Donor-advised funds are becoming more of a charity, less of a tax haven

By Ben Paynter

Let’s say you learned about an investment method that rewards people for putting money into an account that’s earmarked for future charitable use. Theoretically, it would allow contributors to let their donations appreciate as they figure out who they want to give them to. But it doesn’t have any rules about when or how much you actually have to give away. And it’s designed to accept noncash assets like stock, company shares, and real estate, which lets people avoid paying capital gains tax on them in the first place.

What would you call that exactly? Is it charitable innovation or a clever tax shelter?

For years, that’s been the big question surrounding donor-advised funds (DAFs). The Institute for Policy Studies warned in mid-2017 that only about 20% of what was being funneled into these accounts had flowed back out. As of 2018, the National Philanthropic Trust estimated that DAFS had accumulated $110 billion, all money earmarked for charity that charities weren’t getting.

Some people have been stockpiling funds for a while now, but the annual rate of money in to money out is starting to improve: The sector reportedly saw $29 billion in contributions in 2017 with $19 billion going back to cause groups. A new report form Schwab Charitable shows that one way to encourage this kind of behavior is to lower the barrier to who can participate. Schwab’s minimum DAF account balance is $5,000.

Donor-advised funds are becoming more of a charity, less of a tax haven |
[Illustration: FC]

Last year, its users gave $2.4 billion from DAFs to more than 83,000 cause groups. That’s a 33% increase over the year before. The top groups supported were Feeding America, Planned Parenthood, Doctors Without Borders, Campus Crusade for Christ, and Salvation Army, respectively. That’s similar to Schwab’s performance during 2018, when Schwab reported that DAF holders granted $2.2 billion, which was up 35% over its 2017 totals.

To calculate its annual payout rate, the group looks at current year grants compared to prior year assets. Fred Kaynor, the vice president of business development and marketing at Schwab Charitable, says in an email to Fast Company that the fiscal year 2019 rate was 19%, up just a bit from a five-year average of about 18% annually. That sounds low, except that giving behavior really does appear to be increasing over time. In a separate statement, Schwab Charitable said that “85% of accounts opened with Schwab Charitable begin making grants within 17 months of opening” and “typically 80% of contributions are distributed to charity within 10 years.”

“We are very proud of our donors’ generosity and engagement, and on average, more than 60% of our donors say they give more than they otherwise would because of their Schwab Charitable account,” Kaynor adds. “Donor-advised funds are designed to facilitate long-term giving, and by making an irrevocable contribution to a donor-advised fund and investing it for future growth, our donors supply charities with a steady stream of grants over time, which is crucial, especially during periods of uncertainty.”

Schwab says its 2019 contributions have also jumped by 30% when compared to fiscal year 2018. Roughly two-thirds of that total value came from noncash assets. That very likely includes tech stocks, as millennials are averaging six grants per year valued at $4,000 each, a number that could also be skewed by some outsize givers. Schwab claims to have helped its donors make a total of $12.5 billion in grants to more than 150,000 charities over the past 20 years.

As more money is contributed to these accounts, their impact can grow. The question is just how quickly account holders want to make that happen.

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