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WEALTH MANAGEMENT UPDATE ON DONOR-ADVISED FUNDS
More than $120 billion is currently held in donor-advised funds (DAFs), and grants from DAFs to charities have nearly doubled in the past five years. Virtually unknown to the public a decade ago, the charitable savings accounts are the fastest-growing gift vehicles in the philanthropic world. Three Chicago-based philanthropy executives shared their DAF insights and updates with Crain’s Content Studio. How is your organization involved with DAFs? Rose L. Jagust: The Jewish United Fund/Jewish Federation of Chicago provides humanitarian aid for over 500,000 people of all faiths in need in Chicago, millions in Israel and across the globe. Our DAF program has operated since 1971 and is among the oldest providers in the country. The program has grown to almost 1,000 funds and manages assets of approximately $215 million. In 2019, our donors contributed $39.5 million to thousands of charities, Jewish and secular, supporting nearly every type of charitable cause. They’re particularly passionate about education, human services, health and medical research, and building the Jewish community. Jewish Federation of Chicago professionals work with donors of all ages and incomes from throughout the Chicago area, helping them to be better informed, savvy philanthropists. We pride ourselves on working with multiple family generations, helping them act on their charitable interests and pass along their charitable legacies. Phil Zielinski: Mercy Home is a children’s charity based in Chicago that offers solutions for kids affected by abuse, neglect, violence, homelessness or other traumatic experiences. Because we’re a 501(c)(3) nonprofit organization, we often receive grants from DAFs to
throughout the country. We now work with fund holders from over 40 states, and our program has more than 2,000 funds and assets of almost $2 billion. Our annual DAF grants typically total more than $325 million, and in this extraordinary fiscal year we’ve distributed $500 million so far. Whether DAF holders’ giving is focused in Chicago or beyond, donors have the opportunity to learn about issues important to our region and connect with the Trust’s work to build a thriving, equitable and connected region. What’s the most common question or concern you’re hearing regarding DAFs? Zielinski: People ask if a DAF is right for them. Our response is that a DAF is an excellent tool for anyone who’s charitably inclined, looking for a tax deduction and wants to avoid the administrative costs of a family foundation. It’s the perfect way to start a family conversation about giving back, and is also a great way to consolidate complex assets—such as business interests, closely-held stock or real estate—into a single philanthropic account. Carlson Vogen: As a community foundation serving the Chicago region, donors often ask if they can support organizations and causes outside Chicago through their DAFs. Our program enables fund holders to make
“ . . . A DAF IS AN EXCELLENT TOOL FOR ANYONE WHO’S CHARITABLY INCLINED, LOOKING FOR A TAX DEDUCTION AND WANTS TO AVOID THE ADMINISTRATIVE COSTS OF A FAMILY FOUNDATION.”
ROSE L. JAGUST
VP - Donor Advised Funds JUF/Jewish Federation of Chicago rosejagust@juf.org 312-357-4954 donors use their funds for both large and small donations to charity. We also mandate that donors give out at least the interest earned on their funds each year and even as our assets continue to grow, our aggregate giving has stayed in the 20 percent to 30 percent range.
KRISTIN CARLSON VOGEN
Senior Director Philanthropic Services The Chicago Community Trust kvogen@cct.org 708-527-1396 What’s driving the current interest in DAFs? Zielinski: I think the best explanation for their growth is that donors see them as a simple, cheap and flexible way to give to their favorite charities. A donor can contribute to a DAF when it makes
PHIL ZIELINSKI
Director - Philanthropy Mercy Home for Boys & Girls phizie@mercyhome.org 312-738-9527
sense, but doesn’t have to distribute to the charity right away. This donor receives a charitable tax deduction when the gift is made, and can be more strategic in planning their philanthropy in the long term. The DAF streamlines recordkeeping too, because even if the donor gives to multiple charities in a
SMART PHILANTHROPY
- PHIL ZIELINSKI, MERCY HOME FOR BOYS & GIRLS support our young people on their path to healing. Mercy Home is more than 99 percent privately funded, which means that the vast majority of donations we receive come from individual donors. We’ve seen a dramatic increase in the number of gifts from DAFs in the past few years, and are committed to helping our donors increase their impact on the philanthropic sector while simplifying their giving through DAFs. Kristin Carlson Vogen: Since our founding in 1915, donors have entrusted their philanthropic dollars with The Chicago Community Trust to address the region’s pressing needs. Beginning in the mid-1980s, we offered donors the opportunity to give during their lifetimes and extended the capacity to give beyond Cook County to nonprofits
grants to qualified 501(c)(3) public charities anywhere in the country. Increasingly, we field questions from nonprofits asking how to access DAF grants. Individual donor cultivation remains the primary way to access this increasingly popular giving vehicle. Jagust: There’s been a lot of talk over the last few years regarding the substantial growth in the amount of money being held in DAFs and the issue of whether that money is being warehoused rather than used for charitable purposes. Specifically, there’s concern that DAFs are being used by the wealthy only for the purpose of obtaining a large charitable deduction. At the Jewish Federation, we have DAFs of all sizes, from a few thousand dollars up to funds with millions, and our
