Everywhere you look, the signs of economic malaise are hurting not only average Americans, but the neediest as well. And as the economy suffers, so do charities. Despite a slight uptick in 2010, 2.1% in inflation adjusted dollars, total charitable giving is still well off its levels before the recession, according to the Giving USA Foundation and the Center on Philanthropy at Indiana University.

The total charitable contributions for American individuals, corporations and foundations rose to $290.89 billion in 2010 from $280.30 billion in 2009, the organization said in June. But those slight increases come off huge drops in 2008 and 2009 that were the worst in 40 years. The foundation's contribution figures show a 3.5% decline in 2008 and a 6.5% decline in 2009.

The two-year estimated change from 2008 to 2010 is negative 3% in current dollars. Charitable giving by individuals has declined 1% over the last two years, while bequest giving has declined 27.1% and giving by foundations saw a 2.9% decline.

Meanwhile, state and federal budget cuts are having a chilling effect on organizations that aid the homeless, the elderly and the sick, not to mention cultural organizations. Massachusetts and other states have seen their funding for AIDS health services slashed by the feds. Michigan, facing a budget gap, is considering getting rid of $200 deductions for individuals ($400 for couples) to give to community foundations, food banks and public radio. In Rhode Island, social services charities helping the disabled and the elderly say they are hurting from state spending cuts. In Minnesota, funding has been rerouted for homelessness programs, meaning certain nonprofits are losing grants.

And arts funding in particular has been slashed in many states. In August, The New York Times reported that 31 states have cut their arts budgets for fiscal 2012, and there's been a 42% drop in arts aid over the last ten years.

The Gates Foundation captured the general sour mood for charities when it told the Chronicle of Philanthropy that it had cut back on grant making for 2010.

But there's also a silver lining to that: The software mogul's foundation is so big, that if it were removed, foundation giving actually rose for the year. And charitable giving by individuals, who by far and away make up the most in philanthropic dollars, rose by 2.7% in 2010 from the year before.

It's not so much that giving is rapidly declining so much as it is changing, says Daniel Connolly, the director of development at Quality Services for the Autism Community in New York City. While his organization, QSAC gets most of its money from the government, Connolly has also worked with other organizations helping AIDS patients, and he has seen the battle for dollars.
"I think money from corporations has been on the decline," says Connolly. "But giving from foundations and the high-net-worth community and individuals has not only recovered, but that community really got together and filled in the gaps for what government and corporations [weren't giving]. The big foundations, Ford and Rockefeller, got together when the market declined several years ago and said we have to collectively help, so our endowment can decline somewhat, but it's important to provide the safety net that we had long been providing."

Connolly also said that the reason many charities are struggling is that there are many more competing for the pool of dollars. "If you look at the nonprofit field in the past 15 years, you see a staggering increase in the number of nonprofits dedicated to serving the same field. Now there's 300, where ten years ago, for the exact same mandate, there were 30."

And those charities who haven't stepped up their fund-raising acumen are those most at risk, says H. King McGlaughon, the new chief executive officer of Foundation Source, a firm that offers services to 1,000 client foundations. According to McGlaughon, who until recently led philanthropic efforts at Wells Fargo and Wachovia, charitable contributions in the U.S. have continued to hover around $300 billion every year because giving is still a core value of Americans. But he acknowledges that the last 18 months have seen erratic giving as donors ride out the stock market rollercoaster.

"Through 2010, giving was really struggling in terms of getting donors to commit to the same level of giving that they had previously met," says McGlaughon. "By the first part of 2011, giving was really picking up. But in the last few months, the volatility in the markets has slowed that down again."

He says the trend now is that people are hesitating to make long-term commitments because of the sine wave market gyrations in the stock market. That is affecting giving in the short run. But it remains to be seen what 2011 will look like until the end of the year, since the fourth quarter is usually the biggest one for making donations, when people do more charitable giving for the holidays (and, not coincidentally, have a better idea of what their year's tax bill will look like).

