Whenever there is volatility in the markets, non-profit organizations become concerned that donations will drop. This is again the case this year, and their concern will increase especially if markets have not yet recovered before the busiest giving season at the end of the year.
Fortunately, we’ve seen that during difficult markets and various crises over the past 30 years, donors who had previously established and contributed to donor-advised fund (DAF) accounts were able to maintain their level of granting. American Endowment Foundation donors significantly increased their grants during the market drop when Covid first spread in spring of 2020. During this year’s market decline, AEF donors have increased the number of grants they’ve recommended by more than 20% over a year ago.
This is largely because assets donated to and invested in DAF accounts can only be used for granting to charities, so it has been better for donors to tap these accounts for which they have already received a tax deduction rather than dip into their wallets and investments to give.
Especially in recent years, many donors have bunched their contributions to their DAF accounts when their income has been high, their investments have greatly increased, or as they’ve approached retirement. This trend has accelerated as their advisors have explained how this will help them provide consistent levels of support to charities once they have retired, when their income or investments decrease, or when their businesses are not as profitable.
During periods of challenging markets, clients who have a DAF can take comfort in knowing that they’ll still be able to provide ongoing grants to charities that mean so much to them. Though a charity may understand that a donor who does not have a DAF has less to give in a particular year, this is still a difficult discussion that would not be necessary if the donor had previously established a DAF account.
Many donors today still have highly appreciated publicly-traded securities or funds that they can contribute. Others have the ability to donate illiquid assets that have increased in value such as real estate, cryptocurrency, privately held stock or limited partnership interests.
These donors often do not want to donate these significant assets at one time directly to individual charities, and instead establish DAF accounts. This allows them to receive the tax deduction upfront, and then make grants over time to these charities. Some donors fear donating all at once to an organization that may change its mission, lose a key leader, or may not be able to effectively utilize a large and sometimes unanticipated donation.
When onboarding new clients during market volatility, some advisors encourage clients to donate appreciated securities that are no longer a good investment to fund a DAF account. Once donated, the advisors can then select new investments that are a better fit for the DAF account. Others have clients donate unmanaged assets into the DAF so the advisors can then re-invest and manage these new DAF assets.
Philanthropic clients may not reach out to their advisors during market downturns to discuss charitable giving, but they would be receptive to advisors’ ideas or suggestions about ways in which they can continue to provide ongoing 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. 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.
Creating and funding DAF accounts enables donors to fund their favorite charities during good economic times and bad, both now and in the future. There have been proposals and legislative efforts to regulate and complicate giving over the past decade, but many non-profit organizations have opposed these since grants from DAF donors have been invaluable to them during challenging times.
This article originally appeared in AEF Insights, a publication of American Endowment Foundation (AEF). Ken Nopar is the vice president and senior philanthropic advisor for AEF, a leading independent donor-advised fund since 1993 with over $7 billion in assets under oversight and 10,000-plus DAFs. AEF works closely with its donors’ wealth, legal and tax advisors in all 50 states. Nopar can be reached at email@example.com.