And it may be leaking. In nonprofit speak that may mean there’s a grant due, a crisis in the program, a problem staff, a disengaged board member, an alienated donor or an angry parent.  Some of those things may very well be happening, and happening simultaneously. There’s also an agency that you are responsible to steward and a mission that you are entrusted to move forward.

Even though it feels like it, You Are Not Alone

You are not alone. For those of us who have spent our lives in social services, it’s a phrase we have each repeated hundreds if not thousands of times. We say it to our clients all the time, but apparently the leaders of our agencies don’t hear the answer for themselves.

The way you feel today, right now, every nonprofit leader feels or has felt. I promise. Every CEO at one time or another has wondered how they’re going to make payroll, keep their job, or keep their sanity. Knowing you’re not alone won’t answer any of those questions but it will remind you that the CEO down the street of that agency you wish yours was as together as, feels the same way sometimes. You just don’t see it.

It All Comes Down to Values

Every day I have conversations with leaders and every day, at least once, I utter the phrase “it all comes down to values” and it does. If you can tell me what you value, I can tell you in what circumstances you’ll be successful, and in what circumstances you’ll be frustrated.

Where you sit determines where you stand. What you value determines how you lead, where you feel comfortable, where you’ll thrive, and where you’re likely to be the odd one out.

Your values have to match your organization’s values, which have to be reflected in their policies. When the three are not aligned, you will struggle. When they are, you will thrive!

We do not, in fact, all bloom where we’re planted. We bloom where we’re cultivated.

 

Do you have advice for your younger self, or for others in our field? Will you share?  Did you find any of my advice instructive? As always, I welcome your insight, feedback and experience. Please offer your ideas or suggestions for blog topics and consider hitting the follow button to enter your email. A rising tide raises all boats.