Bad Markets, Recessions & Donor Advised Funds

By Ken Nopar, Senior Philanthropic Advisor

When markets drop significantly or when businesses are not as profitable, the charities that wealthy families and business owners support are adversely impacted.  Because many donors are passionate about the causes and nonprofit organizations they support, the last thing they want to do is to send a much smaller contribution than in previous years.  Fortunately, those donors who have previously donated assets to a donor advised fund (DAF) are able to continue to provide generous and consistent funding to their favorite charities, even when their investments drop in value or when their income decreases.  

Bad MarketSome would assert that private foundations can serve the same purpose and generally they are correct. Others, however, would argue that many foundations only give away the mandatory 5% annually, so their giving would decrease when markets drop. Because donors with DAF accounts give away a much higher percentage of the value of their DAF accounts since there is not a minimum required level of giving, they do not feel restricted and can be more generous with their grants.

Though most people primarily donate because of their interest in a cause or charity, as a result of the Tax Cuts and Jobs Act, far fewer people currently itemize their deductions and some smaller donors have reduced or eliminated some of their contributions. Furthermore, when donations from individuals decrease during an economic downturn and when government and corporate support drops as well, the concern within the nonprofit community increases significantly.

Knowing that other donors may decrease their contributions during these times, some DAF donors strive to provide the same or even larger levels of support.  Especially in recent years, many donors have bunched their contributions to their donor advised fund during high income earning years or in the years as they approach retirement. This trend has been accelerating as their advisors have helped them realize that they will be able to provide consistent levels of support during retirement when their income will be less and the tax benefits of donating may decrease as well.

Many donors, when making large donations of cash, stock, or complex assets such as privately held stock, real estate, or limited partnership interests, do not want to give all of those assets at one time directly to individual charities. They establish DAFs because they want and need to receive the tax donation upfront but want to make the grants over time. They prefer to spread out their large donations over time because they fear giving it all to an organization that may change its mission, replace a key leader, or may not be able to effectively utilize a large and sometimes unanticipated donation. Additionally, some charities cannot accept gifts of complex assets while many DAF sponsors can.

Philanthropic clients may not reach out to their advisors during market downturns or volatility to discuss charitable giving, but they would be receptive to advisors’ ideas or suggestions about ways in which they can continue to provide their generous support. By proactively discussing charitable giving, advisors can deepen these relationships and talk about a positive subject instead of the decline in the markets or performance. This conversation helps not just the clients but also the charities that they care deeply about. 

Sometimes market volatility can be the impetus for clients to open DAF accounts, as they realize that they should have listened to their advisors and opened the accounts previously. Had they done so, they would have already donated and set aside assets for charitable giving.

Since some clients don’t always open the DAF accounts at the time advisors recommend they do so, American Endowment Foundation (AEF)  introduced the popular placeholder DAF. The advisors and donors complete the application when they agree that it’s a good idea, but if they are not quite ready to fund it, they do not donate assets to the DAF at that time.  No fees are charged until the donors make the initial donation after they’ve decided exactly how much and which assets they wish to contribute.  In recent years, over 20% of all of AEF’s DAF accounts begin as placeholder DAFs.

Clients know that organizations’ fundraising efforts become more difficult during economic challenges and when other donors may contribute less. It is always easier for clients to make a grant through their DAF sponsor’s online giving portal and after they have already set aside assets in the DAF. This is much easier, and more efficient, than if they had to donate by check or credit card or if they had to contact their advisor to donate stock or other assets.

As a result, clients with DAFs can take comfort in knowing that they will still be able to provide support for the charities that mean so much to them and do so much for the people and missions that the charities strive to help. Donors know that these organizations, especially during challenging times, depend upon their yearly donations as well as those from other donors who have established donor advised funds.

Ken Nopar is the vice president and senior philanthropic advisor for the American Endowment Foundation donor-advised fund.