High net worth individuals have increasingly been putting their money into donor-advised funds, a form of charitable giving in which the fund is managed by the charity on behalf of the individual or their family.
DAFs have been on the rise in the past year, in part due to the uncertainty over higher tax rates and the future of the charitable deduction last year. A new report from the National Philanthropic Trust, one of the top charitable grant-making organizations in the U.S., illustrates the trend.
The NPT’s annual Donor-Advised Fund Report found double-digit growth in assets and contributions last year to DAFs, with a total of $45.35 billion in total assets under management across more than 200,000 accounts. That signifies an increase of 18.9 percent from a revised total of $38.14 billion in the previous year and continues a steep growth trajectory that started in 2011 (the NPT has been compiling its annual DAF reports since 2006).
Indeed, DAFs seem to be becoming more widely used nowadays, and not just by the ultra-rich. The report indicated that contributions to DAFs grew by 34.6 percent last year, totaling $13.71 billion. That figure represented over 4 percent of all charitable giving, or more than 6 percent of all individual giving in the U.S. That’s compared with 2011 contributions of $10.19 billion (the figure was revised from last year based on new charitable sponsors tracked by the report).
“We were pretty amazed that it was such a significant boost, especially because a number of the largest donor-advised fund programs had fiscal years that didn’t capture the entire fiscal cliff, so these numbers actually represent a partial boost from the fiscal cliff,” said NPT president and CEO Eileen Heisman in an interview Wednesday. “Some of the larger donor-advised fund programs have June 30 fiscal years, so the end of the year last year wasn’t captured completely in this one. This increase in donor-advised fund activity due to the fiscal cliff is going to show up over two of these DAF reports.” Indeed, the figures are likely to be even higher in next year’s report, Heisman noted.
Grant-making last year by DAFs was estimated at $8.62 billion, representing an increase of 6.7 percent compared with 2011, which was revised to $8.08 billion after data was added about additional donor-advised fund sponsors.
The number of donor-advised fund accounts increased by 7.0 percent in 2012, to 201,631 (from 177,357 in 2011), while the number of private foundations grew by 4 percent. This is the second year of rapid growth since 2008. The number of accounts at single-issue charities rose by 11.4 percent, while community foundations increased by 3.3 percent, and national charities increased by 7.5 percent.
“Donor-advised funds probably bounced back faster than other kinds of charities because the nature of what we do is different than if you are running a university, a hospital or a soup kitchen,” said Heisman. “The donor-advised funds clearly have bounced back from the recession and there seem to be people accumulating wealth using donor-advised funds as a way to do their charitable giving in great numbers.”
For 2012, the payout rate slowed slightly to 16.0 percent, reflecting the rapid rise in DAF assets alongside a modest rise in grants from DAFs. Payout rates from 2007 through 2012 annually exceed 15 percent, three times the mandated 5 percent minimum payout rate of private foundations. This level of grant-making resulted from donors who wanted to give generously through challenging economic times.
In some ways, donor-advised funds have overtaken private foundations in terms of charitable giving by the wealthy, at least in terms of the number of accounts, if not the assets inside them.
“When you look at the number of donor-advised funds vs. private foundations for just the number of accounts, there are over 200,000 donor advised funds and there are an estimated 77,000 private foundations, so it’s almost triple,” said Heisman. “But when you look at the assets under management, it’s actually the reverse. Donor-advised funds have $45 million and private foundations have $556 billion. So while you have many more donor-advised fund accounts, you have more assets in private foundations because wealthier people and the very large private foundations are counted in the $556 billion number. It’s an interesting juxtaposition.”
Much of the impact from the fiscal cliff came from fears last year that Congress might decide to limit the amount of charitable deductions that could be claimed. Ultimately that didn’t happen, in part thanks to lobbying by charities who visited Capitol Hill to press the case for preserving the deduction in its traditional form.
“People were kind of on the edge of their seat, and there was a threat for the first time in almost a hundred years that they were going to alter the charitable deduction,” said Heisman. “The deduction was under threat of changing, so I think what some of those households and their advisors were saying was, ‘Why don’t you store some extra money this year,’ thinking that perhaps the charitable deduction was going to be lowered so you could take advantage of the higher [level] while it’s still there instead of wondering what might happen. That being said, the charitable deduction was not altered at all. But at the time, into December, they didn’t know that, so these numbers reflect the concern that people wanted to capture the deduction at its high point rather than worry that in the following year, it might be at a low point.”
In case lawmakers reconsider the charitable deduction in the context of the increasingly dwindling prospects for tax reform this year, leaders from various charities are planning to visit Capitol Hill next week on “Protect Giving Day,” November 20, to urge them to protect the charitable deduction.
Heisman noted that the charitable sector accounts for an increasingly large part of the economy, with $316 billion given in charitable gifts last year, representing about 2 percent of the U.S. gross domestic product, and 10 percent of the workforce employed in the charitable sector. Many accountants serve on the boards of charities and volunteer their time to provide them with accounting services. And donor-advised funds are increasingly being used as a vehicle for charitable giving.
“The average donor-advised fund is almost $225,000,” said Heisman. “Even though that’s a big amount for some, compared to private foundations, it actually reflects more of a democratization of organized philanthropy. There was a time when the only way you could have a foundation was if you were a Ford or a Rockefeller. But because donor-advised funds are so easy to use, the barrier to entry is much lower, so they’re really a form of giving vehicle that are available to a much wider range of Americans. That’s another reason why they’ve been so adopted.”