"I would say the trend is toward waiting to make large commitments," says McGlaughon. "Everyone I'm talking to in the nonprofit sector, as well as our private clients that I talk to here at Foundation Source, don't intend to make significant changes in their giving from last year. But they are waiting closer to the end of the year to make those gifts."

Still, another baleful trend he sees is that foundations are shrinking the pool of charities they give to, he says. "They're trying to make their dollars go further in their charitable giving strategy," he says, "by giving more dollars to fewer organizations."

According to Foundation Source's own research, smaller foundations that are $2 million to $50 million in size are giving more than they were two years ago, likely because they are more closely tied to local organizations and are seeing, up close, the greater demand for help from vulnerable people in stressed economic times. Though private foundations are required to pay out 5% of their holdings, the smaller foundations in his universe are paying 7% to 9%, he says. "They understand how stressed those local organizations are. They know the employees personally. Many times, they or their families have benefited from the services." 

Sarah Herrian, a founder of the charity Forgotten Ministries in Enid, Okla., a 501(c)(3) Christian organization that partners with churches to run clothing and blanket drives for the poor, says that her $50,000 annual budget has stayed about the same. Mainly, she says, she's up to her eyeballs in blankets and clothes from individuals. But at the same time, she hasn't seen her big donors leave the charity, she says.

"We do have people giving on a monthly basis," she says. "They commit to a certain amount. We haven't seen a lot of wavering in that giving as far as their commitment. But I know a lot of people with larger budgets are definitely seeing a difference in annual budgets." One of the make-or-break facets of a good charity she says, is its willingness to take donors out to see the people they're helping.

"That is so much more of an enticement than sending them something in the mail."

Foundation granting, however, has likely been hurt by the lower stock values of foundation assets. Matthew Chope, a partner at the Center for Financial Planning in Southfield Mich., is also a board member of the Southfield Community Foundation, which has $2 million in assets and has given away $2 million that has passed through in donations in the past three years for after school programs, battered women awareness, senior programs and scholarships. Chope says that a lot of foundations have funds that are under water and their policies limit how much they can give in that circumstance.

"A lot of the endowments were fully invested to their strategic allocation code or model for portfolios, but the portion that was in equities, probably 50%-60% for a lot of endowments probably fell by half or more," he says. "That made a lot of the pools within the endowment under water, so they couldn't give. Because a lot of the policy statements state that if you're under water from what the contributions to the endowment were or the specific donation pools were, then you can't give. You have to wait until it gets back above. And the only way it gets back above is new donations and growth in the portfolio."

Donor-Advised Funds Continue Surge
Though overall giving has been erratic as the market roils, one giving vehicle that has continued to see increased donations is donor-advised funds, accounts run by sponsors such as Fidelity Charitable, Schwab Charitable and Vanguard holding monies that the donors can direct after they've made contributions. Giving USA doesn't break out the numbers for donor-advised fund growth, but says that all the major players in the area have reported year-over-year increases in contributions.

Schwab Charitable says it saw donor advised fund contributions increase 11% from fiscal 2009 to fiscal 2010, and 30% from fiscal 2010 to fiscal 2011.

"Our contributions are actually up over the summer pretty substantially, and our granting is actually up 20% year over year," says Kim Laughton the acting president of Schwab Charitable. "What ends up happening is that whatever happens with the stock market in the last few months of the year will really in many ways dictate how good of a year it is for giving."

Furthermore, she says, a lot of people are still holding on to appreciated securities that have risen greatly in the last two years, and that will also determine how much people donate. (Appreciated assets made up 68% of the contributions in fiscal 2011, Schwab Charitable says.) "So it's still a lot of room I think for people to be giving charitable contributions and using appreciated stock to do so, which is really the bread and butter of what we do."

Fidelity Charitable, which launched the first donor-advised fund 20 years ago, saw its 2010 contributions rise 42% to $1.6 billion, and it saw $512 million in donations in the first half of 2011, a 30% increase from the same period the year before, says Amy Danforth, a senior vice president at Fidelity Charitable. The fund gave away $604 million in first half, a 14% increase from the year before.

