DAFs: Waiting On Washington, Upping Gift Frequency Targeted By Fund Managers

Vanguard Charitable is entering some uncharted waters this year as the combination of a new administration, forthcoming tax reform, and a strong stock market have all converged in a way never before seen in the donor advised fund (DAF) space.

This year marks just the third administration change in the 20-year history of Vanguard’s DAF. In the President Bill Clinton to President George W. Bush transition, contributions to the DAF increased from $59.8 million ($6.7 million granted) in 1999 to $111.4 million ($19.5 million granted) in 2000 to $169.3 million ($45 million granted) in 2001.

The transition from President Bush to President Barack Obama was preceded by $684.4 million in contributions ($370.2 million granted) in 2007 followed by decreases in contributions in 2008, $670.1 million ($432.4 million granted), and 2009, $533.1 million ($383.2 million granted).

The fund was riding high in the lead up to this past presidential election, with more than $1.2 billion ($698.5 million granted) in 2015 and nearly $1.3 billion ($704.7 million granted) in 2016. History doesn’t provide any indicators as to what to expect in 2017 and beyond, however, according to Ann Gill, chief philanthropic officer.

The first administration change took place while the DAF was still in its infancy, according to Gill. The second came during a national recession. This time, the inverse is true. An administration change is taking place during a time where the market is climbing.

Gill and Vanguard are in a position, like many DAFs at the moment, where they are waiting to see the shape of promised tax reform. DAFs, which have been the target of Congressional interest in the past, could be impacted by a variety of tax proposals floating around Capitol Hill, including a capping of the charitable deduction and increase of the standard deduction. Gill said that coming out of the election cycle there is an appreciation that the new administration is likely to be followed by changes in tax policy, but there is little additional clarity.

“I don’t know what to expect,” Gill said. “We are aware that policy makers are sensitive to the value of the charitable deduction. I would put myself out on a limb and say that I don’t know if tax policy is looking specifically to address [the charitable deduction], but they are sensitive to it.”

Contributions to DAFs are influenced by a number of factors, according to Gill, including tax deductions — bringing a year-end element to grants — and the market, which influences how donors contribute. In December 2016, for instance, 66 percent of DAF contributions to Vanguard were made through non-cash gifts as compared to 52 percent in December 2015. That suggests to Gill a strengthening of the equity market.

Individual donors’ charitable plans also play a large part, which is why Gill’s message to donors has been to focus on their own goals with their donations and provide the organizations they care about with the funds they need for stability in what might be a time of economic and political change. Worrying about what they can control, leaders at Vanguard are not actively engaged in lobbying efforts around tax reform, but are in close contact and learning from those who are, according to Gill.

The Alliance for Charitable Reform (ACR) has been more active on that front. Its lobbying day this past February attracted 200 attendees, including 140 who had never lobbied before, according to Sandra Swirski, executive director. Swirski said ACR’s focus is on the House of Representatives and interest in doubling the standard deduction from $6,300 to $12,600, in effect eliminating many of those who itemize their deductions, including charitable gifts. Such reform would deplete the pool of itemizers from one-third of Americans down to about 5 percent, Swirski said.

Approximately 80 percent of giving comes from the 33 percent of individuals who itemize, according to Swirski. Removing the incentive to itemize might not stop individuals from giving, but it might change the time and amount of gifts. “We argue that if you go from 33 percent to 5 percent, there will be less giving,” Swirski said. “Nobody is quibbling with that.”

Swirski posed a simple scenario demonstrating how DAFs could potentially be impacted. Suppose one is earning a six-figure salary and living in a modest home in northern Florida. The person is donating clothes to Goodwill, giving to their congregation, and maybe putting aside $5,000 or so every year into a DAF with the intention of saving up to make a major gift to their alma mater. There’s no state income tax and housing is relatively inexpensive, so the individual would normally itemize at about $10,000.

Now, with the standard deduction at $15,000, part of that individual’s benefit to give is gone. “This impacts me, because I’m not itemizing anymore,” Swirski said. “I might still give, but I’m not giving as much because it costs me more to give.”

ACR is not opposed to increasing the standard deduction so long as adjustments are made to promote giving. Leaders at ACR have been in contact with both the House Finance Committee and House Ways and Means. There is recognition in Congress that unintended consequences could take place due to tax reform and representatives have been open to working through them with partners in the charitable space, Swirski said.

One potential remedy would be a universal charitable deduction, something supported by David Wills, president of the National Christian Foundation (NCF). Wills has worked in the DAF space since 1992, the past 19 years with NCF. He said that the likelihood of tax reform is greater now than at any other time since he entered the space.

Contributors to DAFs give cash, publicly-traded stock, and other “gifts of net-worth,” the giving mechanism allowing contributors to give what they have and, depending on how the economy fluctuates, one of those prongs can be up while the other two are down and vice versa. The fourth leg in giving to DAFs is policy, which informs how much it costs to give a dollar.

