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Donor-advised funds growing at a ‘meteoric’ rate

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The donor-advised fund, an 80-year-old vehicle for charitable giving, is growing in popularity with contributions and grants recently reaching record highs.

Assets under management in these funds totaled $85 billion last year, marking a 9.7% increase over 2015, according to the 2017 Donor-Advised Fund Report from the National Philanthropic Trust. Whereas some of that growth was driven by investment gains, record contributions also played a major role.

That same report finds that grants from donor-advised funds to qualified nonprofits grew 10.4% last year to a record $15.75 billion. Donor-advised funds remain the fastest-growing giving vehicle in the U.S., with 285,000 individual donor-advised fund accounts, a 6.9% increase from the prior year.

Overall, donor-advised funds now account for about 8.3% of all individual giving as estimated by Giving USA.

“It’s been meteoric growth,” National Philanthropic Trust CEO Eileen Heisman told Accounting Today, one of Financial Planning’s sister publications. “Ten or 12 years ago, we weren’t seeing anywhere near these kinds of numbers. I think technology helps and financial service companies being involved in distributing it helps.”

California, Massachusetts and Pennsylvania boast the most donor-advised fund accounts. Heisman notes that some of the largest providers are concentrated in those states. Schwab, for example, is based in California, as is the Silicon Valley Community Foundation. Fidelity is headquartered in Massachusetts, while both Vanguard and National Philanthropic Trust are based in Pennsylvania.

Meanwhile, Nebraska experienced the most rapid growth in accounts in 2016.

Millennials are beginning to get involved with donor-advised funds but still aren’t heavily invested in them. “We’re not seeing them in large numbers yet, but we’re certainly seeing their effect on philanthropy in general,” Heisman says. “We expect that as they start accumulating more wealth than they need to live, they’re going to start adopting donor-advised funds as a really easy-to-use tool.”

Heisman notes that many donor-advised funds can be managed from a phone or tablet, making them a well-suited tool for tech-savvy philanthropists.

The Giving Tuesday philanthropic campaign is attracting more attention to charities as a follow-up to yearly shopping staples like Black Friday, Small Business Saturday and Cyber Monday.

“I think Giving Tuesday is going to become a part of the fabric of giving, and then people aren’t going to remember what it was like not to have it,” Heisman says, noting that her organization often sees a small spike in donor-advised fund grant requests around this time of year. “It’s not all about buying things for the holidays. It’s also about giving back.”

Three years ago, the Ice Bucket Challenge helped raise millions of dollars for the ALS Association and other charities helping victims of amyotrophic lateral sclerosis, also known as Lou Gehrig’s disease. Heisman doesn’t see a similar trend this year, though crowdfunding campaigns are growing in popularity.

“What we’ve seen is a lot of short work bursts of crowdfunding for different kinds of projects,” she says, noting several campaigns, including one by the National Museum of American Jewish History. The Philadelphia-based museum used Kickstarter to raise funds to restore a Volkswagen bus to promote a rock-and-roll exhibit. Sites like GoFundMe and Omaze have also been helpful in raising funds for various causes.

“I think the GoFundMe campaigns give people a reason to want to give in short bursts without a lot of commitment in the long run,” Heisman says. “Part of the challenge of a charity is if these donors are around, how do you keep them involved?”

More donors are turning to cryptocurrencies like bitcoin as they make their charitable contributions.

“If you had asked me three years ago about cryptocurrency, I probably would have said, ‘What’s that?’ But so far this calendar year, we’ve had about $10 million in cryptocurrency gifts, and we’ve gotten more sophisticated tools,” Heisman says. “It seems like somebody absolutely has turned on the light on cryptocurrency giving.”

Many charities do not feel equipped to handle digital currency, though, and in some cases, the National Philanthropic Trust has offered to facilitate these transactions.

“I think a lot of charities are really nervous about it,” Heisman says. “I said to the charity we were talking to, ‘You know, why don’t you use us to accept cryptocurrency? We’ll accept it and pass it along to you. There will be a small fee, but if you don’t want to take the risk and you don’t have expertise in it, we’re more than happy to do that, not just for cryptocurrency but for other illiquid assets.’”

The National Philanthropic Trust already handles donations of illiquid assets like artwork, including a gift of a Picasso painting that later sold for nearly $20 million at auction. The organization has also been dealing with donations of real estate and hedge fund investments.

“We liquidate them as quickly and reasonably as possible and practical,” Heisman says. “We’ll try to maximize the value, and then that asset turns into a liquid asset that they can make grants from.”

One big question mark hanging over the nonprofit sector lies in the tax reform bill, which may end up discouraging philanthropy if write-offs for charitable donations and other itemized deductions prove to be much smaller than a higher standard deduction.

“I think the big problem is nobody knows what’s really going to happen,” Heisman says. “One of the things we do know is that when there’s a threat or the tax changes, often people will frontload a gift or maybe a couple of years of their giving in anticipation of not knowing what’s going to happen in the following year.”

Advisors usually play a major role in crafting those decisions, she says.

“I’m not sure what their tax advisors are telling them, but we’ve had a number of high-net-worth donors who have told us they may be splitting the gifts between December and January,” she says. “Usually when we hear something like that, it’s driven by advisors.”

Many donors plan to claim as big a charitable contribution deduction as they can for this year, while hoping they can do the same for next year too. Meanwhile, the prospects for donor-advised funds still look bright as a way to plan charitable giving, Heisman says.

“Philanthropy is such a part of the American way of thinking about life and passing values onto your kids,” Heisman says. “Once you put financial service company bankers and financial advisors in the mix, and they start offering a charitable product, now the distribution of that product goes farther and wider than you could ever imagine than if it was just in the charitable sector alone.”

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