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WEALTH MANAGEMENT UPDATE ON DONOR-ADVISED FUNDS calendar year, the result is only one tax receipt and one charitable deduction amount. Carlson Vogen: By making one transfer to a DAF, the donor keeps track of one charitable deduction, yet can contribute immediately and in the future to recommended nonprofits. With the stock market at record highs, many individuals want to take advantage and contribute shares of stock. It’s much easier and simpler to make one transfer into the DAF and then distribute dollar amounts to recommended charities. Jagust: By “bunching” several years’ worth of giving into a DAF, donors can take a deduction in one year while supporting their favorite charities over a longer time. When the DAF’s assets dip, they can repeat, as necessary. DAFs are also being used in more flexible ways. For instance, individuals and families use DAFs to mark life events and to pass on charitable giving to the next generation. Employers have started offering employees the ability to make payroll
deductions into DAFs that they can then use for charitable giving, and these kinds of funds have led to a large increase in the total number of DAFs. What tax or regulatory changes relating to DAFs should donors be aware of? Jagust: The issue that’s most recently been debated and has reached one state legislature is related to the substantial growth of assets in DAFs. Calls have come forward to mandate a minimum percent spending for each DAF each year. Just recently, in response to the pandemic, advocates have called for a 10 percent distribution rate from every one of the 728,563 DAFs in the United States. This is happening even though in the aggregate DAFs collectively distribute significant amounts to charity each year at rates much higher than that distributed by private foundations. For example, at the Jewish Federation, we’ve averaged a payout of 23 percent of our DAF assets in the last 10 years. We also mandate that donors must give out at least the
“EMPLOYERS HAVE STARTED OFFERING EMPLOYEES THE ABILITY TO MAKE PAYROLL DEDUCTIONS INTO DAFS THAT THEY CAN THEN USE FOR CHARITABLE GIVING . . .” - ROSE JAGUST, JUF/JEWISH FEDERATION OF CHICAGO
interest earned on their funds each year. Moreover, the majority of DAF programs also give out significant amounts of money collectively, with an average of approximately 21 percent of assets in the aggregate being distributed in 2019.
could significantly decrease, or even eliminate, your federal tax liability.
Carlson Vogen: Some people are raising questions about the legitimacy of charitable deductions for DAFs when grants are paid in a different year. There have been suggestions to create a required minimum distribution similar to private foundations. As a community foundation, we encourage our donor advisors to make grants annually from their DAFs. Typically, the payout rates from our grants exceed 18 percent. This year, we’ve seen unprecedented distributions and will likely see an average payout far exceeding 20 percent.
Carlson Vogen: DAF grants must be distributed to qualified 501(c)(3) public charities. Private nonoperating foundations—including independent, family or corporate—are also 501(c) (3) entities, but don’t qualify as public charities and can’t receive a grant from a DAF. Some DAF sponsors have restrictions on the types of nonprofits that can be supported, and all DAF sponsors have the ultimate authority on approving a grant recommendation from a donor advisor.
Zielinski: I’d encourage all donors to pay attention to how the CARES Act—passed in response to COVID-19—affects charitable giving in 2020. Contrary to the theme of this conversation, the CARES Act actually incentivizes donors to give cash directly to a public charity, rather than through a DAF. Taxpayers can deduct up to $300 in cash gifts made in 2020, even if they take the standard deduction. They can also deduct cash gifts of up to 100 percent of their adjusted gross income, effectively eliminating their federal tax liability in 2020. This means that if you’re facing a heavy tax burden this year, a large cash gift directly to a charity
Are there rules or regulations that limit how donors can use their DAFs?
Zielinski: The basic rule of thumb is that a DAF may only be used for charitable purposes, and the donor cannot receive any benefit for their gift. As expected, the most common restrictions for DAF giving involve fundraising events and charitable pledges. IRS rules state that a donor cannot receive any personal benefit from their DAF gift, which means that they can’t use it to purchase tickets to a charity event, to bid on an auction item or fulfill a legally binding pledge. Jagust: Donations may also go to some other organizations, such as houses of worship and government entities, but in those cases, there may be additional due diligence required to ensure that the donation is used only for charitable purpose. Donors also need to understand that requests for grants from their fund are recommendations only and that the hosting organization can add additional requirements to these rules. For example, the Jewish Federation would not make a grant to an organization whose mission and activities run counter to the interests of the Jewish community. Can DAFs be used in response to immediate relief needs, such as COVID-19?
