Donor-Advised Funds In The Era Of Tax Reform

Investors have flocked to donor-advised funds in record numbers since last year, encouraged by the changes to the tax code, a robust stock market, a deluge of natural disasters and political noise. But the stepped-up usage of donor-advised funds (charitable accounts sponsored by public charities) is more than a fad or a gut reaction to the latest news headlines.

Donor-advised funds, first established in the 1930s, enable individuals to set aside cash and non-cash assets and invest them, for tax-free growth, until they grant them to specific charities. Non-cash assets contributed to the funds include publicly traded securities as well as such complex assets as privately held securities, private business interests, real estate, art and, more recently, cryptocurrency.

According to the latest annual industry report from the National Philanthropic Trust, a sponsor of these funds, donors contributed $23 billion to approximately 285,000 individual donor-advised fund accounts across the U.S. in 2016 and used them to recommend nearly $16 billion in grants to qualified charities. NPT and other leading donor-advised fund providers reported record increases in new account openings, contributions and grants in 2017.

Ken Nopar, the senior philanthropic advisor for another fund sponsor, the American Endowment Foundation, says it saw a 70% year-over-year surge in the number of new accounts opened in 2017. He said the new tax law wasn’t the major impetus for this surge, however, “it certainly was for people who were sitting on the fence about doing it,” he says. “The mentality of some probably was, ‘If not now, when?’”

A bigger push, he says, has come from advisors who view donor-advised funds as a good fit for their philanthropic clients who have appreciated assets. There’s an increasing awareness that philanthropy is “not just for the Zuckerbergs of the world,” Nopar says. “Donor-advised funds are for people of all levels of wealth.”

The American Endowment Foundation allows advisors to manage assets of any amount in their clients’ donor-advised fund accounts. Many other sponsors permit advisor involvement only at asset levels of $250,000 or higher.

Investors are learning through their advisors and friends that donor-advised funds offer a simple, efficient and effective way to help themselves and the charities they wish to support, says Nopar. There’s no setup fee, and donors get the tax deduction immediately. The funds also take pressure off advisors because clients can access their accounts online anytime they wish to make grants.

Advisors are also feeling more compelled to address philanthropy. From what he’s hearing from them, Nopar says, “There’s sort of this concern now that if they don’t have this conversation with their clients and prospective clients, they know some other advisor will.”

He expects to see a lot of new donor-advised funds opened throughout this year. He also anticipates that many donors will beef up their contributions to their existing funds given the uncertainty about where the markets are headed.