Donor-advised funds grow in popularity thanks to tax reform

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The number of donor-advised fund accounts has tripled in the past four years and grown approximately 150 percent since the passage of the Tax Cuts and Jobs Act at the end of 2017, according to a new report.

The annual report, from the National Philanthropic Trust, the largest national independent donor-advised fund sponsor in the U.S., found that contributions to DAFs grew at a higher rate in the first year since the new tax law began making an impact on tax returns, which is an indicator of donors responding to tax reform and “prefunding” their charitable giving. Other factors included the stock market, millennials, tax reform and emerging DAF-specific technology.

“I think there are two big reasons why we saw the increase,” said Eileen Heisman, president and CEO of National Philanthropic Trust. “One is that the market was so high. The market continued to increase during most of the year. We had a volatile December last year, but during most of the months the market was up and people tend to give appreciated publicly traded securities when it’s up. I think the other reason is that for most of the charities, if not all of them, it was the first year that donors were filing under the new tax law. People weren’t sure sometimes how close they were or not to the new standard deductions. Now, if you’re really wealthy, you don’t worry about it, but if you’re moderately wealthy, you might. I think people were putting money in their donor-advised fund in anticipation that they might not hit the threshold and it would guarantee them to get over for these deductions.”

The doubling of the standard deduction since the passage of the TCJA is figuring into many taxpayers’ planning. “In the old way in which people would file their taxes, they would take all their charitable receipts out in February or March, and they would figure out how many gifts they made, and they would give all these things to their accountants or maybe fill out these things themselves,” said Heisman. “In the new world, after tax reform, you’d have to do all of that in December. Think about that. In order to know how close you were, you’d have to take all your tax receipts out in December and say, ‘Oh, I’m $2,000 short. If I want to go take advantage of going beyond the standard deduction, I’m short.’ Then you’d have to figure out what you want to give. I don’t think too many people did that. I don’t think too many people took all the receipts out in December, but I think what they did was say, ‘I’m going to hedge my bet. I’m going to put some extra money in my donor-advised fund, so just in case this first year, it will help me figure out what to do going forward.’ I think that’s what we were seeing. I think people did that because they knew there were new tax regulations, but they weren’t quite sure how it was going to affect them, so they’d rather be safe than sorry.”

Grants from DAF accounts to qualified charities totaled $23.42 billion in 2018, an 18.9 percent increase compared to $19.70 billion in 2017. This represents the first time grants from DAFs exceeded $20 billion.

Contributions to DAFs totaled $37.12 billion, a 20.1 percent increase compared to $30.90 billion in 2017.

Charitable assets in all DAF accounts totaled $121.42 billion, an 8.3 percent increase compared to $112.10 billion in 2017. DAF assets surpassed the $100 billion mark for the second time and experienced continued growth momentum since 2010.

DAF accounts in the U.S. totaled 728,563, a 55.2 percent increase compared to 469,331 in 2017. DAFs remain the fastest growing giving vehicle in the U.S.

Grant payout rate to qualified charities, however, decreased to 20.9 percent compared to 22.8 percent in 2017. Donor-advised funds continue to have a payout rate nearly four times higher than that of private foundations. The grant payout rate has exceeded 20 percent for every year on record.

The size of DAF accounts averaged $166,653 in 2018, a 30.2 percent decrease compared to $238,857 in 2017. Two years of historic growth in number of DAF accounts resulted in this decrease. Grants from DAFs to qualified charities totaled $23.42 billion in 2018, an 18.9 percent increase over the prior year. Total DAF assets available for grantmaking increased to $121.42 billion, an 8.3 percent year-over-year increase.

Donor-advised funds are even starting to spread to some middle-class taxpayers, especially for taxpayers who are bunching their donations. “Our minimum is $25,000,” said Heisman. “I think we’re seeing some of that. But some of the other sponsors have $5,000 as their minimum, and I think for some of those charities — Schwab and Fidelity both have $5,000 minimums — I think you would see people who would say, 'I’m going to fund my donor-advised fund every other year, so I can get two years of giving out of that one year, and take advantage of getting above the standard deduction and then have two years of giving.' If people can afford to do it, the new tax law would push people into doing this strategy called bunching. They can bunch two or three years and take advantage of that year. In between they can still make grants to their favorite charities, but they do it from their DAFs instead of from their checkbook.”

She is also seeing more of a trend toward payroll contributions to DAFs. “The one thing that’s notable is that for the second year in a row, there was a big rise in the number of donor-advised fund accounts, and it’s attributable to an American charity that was started by a Canadian company that does a lot of workplace giving,” said Heisman. “They’re using payroll deductions to go into what constitutes your own DAF account that’s being funded by your payroll deductions, and I think that might be a trend that we might be seeing more of in the future. It’s like the way United Way would work at a big company, where you would sign up and X amount would be deducted every other week or whatever from your paycheck. It’s the same kind of strategy, but instead of going to United Way or the Jewish Federation or Catholic Charities, it’s going into a donor-advised fund account. I think we might be seeing more of that in the future.”

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Donor-advised funds Charitable deductions Philanthropy Tax reform Tax deductions