Most CPAs practicing in the not-for-profit sector understand what a donor advised fund (DAF) is and how it is used to benefit both donors, as well as to enable philanthropic giving to qualified charities as its beneficiaries. But those familiar strategies may now need to be rethought due to the passage of the Tax Cuts and Jobs Act of 2017 (TCJA). Both donors and DAF managers may need to change priorities and strategies.
Although it is still early after passage of the new tax law, some tax experts, including regulatory staff at the IRS and Congressional Budget Office, estimate that the TCJA may reduce charitable giving by as much as $25–30 billion per year starting in 2018.
This estimate is primarily based on the increase in the individual standard deduction from $12,000 to $24,000, which may eliminate some impetus for charitable giving. Estimates suggest that approximately 40% of taxpayers will take advantage of this higher standard deduction limit and not itemize deductions as in past years.
Of course, there are valid counterarguments that, with lower tax rates both for individuals as well as corporations, more money and other assets will be available for donors to contribute. All of this is still speculation, but the not-for-profit community should be cognizant that charitable giving is anticipated to decrease beginning in 2018. Just how much is as yet undeterminable.
The Role of Donor Advised Funds
So how do DAFs fit into this new tax environment? The development of these funds has been a great opportunity for donors, who take an immediate tax benefit once assets are placed in DAFs. It also gives both the donor and their investment fund advisors the opportunity and responsibility to determine when and to which qualifying charities these distributions are to be made. It is estimated that well over $150 billion has been accumulated in all DAFs since their inception.
Further incentives include the fact that earnings on DAF assets grow tax-free, including sales on appreciated securities within the fund. Fees earned on these funds grow proportionately as well, but that is the cost (and benefit) of asking fund managers to oversee both the accumulation and distribution of assets for the purposes intended.
The main focus of DAFs as part of tax planning strategies for individuals was to achieve significant tax savings with immediate deductibility for donated amounts. Although the rationale for these deductions was making charitable contributions to qualifying organizations, there was not much discussion about the timing of distributions for purposes of funding their missions. In fact, there are no time limitations as to when DAF assets must be distributed. The timing of distributions is at the discretion of the donors or DAF managers as part of their fiduciary responsibility.
This last point is the main focus of this article. In today’s economy, fueled by the recent new tax regulations mentioned above, distributions from DAFs should take greater priority in the creation, management, and accumulation of qualifying assets. To date, many more assets have flowed into DAFs than have been distributed, both proportionately and in whole dollar amounts, and they continue to grow.
Why is this so important? Part of the answer is also relevant to the new accounting and reporting standards that are being adopted by not-for-profit organizations beginning in 2018. New disclosures about “liquidity” are mandated for not-for-profit entities. Organizations and their auditors must identify the value and liquidity of their assets to meet their obligations, including short-term and long-term debt commitments as well as dayto-day operations.
This is another reason why donors and DAF fund managers should take a more proactive effort in identifying the needs of the charitable organizations to which they wish to contribute, both as to the amount and timing of that funding. This is why the relevance of “charitable giving” needs to be a greater motivating force within the DAF environment, without compromising on the tax planning effectiveness that gave credence to DAFs from the beginning.
Fund managers, as well as their donor clients, understand that growth of DAF assets is a valuable tool that needs relevant fiscal investment management. However, the dual fiduciary responsibility of managing the distribution of these assets has taken on increased significance.
The Rainy Day Is Here
Many not-for-profit organizations know donors who have set up DAFs. It is not inappropriate or aggressive, if done professionally, to approach these donors and ask for additional available funding to meet their mission when it is much needed. In many past cases, management has been reticent to appear too aggressive in pursuing donors. However, approaching donors with the knowledge that they have set up a DAF gives them greater flexibility in their requests, since they know assets have been specifically set up to meet these charitable needs.
It is equally suggested that qualifying charities reach out to fund managers such as Fidelity, Schwab, and others who manage a significant amount of the DAF assets already established. In many situations, these fund managers have considerable influence and authority to grant distributions as they see appropriate as part of their fiduciary responsibilities. Qualifying charitable organizations must realize that they have the responsibility to make their appropriate financial information available to donors and fund managers, including historical, budgeted, and projected operating needs.
There is no time like the present to take full advantage of the DAF distribution aspect and to motivate donors and fund managers in light of the new tax law with its anticipated consequences on charitable giving in a fragile economy.
The assets are there to help make a difference, and the timing for utilization is important. Not-for-profit organizations should take advantage of these sources for their intended purposes and come full circle on the DAF process.
Donors, especially significant donors, will continue to fuel the charitable sector with much-needed funding. For this, the entire not-for-profit financial and economic community is most grateful. But it should also acknowledge that most donors give from both their pocketbooks and their hearts.