Your philanthropy gets smarter when we work together. When you seek to improve our community and support causes that motivate you, the Trust can help.
Please contact Tim Bresnahan at tbresnahan@cct.org or visit www.cct.org/generosity.
LOCAL PHILANTHROPIC EXPERTISE / LEGACY AND BEQUEST PLANNING DONOR ADVISED FUNDS / IMPACT INVESTING
Zielinski: Absolutely! Just like a cash gift made in response to a natural disaster or other tragic event, a grant from your DAF can easily be deployed to wherever it’s needed most. And because these gifts are liquid, they allow nonprofits to remain nimble during a crisis, when programs and services must evolve to meet a new set of needs. For instance, in response to the pandemic, Mercy Home established the “Community Care” program to expand services and provide essential needs to the greater Mercy Home community. A number of donors have earmarked their DAF gifts for this program, which has allowed us to quickly pivot and provide help to those who need it most. And one donor stepped up to challenge others to distribute their DAF gifts in the time of COVID-19 as well, inspiring our current “DAF Challenge” running until the end of the month. Please see our ad for more details. Jagust: DAFs are the perfect tool for responding to immediate relief needs. Many of our donors cycle money in
and out of their DAFs, yearly or every few years. In this way, they always have charitable funds available and ready to use for special purposes. We’ve seen our donors use their DAFs time and again for immediate relief needs such as following natural disasters like hurricanes and fires and now for the pandemic. Our DAF donors have given over $2 million in the last few months specifically for COVID-19 needs, with additional gifts to a myriad of social service agencies that help many at-risk populations. Carlson Vogen: In the wake of COVID-19 we saw a tremendous surge in giving and people wanting to do what they could to help our communities through the crisis. In the early months of the pandemic, from March to June 2020, Trust donors made $151.3 million in grants from DAFs—a 53 percent increase compared to the same time last year. The flexibility and ease of giving that DAFs provide was vital in mobilizing these funds to sustain nonprofit and community organizations and support the most vulnerable residents. Because DAF dollars are already set aside for charity, it’s much easier for fund holders to respond to urgent needs and increase their generosity, regardless of how economic shifts may impact their personal investments or immediate income. As we continue to come to terms with the ongoing impact of the pandemic, what we’ve learned this year can help us to understand potential giving trends moving forward, or how to respond to tumultuous events in the future. Is there an incentive to make a gift from a DAF rather than a cash gift? Carlson Vogen: DAF distributions are more agile and thus can be called upon when a donor will not be able to meet the threshold for itemized deductions, or when a donor doesn’t have resources to give to charity in a specific year. For example, after the Tax Cuts and Jobs Act of 2017, many tax advisors advocated for DAF “bunching”— providing a larger contribution for a DAF in one year, using that for gifts to charity in following several years, and contributing more in subsequent years. Because of the pandemic, 2020 is an unusual year as cash contributions to direct service charities can be deducted up to 100 percent of one’s AGI, instead of limited to 60 percent. Jagust: In general, making a gift from an already established DAF is easier and makes more sense. Since the donor has already received a tax deduction when they gifted to the DAF, there’s no tax consequence when money is gifted from the fund to the charity, which means the donor doesn’t have to worry about keeping receipts from various charities. Also, most DAF sponsors have on-line password-protected sites that make it efficient and fast to make a gift. However, if donors want to make gifts to a political campaign or a lobbying organization, they’ll have to make those via a cash gift, not a DAF. Zielinski: Mercy Home currently has a “Double Your DAF Challenge” for
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“DAFS ARE A GREAT AVENUE FOR FAMILIES TO COME TOGETHER AROUND THEIR SHARED VALUES AND CHARITABLE GOALS AND CREATE A PLAN FOR GIVING...” -KRISTIN CARLSON VOGEN, CCT all DAF gifts initiated by Oct. 31. This means that any DAF gift made until the end of the month—up to $50,000—will help twice as many kids and families in need. This is our first time holding a campaign like this, and was sparked by a conversation with an anonymous donor who wanted to incentivize others to support Mercy Home in the era of COVID-19. She read an article about the #HalfMyDAF Challenge, in which a California couple challenged others to distribute half of their DAF accounts to charity, unlocking badly needed funds to nonprofits across the country. This is one more example of philanthropists finding innovative ways to increase giving, and ultimately help those who need it most. What factors should donors consider when choosing among DAF providers? Jagust: Donors should decide if they prefer a local provider like a community foundation, a single-issue charity or one of the national commercial providers. Charities like the Jewish Federation of Chicago, which acts like a community foundation for the Chicago Jewish community, along with single-issue charities that host DAFs tend to offer more individualized service, with staff who take the time to learn about donors and their interests. These charities