Episode 111: Donor Advised Funds DAFs - Coming Challenges and the Concept of Power

It's another great day right here on "Around with Randall." And of course I'm Randall. Today's discussion in this podcast is really centered around Donor-advised funds and some of the things that I think are going to be really important discussion points in the near future. We will certainly do our 2022 predictions review show podcast here in the next couple weeks as well as what we're looking for for 2023, but what's going on with Donor-advised funds I think deserves special attention, and thus today's conversation between you and me.

Let's start with the basics. Donor-advised funds are called DAFs, in terms of an acronym, are funds that are contributed by individual or and or individuals, usually within some type of Community Foundation. Or maybe they put them, and this has been kind of a trend with places like Schwab and Fidelity and Vanguard having Donor-advised funds there as well. The reason that they exist is it allows for an infrastructure. Sure for the donors that they don't have to worry about, if you have let's say a couple million dollars and that may be even high because we'll talk about the averages here in a second, and you're looking to create a regular process to be able to give that money out over time. You can try to do it yourself, or if you go to your Community Foundation or you look to maybe a brokerage house or something of that nature, you can have people or processes put in place by that large organization and you give them the money. They invest it for you. You probably have some input on how that investment goes, depending on the place. And instead of you being besieged by nonprofits and charities seeking your support they go through a centralized process and then you're presented those options.

The advantage from a financial perspective is you get an immediate tax deduction for what you give, and there's very little regulation about how much money you have to give out. And this is one of the big differences between that and private foundations. Private foundations have, as we've kind of all heard, they've got to give away five percent in a Donor-advised fund. I don't necessarily have to, and that's kind of the challenge what we saw coming out through and out of the pandemic is, a lot of what I'll call uh legislative law making conversations about, wait a minute, does it seem right, fair, appropriate to have someone give multiple millions of dollars, put it into a fund, they get an immediate tax deduction that can be carried forward for five or seven years depending on state or federal. And yet they don't have to give that money out into the community.

And in particular when we were in the beginning parts of the pandemic where we had businesses that were failing and in challenges from an economic perspective, those challenges also then reached into non-profit worlds. Could this, should this money be being used for positive outcomes in a more immediate time frame? And we've begun the conversation around in several cases, legislation around both state and federal, around putting some time limits on Donor-advised funds and this is now the controversy. There's two sides to the argument.

Number one is don't touch what's not broken. So a number of individuals have written about, advocated, done podcasts, gone on television saying we don't want to see changes to Donor-advised funds. One of the big reasons they give is that Donor-advised funds create great flexibility for donors to give to things that they value. They can use examples and do use examples of things like hurricanes and natural disasters, the pandemic, what's going on in Ukraine. And because money isn't being forced out of those accounts at certain intervals, people can take sums of money and apply it to that particular need. They also state that there is really no reason to fix a problem when a problem doesn't exist, that nearly 73 billion dollars was given to Donor-advised funds in 2023, or excuse me 2021, and that they're making bigger contributions going out than ever before. In fact one study indicated that it's the highest all-time distribution increases in the last couple, in the last couple years. Over the history of Donor-advised funds, billions of dollars, and so we're seeing a natural movement as need is identified to move those funds.

On the other hand there are individuals, entities who are writing, discussing on TV, podcasts, other places saying not so fast. That currently there's about 750, I'm sorry to, 73 billion dollars in Donor-advised funds that aren't being used. And that number is growing enormously, as mentioned 73 billion dollars went into Donor-advised funds. But about half was given out, which means the size of these funds is growing. In addition, we're also seeing a number of funds that aren't doing any distributions. The latest number that I saw was somewhere around, even with an average of 180,000, in across the United States average. There's a lot of them that are are a lot more than that. A lot of what they call dormant accounts, potentially hundreds of thousands of them, and while the advocates for keeping things status quo say this is working, those that want to see change are saying we don't actually know how many dormant accounts are because Community foundations and brokerage houses and others don't have to report those numbers. And it could be enormous amounts of accounts that are just sitting there. It's interesting in that we're finally beginning to see this political crisis or Nexus come to bear, and in fact there was Federal legislation that was actually proposed that indicated that in some way, shape, or form, we need to make changes putting sunsets or limits on how long money can stay in accounts.

I don't anticipate anything being done before the 2024 election because we're going to have a divided congress with the house in the Republican side and the Democrats holding the Senate and obviously a Democratic president. And my guess is they're not going to agree on a lot of things. I think there's a third element to this that isn't discussed anywhere in the literature, but frankly something, and I've talked a little bit about a podcast I'll be a little more detailed here that is an important factor. Let's just make up an example because it's the easiest way to kind of describe the scenario or situation. You have a situation where a couple gives a million or two million, or five million, whatever number you want to put on it, let's say to a Community Foundation into a Donor-advised fund. We'll say that couple 75 years old, they have been charitable, philanthropic in their past and all of a sudden those nonprofits may not have as much direct access to that couple even though they're living, maybe they do in the community, because don't forget a community-based foundation or or a donor advised fund, somebody's making the decision as long as they're alive.

And so you might be reaching out to Bob and Cindy, who made those gifts before now, put the money in the charitable, their charity, or their their philanthropic dollars. They want to give out into a Donor-advised fund and you're still in contact with them. And maybe they are able to just make a phone call and say allocate X number of dollars to these three, our favorite charities, which have been the same for years. And as they get a little older all of a sudden they're like, you know we don't want the phone calls anymore. We have health challenges and it's a lot going on in our families, and I'm, we're not traveling as much and we're kind of beginning to slow down in the latter parts of our life. And so we're going to start pushing that responsibility to the Community Foundation, and all of a sudden there becomes a wall between you as a nonprofit and the people you were closest to.

