Donor Advised Funds Can Provide Relief for Charity During Recessions
It’s no surprise that charities and non-profits struggle when financial markets experience a sudden and significant decline. The impact of the novel coronavirus on global markets is a prime example of this and of the hardship that charitable organizations are currently facing. Food banks in particular across Canada and around the world are struggling to stay afloat during the pandemic, and that’s just one example.
The reason for this hardship is twofold. First, many charitable organizations are in higher demand when the economy is suffering, which makes sense as more people seek their services. At the same time, donations from individuals and corporations often decrease during an economic downturn, causing the strain on charities to grow even more.
Fortunately, donors who had the foresight to establish a Donor Advised Fund (DAF)—or the benefit of a financial advisor who encouraged them to establish one when markets were healthy—may be well positioned to continue to support their preferred charitable organizations even during a crisis.
A DAF is often referred to as a flexible giving tool. What this means during a sudden drop in markets is that donors who have previously donated assets to a DAF are able to continue to provide consistent funding to their preferred charities, even when their investments drop in value as a result of market fluctuations. What’s more, the flexibility of a DAF has been linked to more generous grant making during recessions compared to other giving forms.
A study conducted at the University of Pennsylvania by Dan Heist and Danielle Vance-McMullen, found that while other forms of charitable giving generally drop during economic downturns, their study found that grants from DAFs remain relatively stable in recession conditions, despite a reduction in contributions and decline in assets.
Given these findings, donor advised funds may be an important resource for charitable organizations both during times of crisis and in preparation for the next recession. The study also offered a new way of looking at the grant-making activity of DAFs.
Rather than focusing on the payout rate, the study created a new metric, flow rate, which compares the amount of money granted from DAFs each year to the amount of money donated to DAFs by donors.
The researchers said this calculation better reflects the true activity of DAFs since payout rates don’t account for the significant amount of money donated into funds each year.
In 2015, the study found the median flow rate for DAFs was 87 percent, meaning that for every $1 million contributed in 2015, $870,000 was granted to charities. The remaining $130,000 was invested for future grants to non-profits—set aside for future use.
Financial advisors can play a key role in activating the flexibility of a DAF during a crisis. For most people, making a philanthropic contribution may not be top of mind while the economy is sluggish, however, donors with a DAF might appreciate their advisors’ perspective and advice on the ways in which they can continue to provide support to a preferred charity by making adjustments to the granting amount, timing, and recipient.
Knowing that other donation sources may decrease during difficult times, some donors may wish to provide the same or even larger levels of support to a preferred charity through their DAF.
To be able to do this, donors will often work with their financial advisors to make strategic contributions to their DAF during high income earning years or in the years approaching retirement. In doing so, donors are better prepared to provide consistent levels of support during retirement when their income will be less, and the tax benefits of donating may decrease as well.
Many donors, when making large donations of cash, stock, or complex assets such as privately held stock, or real estate may not want to give all of these assets at one time directly to an individual charity. In this case, a DAF can be established, the donor would receive an immediate donation receipt and would be able to make grants over time. In doing so, donors can maintain some control over the distribution and timing of their grants. Additionally, some charities cannot accept gifts of complex assets while charitable organizations, such as Gift Funds Canada, can advise and assist with virtually any gift type no matter how complex.
If the history of the stock market has taught us anything, it’s that fluctuation is inevitable and the best way to manage sudden change is to prepare in advance. For donors who wish to maintain a steady or even increase their philanthropic support of a preferred charitable cause, a donor advised fund is a proven planning tool.