can also provide more in-depth philanthropic advice regarding issues such as strategic grantmaking, legacy planning and teaching second and third generations about philanthropy. The commercial institutions provide efficient service, but generally do not assign dedicated staff to each donor. However, this option may be more convenient if the institution also manages the donor’s personal investments. Of course, fees and ease of use also are important, so donors should review the administrative fees charged and whether the provider has an easy-to-use online system for recommending grants. Zielinski: Most donors open a DAF account with the same administrator where they’ve already invested their personal wealth, such as Fidelity, Vanguard or Schwab. This makes perfect sense if your primary motivation is simplicity; after all, a central goal of having a DAF is to make giving simple. But if you’re looking for guidance in your philanthropy, and how to make the greatest impact, a community foundation, such as our friends at The Chicago Community Trust or the Jewish Federation of Chicago, may be a better fit. These smaller shops can provide a valuable service in philanthropic advising which can be transformational for you and your family, especially if you’re interested in legacy planning, or teaching younger generations about
philanthropy. No matter which option you choose, pay attention to account minimums and administrative fees, and take advantage of investment options to grow your investment and increase your impact on charities when you make a grant. Carlson Vogen: Local community foundations, including The Chicago Community Trust, have expertise about nonprofits serving the surrounding community, as well as knowledge about issues that are pertinent for impactful granting. Every DAF holder at The Chicago Community Trust is assigned a philanthropic advisor. That advisor guides the DAF holders on their philanthropic journey, asking questions relevant both to grantmaking and longterm administration of the fund. How can DAFs be used to engage subsequent generations in charitable giving? Carlson Vogen: DAFs offer a great deal of flexibility for individuals to achieve their philanthropic legacy goals. Donors can create a DAF either during their lifetimes or through their estate and design a succession plan that engages family members and subsequent generations. DAFs are a great avenue for families to come together around their shared values and charitable goals and create a plan for giving long into the future. Jagust: With younger children, parents can connect them to talk about charity at a family meeting and encourage them to think about how they want to help others; and a small grant to an organization on behalf of the child can do much to help that child develop a habit of giving. As children mature, parents can allow children access to the DAF to make their own grants with approval from the parents or open a separate smaller DAF for the children that the parent oversees. Finally, parents can name their children to succeed them in using the DAF and structure their testamentary documents to leave a portion of their estate to the DAF, which is also tax beneficial for the parents’ estate. Zielinski: Talk about the Family Philanthropy Fund when you get together for Thanksgiving each year—it will be your new family tradition! When you invite younger generations into the conversation, you’re telling them what’s important to you, and what you’re doing right now to make the world a better place. You’re also inviting them to think of something greater than themselves, and to support causes that they believe in. In my experience, these are always better conversations around the Thanksgiving table than football or politics..
ABOUT THE PANELISTS ROSE L. JAGUST is vice president of donor advised programs at the Jewish United Fund/Jewish Federation of Chicago. She also heads JUF’s Center for Jewish Philanthropy, which serves thousands of Jewish individuals and families and holds more than 1,025 funds and foundations valued at around $1 billion. She is a member of the Chicago Council on Planned Giving and has presented at the Council’s annual meeting, as well as other meetings and conferences in the nonprofit area. Before joining JUF in 2001, she practiced employment law and worked in the nonprofit sector.
KRISTIN CARLSON VOGEN is senior director of philanthropic services at The Chicago Community Trust, a foundation that for more than 100 years has connected donors with community needs. She and her team engage families and individuals to focus their giving for impact, leverage the knowledge of the Trust’s community impact staff for the benefit of donors and advisors, and enhance opportunities for impact investing. Before joining CCT in 2018, she was president and CEO of the Oak Park-River Forest Community Foundation, and earlier in her career worked at Bank of America/U.S. Trust as a philanthropic specialist.
PHIL ZIELINSKI is director of philanthropy for Mercy Home for Boys & Girls, a residential care facility that has served Chicago-area kids in crisis for more than 130 years. He and a team of philanthropic advisors work with donors to maximize their impact on the causes they care about while minimizing tax exposure. He has nearly 15 years of philanthropy experience, including previous roles as a lobbyist, grant administrator and planned giving officer. He is a certified fund-raising executive (CFRE), a member of the Chicago Council on Planned Giving, and the Association of Fundraising Professionals.
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Donate at MercyHome.org/CrainsDAF