I've have multiple examples, which I will not articulate individually here, where when those moments occur. All of a sudden even though they had intended to keep that charity, that nonprofit, at the high point of their giving it becomes a challenge because you've introduced a third party into the relationship, and that third party's allegiance isn't to nonprofits. They can say they want to help nonprofits and they generally do. That's not where their allegiance is. Their allegiance is to the people who gave the money, and all of a sudden they don't assume anything. And thus it gets harder. And maybe you've had some of those experiences, and then the couple passes and now the question is, who's going to make the decision of where that money is to be spent that was given three, five, seven, ten years ago, those multiple millions of dollars from Bob and Cindy?

A lot of times it's the kids, but let's say the kids aren't that interested or there are no kids, and now it goes into a pool of money where there are water restrictions, that the money should be used in X, Y, and Z purposes. But there's nobody influencing it like there was before. I have a couple of examples where literally when you ask the question, what are the priorities for this particular Fund in a Community Foundation, nobody can answer the question. And part of the challenge here is is that when you are a Community Foundation worth hundreds and hundreds of millions of dollars, you have power. And in some ways the issues of donor-advised funds isn't about distribution as much as it is about power, because if you force Donor-advised funds to allocate resources, let's say within a five-year span when the money came in or tenure, pick, doesn't make a difference. It's going to radically reduce the amount of money that's in the Corpus or the endowment or the investment pool that these organizations have. And I know factually these organizations, meaning the staff, the board, are making decisions with more and more resources because people who started their funds 30, 20 years ago aren't around anymore. Their kids aren't as involved and somebody has to make the decision, and these entities are making decisions on behalf of the people who gave the gifts originally. I'm not saying to do anything nefarious there's nothing illegal going on, but all of a sudden was that aligned with where that money was originally meant to go. And because we're dealing with hundreds of thousands of these funds, it's kind of all over the place, scattered in terms of who's responsible. Well that's what they wanted, and this fund's different. And what this is leading to is a lot of non-profits were really struggling to figure out how do we get to that money to those Donor-advised funds, and it becomes a power struggle.

Donor-advised funds, from a legal taxation perspective, I have no problems with. But my first run-in with this kind of scenario that I described with Bob and Cindy is actually true. But it wasn't Bob and Cindy, it was two other names. And these were some of the most generous wonderful donors who made it very clear that they wanted an entity that I believed in to always be at the top of the giving. And as soon as they were gone it became a challenge, and I had it in writing. I'm hearing more and more non-profits who are applying for, I'll call them grants, to community foundations and other places who don't get the grant but can't get any answers as to why not, what do we do wrong, how could we improve, we don't talk about that.

Community foundations, because they're the largest but it will throw the brokerage houses into the conversation as well, but let's stay with Community foundations the first word in that is community. I have a client that's dealing with this, and we're kind of working through some scenarios because they had a number of donors that put money in the community. The Community Foundation, those donors aren't around anymore and we're really pressing them to ask questions. What is it that this fund's supposed to give to X, we're X, we have been a long time donor, or excuse me recipient of the donor's generosity. What are we doing differently that we're not having that opportunity, and by the way, can you tell us who's actually making the decision as to where that money's going. And it becomes The Wizard of Oz behind the curtain.

We don't have any answers. Part of the issue here, and why there's so much money in Donor-advised funds is hour wants those dollars to be centralized it gives the board, the executives, the leaders of those Community foundations immense influence and that's a natural aphrodisiac for people when they can have power, and it's not even their money. So wrapped up in this is just not the question of what's legal and and ethical and Taxation-related. And what are we trying to push in terms of public policy? But it's even more element to me. More elemental than that. It's the conversation of what are we doing with the money in these Community foundations. That's actually helping the community. They're supposed to represent, and who's making the decisions. We could get that open. I think it would take care of the problem of more than 243 billion dollars being available but not being allocated because there'd be less reason to keep it behind the curtain with the wizard. It could be used to help people and legislation. Maybe the way we get there, but I think it fails to answer the question, some basic elemental questions about what's going on inside these organizations, because that's really what's going to turn loose the immense power of philanthropy to help our communities through Donor-advised funds.

I always appreciate when people reach out to me. I'm hearing more and more from individuals. If you'd like to comment or send me an email and say hey you're crazy, I interact with those people because I believe that other things I miss and I don't know and I'm always willing to learn. You can get a hold of me at podcast@hallettphilanthropy.com. If you have a suggestion for a topic please let me know, and I always try to get people to go take a look at the blogs. There's an RSS feed so you can come right to you, two a week, 90 second reads. I only write between three and four hundred words, basically, in each blog because I want them to be thought provoking but I don't want them to be overwhelming so it's something on a Tuesday and a Thursday each week, you can get very quickly. So check those out at hallettphilanthropy.com. Get the RSS feed and they'll come right to you. Don't forget as we move into the holiday season that what you're doing is affecting lives, and I think that sometimes the holidays allows us to see it more often, see it more clearly. Although we should see it all the time and it comes to and brings me to my favorite saying, some people make things happen, some people watch things happen, then they're those who wondered what happened.

We are people in the nonprofit space. As leaders who are making things happen for people wondering in the things we believe in wondering what happened, and that is a calling. That's worth it. That means when you're doing that, when you're partnering with the philanthropist in your community to make things happen, you're doing it for the things in our community that are needing it the most, that's has value. Know that you're important. Know what you do makes a difference. And there's a lot of tactical headaches and hurdles, and problems and challenges that does not mitigate the fact that you're a difference-maker for a lot of people, and a lot of things that need help. And that, I hope, gives you a sense of peace and a little bit of a warm feeling every day, but in particular this holiday season. I'll look forward to seeing you next time right back here on "Around with Randall." Don't forget make it a great day.