"In terms of Fidelity Charitable, we're having our strongest year that we've had since '07," says Fidelity's Danforth. "Our first half results were super strong and we're really gratified by the growth that we're experiencing. We also have a generous pipeline of potential deals that are being covered by our charitable planning consultants.

"Having said that, certainly where there's market gyrations and the kind of volatility that we're seeing, national donor advised funds are sensitive to the market in a way that general giving is not. In the downturn of '08 and '09, donor advised funds were off much more significantly than general giving."

Appreciated Assets
However, many assets have appreciated since the 2008 downturn, and these are prize targets for contribution, since the donors don't have to realize the gain on the appreciated asset if they give it the same way they would if they sold it, which generates capital gains taxes. Instead, they can donate it, forgo the capital gains tax and also win a hefty charitable tax deduction of the asset's fair market value. The huge surge in assets in the last couple of years from the stock market nadir in March 2009 means lots of people will have appreciated stock to donate.

That dovetails with another trend, says Danforth: the number of people with complex assets to donate-C corp and S Corp stocks, restricted stock, real estate, limited partnerships, and assets transferred or sold in a merger and acquisition. Danforth says Fidelity's complex asset contribution tripled in the first half of the year from the year before, rising to $41 million, or 8% of the $512 million total.

To keep up with the increasing interest in these types of donations, Fidelity Charitable has expanded its consultation services and planned several seminars in major cities to help advisors work through the thorny requirements of donating these types of assets, a process that must be done to the letter if the IRS is to recognize the gift. The donor has to sign a gift agreement, and the charity has to do thorough legal due diligence, a process that requires the charity to assess the marketability of the asset and make sure the facts around the donation pass the smell test with the IRS, which can look back over three years to determine whether or not the donation was up to snuff.

Timing is crucial in this sort of donation, and it's never too early to start the discussion with clients. This is important for advisors who want to work with high-net-worth individuals whose businesses are a major component of their wealth. Donors trying to sell their business to interested buyers might often be in a hurry, and the charity might be thirsty for donation dollars. But the assets have to be donated at a point in the negotiations when there is still a good chance that the deal could fall through for the IRS to OK it, not after the deal is done, at which point it has become a taxable event for the donor. More specifically, the gift should be given in the deal negotiation stage and before the terms are finalized, the terms being things like shareholder approval, the price per share, the closing date and closing conditions, indemnities, earn-outs and escrow arrangements, etc. Otherwise, the agency may consider the gift to be an anticipatory assignment of income to the charity. So advisors have to start talking with the charitable organization early, giving the charity time to perform its due diligence, including the review of all  relevant documents-shareholder agreements, partnership agreements and draft M&A documents, says Karla Valas, managing director of Fidelity Charitable's Complex Asset Group.

"The key is that the donor must have completed an irrevocable legal transfer of the complex asset before a corporate transaction is considered a 'done deal'" says Valas.  Moreover, the donor can't exert control over the asset once the donation is considered complete, including decisions by the charity about whether to and/or how and when to dispose of the contributed asset.

If a client is selling his business, an extremely likely event as wealthy baby boomers retire, advisors need to start this conversation early in anticipation of the several weeks or so of vetting required.

Schwab and Fidelity both say this method allows the donor to take a difficult-to-value asset at a time a donor might need an exit strategy from his business, and then divide up proceeds among several charities that don't have the due diligence apparatus to handle such gifts on their own. Instead of one big charity getting it, it's possible many small ones can.

Donor advised funds often see unusual assets donated, anything from parts of sports teams, coin collections, artwork, wine collections, pieces of land and other things that are difficult to value. Once a donor even gave away a seat on the New York Stock Exchange.

Advisors more finessed in these techniques will like find themselves better positioned with high-net-worth clientele, says Danforth. 

"What we have seen is an increase in advisors who are becoming more knowledgeable in this area," she says. "And if you follow the ultra-high-net-worth research, business ownership and exit planning for business is growing as a practice, and the philanthropic element of that is part and parcel of that planning."