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INSIGHT: Donor-Advised Funds in the New Decade

Feb. 5, 2020, 2:01 PM

Donor-advised funds (DAFs) hit a turning point in past decade. Their “hockey stick” growth trajectory has drawn attention across sectors, including philanthropy and finance.

From 2010 to 2018 (the latest DAF Report data available), the number of DAFs increased 300%. Grants from DAFs to mission-driven charities tripled from $7.24 billion to $23.42 billion over the same time period. Americans are changing the way they manage their personal and philanthropic finances in the 21st century and relying on experts for guidance.

Americans have always been generous and, increasingly, they want to stay close to their giving. DAFs offer an efficient way to facilitate both. DAF donors are some of the most engaged and committed philanthropists in the country.

Will DAF growth continue to keep pace in the 2020s? In all likelihood, yes. Let’s look at four things I’m forecasting for the next decade in donor-advised funds.

Giving vehicles will soar as the great wealth transfer accelerates

Experts estimate that baby boomers will transfer $68 trillion to the next generation over the next two decades. This transfer, combined with the bull market, means that a lot of appreciated assets will be changing hands. For savvy investors who are philanthropic (and who may want to avoid paying capital gains), donating these appreciated assets to charity can be a valuable strategy to manage their tax bill.

Giving vehicles, like DAFs, are a particularly attractive option. Donors get an immediate tax deduction for their contribution and can grant the money to multiple charitable organizations over a period of time. In a windfall event, like selling a business or receiving an inheritance, donors may use their assets to set up a lifetime of philanthropy.

DAFs offer a unique flexibility to meet different grant-making time horizons. The charity where the DAF is established often allows the primary donor to designate successor-advisors or charitable beneficiaries. The DAF can continue to have a charitable impact beyond the original donor’s lifetime, another legacy advantage.

Trends that developed in the past decade, like viral giving campaigns (#GivingTuesday and the ALS Ice Bucket Challenge), meet the new generation of donors where they are. Easy-to-use tools like DAFs and crowdfunding sites facilitate giving in this ever-changing world of technology and social media.

In my experience as both an executive at a DAF charity and an educator of philanthropy at the University of Pennsylvania, the next generation is ready, willing, and excited to get involved in giving. A recent Wells Fargo Private Bank Study found that nine in 10 Gen Z and millennial children of high net worth (HNW) families think that their parents’ values—not their money—are the most important thing they will inherit. Giving vehicles offer these parents a reason and a tool to share the importance of philanthropy with their families.

Philanthropic services at financial institutions and DAF providers will become critical to effective philanthropy

For decades, finance and philanthropy seemed like entirely separate worlds—worlds that were almost at cross-purposes. Finance builds wealth; philanthropy gives it away. Today, nearly every major financial institution in the world has teams that can provide philanthropic advice and tools for their clients. Financial advisors have evolved into playing a critical role in philanthropy, both as a guide for clients and as a referral source for charities.

According to U.S. Trust’s 2018 Philanthropic Conversation Study, 90% of HNW clients give to charity, but only 67% report talking to their advisors about it. (Interestingly, only 45% of HNW clients reportedly feel “fully satisfied” with the conversation.) Addressing that gap and developing skills to talk about philanthropy in a meaningful way with clients can give financial advisors a competitive advantage. It will also build a bridge to the next generation.

In the decade ahead, I predict financial institutions will more completely integrate philanthropy into their offering. They could become the first stop for clients seeking what and how to give. Instead of acting as an intermediary between clients and outside charitable resources or organizations, financial institutions will likely offer their own philanthropic guidance and information directly to help their clients give.

We have unprecedented access to information now. Offering curated, targeted, and vetted information will be increasingly powerful. When valuable philanthropic information is coupled with the tools to act (giving vehicles, impact investments, etc.), it will empower effective giving and deepen the connection between advisor and client.

Generous Americans—and their advisors—will acknowledge the role tax policy plays in charitable giving

Philanthropy is deeply personal. Donors are motivated to give for a host of reasons: personal experience, family values, religious beliefs, and the list goes on. One motivator donors report being lowest on their list of reasons to give? Taxes. Only 16% of HNW donors report that reducing their tax burden is a motivation to give. Nearly 50% of their advisors think it’s their clients’ motivation to give.

So, who’s right? Two of the largest jumps in giving to DAFs in the last decade happened when tax policy discussions threatened the value of the charitable deduction. The first was in late 2012, when scheduled tax cuts and federal budget disputes occurred at the same time, creating the “fiscal cliff.” That year-end event threatened the existence of the charitable tax deduction, which, thankfully, was preserved. The second was at the end of 2017, when Congress debated and ultimately passed the Tax Cuts and Jobs Act. Tax policy clearly affects giving behavior.

In both instances, the number of DAFs and assets contributed to them hit record highs. Those spikes continued into the next year. Once clients and their advisors understood the ease of managing their giving through DAFs, it created a “new normal” for DAF growth.

Looking ahead to the next decade, donors and their advisors will be more attuned to the role tax policy plays in charitable giving.

Technology will further simplify giving

The past decade saw major changes in the way we live. Perhaps nothing is more evolutionary than the way technology has impacted every facet of life. Can you remember a world before smart phones, Instagram, or Venmo? The idea of writing a check to 4.5 charities (the average number of charities Americans support annually) is just as quaint. Today’s philanthropists text their donations in the aftermath of a natural disaster or deploy a DAF to make regular grants through an online portal to a charity in their own backyard.

Today’s employers are also jumping on the philanthropy bandwagon. Of the nearly 730,000 individual DAF accounts in the U.S., a measurable percentage are workplace giving DAFs. Employees elect payroll deductions into a workplace giving DAF, using online tools to manage their DAF and move grants quickly to their favorite charitable organizations. Streamlined and accessible, technology is making giving easier than ever.

Now and in the future, charities stand to be the ultimate beneficiary of these advancements in technology. The organizations that leverage tech trends, like using social media to tell their impact story or partnering with DAF sponsors to offer online resources, will attract the most donors and donor dollars.

It is anybody’s guess as to what exciting, world-changing innovations lay ahead in the next decade. I am confident that one thing will remain steadfastly true: People will give to the charitable causes and organizations that mean the most to them in hopes of positively impacting the world.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Eileen Heisman is CEO of National Philanthropic Trust, the largest, national, independent donor advised fund sponsor and one of the top grant-making organizations in the U.S. Learn more at nptrust.org.

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