“Nobody can make money by giving money away, but there are differences in how much it costs,” Wills said, advocating for a universal deduction.

NCF, along with the Faith in Giving Coalition, Charitable Giving Coalition and others, has been active on Capitol Hill for many years. All interactions with the Ways and Means Committee have led Wills to believe that protecting charitable giving will be part of future reform. “I think everyone would agree that we want to encourage communities [to give],” he said. “Anything that enhances that is a very wise thing for us to have in our country.”

National Philanthropic Trust (NPT), like Vanguard, has seen the contributions it has received fluctuate over the years and as administrations have come and gone. In 1999, the year before President George H.W. Bush was elected, NPT saw $200 million in contributions ($2 million granted). Those totals were followed by $131.5 million ($15.1 million granted) in 2000 and $157.9 million ($73.6 million granted) in 2001. NPT didn’t reach the $200 million mark in contributions again until the 2008 election year with $229.5 million ($176.3 million granted). That sum was preceded by $174.1 million ($173.5 million granted) in 2007 and proceeded by $291.9 million ($171.2 million granted) in 2009 and $275.1 million ($203.1 million granted) in 2010.

After some back-and-forth years earlier this decade, NPT has surged in recent years with $901.8 million contributed ($646.7 million granted) in 2015 and just less than $1.1 billion contributed ($612.2 million granted) in 2016.

Eileen R. Heisman, president and CEO of NPT, said that she sees a lot of hard work in those numbers, along with the growing popularity of DAFs since NPT launched in 1996. It took 10 years to reach $1 billion in cumulative contributions as compared four years to collect the second billion, three years to collect the third and one each to reach the fourth, fifth, and sixth.

Those numbers are, of course, colored by more than policy. The tech bubble burst in 2001 and the housing market crashed in 2008, both leading to fluctuations.

With few predictors present in historical data, NPT often looks at trends, the stock market usually serving as a strong indicator of future success, Heisman said. Five-year trends, data points relative to search-engine optimization, mergers and acquisitions are other indicators that play a role.

On the policy side, while some focus on an increase in the standard deduction, Heisman’s interests are focused on the potential capping of the charitable deduction, with a $100,000 cap on individual filers and $200,000 on couples being floated. Such a cap would remove the tax incentives for those who would otherwise give large, transformative gifts, Heisman said. Her sense from sources, at present, is that the charitable deduction will be left intact this year, but there are no guarantees for 2018.

NPT has taken to advocating in support of the charitable sector and has followed updates on Capitol Hill with peer organizations. There’s little to hang one’s hat on until the budget process takes shape and President Donald Trump has no political history from which to find guidance. President Obama was a senator for several years before taking office, so there was a voting history in which to rely on that isn’t present with Trump, Heisman noted. “Until we see a hardcore proposal, everybody is just guessing,” she said.

So what does all this mean for the average small or medium-sized organization looking to boost fundraising? It means that the giving season could grow longer and so organizations should be more aggressive year-round, according to Jack Doyle, president of Amergent, a firm working in the fundraising space. Feedback from older donors has shown that seniors are growing increasingly confused with Schedule A of the Form 1040 and have taken to just accepting the standard deduction. Now, if an increase to the standard deduction takes place and the population as a whole begins taking the standard deduction at a much higher rate, December 31 won’t mean all that much anymore, Doyle said. Organizations relying on donations of $5,000 and less will have a longer season and can find success with asks throughout the year.

“My perspective has nothing to do with tax code and everything about getting money out of the accounts,” Doyle said, noting that even the multi-billion-dollar DAFs generally accept more contributions than grants paid out. “My interest is in the realization that you can ask [donors] to use the accounts more often. And you can say that in January and you can say that in March and you can say that in May and you can say that in August.”

Doyle said that his clients still have some work to do in terms of outreach and marketing aimed toward supporters with DAF accounts. The funds are irrevocably put aside into the funds, Doyle noted, and so there is benefit in simply asking donors for support through their accounts in emails, on the organizational website, and other communications during the year.

Doyle has encouraged clients to look through gifts received from financial institutions such as Fidelity, Vanguard and Charles Schwab. What many have found is that they are receiving hundreds of thousands of dollars per year through DAF accounts that they never asked for, according to Doyle. An aggressive direct-mail fundraiser might solicit a donor every few weeks, yet many organizations only turn to DAFs at the end of the year, and owners of DAF accounts are still generally programmed to make payouts at year-end.

“From a nonprofit marketing standpoint, nobody is doing as much as they could to even look for people who have these giving accounts,” Doyle said. “If December 31 doesn’t matter anymore and people are going to get higher refunds, [fundraisers] who bust butts until December 31 and take off for two or three months will be adversely affected.”