Donor Advised Funds: The COVID-19 " Help Now, Help Later" StrategySubmitted by American Endowment Foundation on May 4th, 2020
By Laura J. Malone, CAP, CEPA
Vice President of Corporate/Complex Giving
It is not a surprise to everyone that we are in unprecedented times and the COVID-19 pandemic is a disaster of immense proportion. Charities throughout the country, and worldwide, need funding either because they are on the front lines or because they have had to discontinue major revenue sources due to “stay in place” and “social distancing” measures, or both.
As discussed in an earlier AEF writing, the recently passed CARES Act contains some provisions which may help charities and donors during 2020. One of the prime attributes of the Act allows for deductions on cash gifts to be raised up to 100% of adjusted gross income (AGI) to public charities instead of the previous limit of 60% of AGI. This temporary deduction exception does not apply to cash donations to donor advised funds (DAFs), as these remain limited to 60% of AGI. With that being the case, do donor advised funds till matter? Resoundingly, YES!
Current Contributions from Existing DAFs
One of the most memorable quotes from the 1993 movie, Rudy, is when Rudy says “I’ve been ready for this my whole life” and that is true for those who already have DAFs in place. Part of why a donor created a DAF was to be ready for when their communities and charities needed them most. In fact, a recent study by Dan Heist, a professor at the University of Pennsylvania, and Danielle Vance-McMullen, an assistant professor at the University of Memphis, substantiated that payout rates from DAFs tended to increase during the most difficult economic environments.
Also, it is important for donors to consider making gifts from their DAF unrestricted. While everyone wants to support COVID-19 relief, how that support looks may vary from charity to charity. Furthermore, that picture may evolve and change on a daily basis as indicated by Kristin Warzocha, President & CEO of the Greater Cleveland Food Bank:
“In the wake of COVID-19 and its’ ever-evolving landscape, unrestricted gifts provide us the flexibility to remain nimble and make decisions that will best serve our community and stretch our dollars the furthest. We are constantly learning, and these gifts allow us to adjust our processes as needed.”
Another important thing to note about unrestricted funds is that many nonprofits are already in a precarious position because they operate with funding that typically does not pay what it takes to provide services. An astounding number of nonprofits do not have enough financial reserves on hand to cover them more than 3 months. Responding to this pandemic means that staff and other “overhead” is being used at an exorbitant rate in order to supply the services needed to the nonprofit’s constituents. Michal Marcus, Executive Director of HFLA of Northeast Ohio, who creates and distributes interest free loans for individuals and businesses throughout Northeast Ohio has noted some of these struggles:
“Unrestricted funds allow us to fulfill our mission the best way possible by providing resources where they are needed. As related to COVID relief, we have had additional expenses in order to get our staff set up to work remotely and still effectively serve our constituents during a time of increased need."
Should I Still Look at Funding or Creating a DAF?
Why is this important to consider continuing to create and fund DAFs? Because, according to William M. Paton, Author of Philanthropic Grantmaking for Disasters, “Over a third of private giving is done in less than the first four weeks of a sudden disaster...and two-thirds within two months. This giving stops almost completely after five or six months." While this disaster is not as sudden as a hurricane or earthquake, the repercussions are likely to last a lot longer than 2020 and the benefits offered by the CARES Act. It is important to consider how donors can continue to support their community and favorite charities after everyone has gone back to “the new normal”, but there are still significant needs to be met.
While the CARES Act’s increase beyond the normal AGI thresholds does not include DAFs, donations up to the existing 60% / 30% limits of adjusted gross income are still available. This can allow donors to use their DAFs to segment resources for future giving that can be used after everyone else has already exhausted their capacity.
Traditionally cash does not make the best gift. However, with the market downturn, donors can sell depreciated stock at a loss, use that loss as a tax write off and donate the cash. If they choose to plan for now and later, they can put some in the DAF and some directly out to their preferred charities. Planned correctly, a taxpayer can eliminate any taxable income tax this year by making sufficiently large cash charitable contributions.
Also, not to be overlooked is the utilization of noncash assets that still have value. While the AGI limitation is 30% to a DAF, that still can be part of the overall 100% donated … not to mention the avoidance of capital gains on the asset. Below is an example on how a low basis non-cash gift can be leveraged for added tax benefits.
(Click here to access this noncash assets calculator.)
Help is needed everywhere and probably at a level much greater than we have ever seen before. Grant making from donor advised funds is less affected by economic struggle than other forms of charitable giving and they are a great resource to be deployed now – that is what they are there for. However, because of the size of this event, it is also important to realize that this may be a marathon effort, which means donors may also want to consider how donor advised fund planning for those later miles may be vital when everyone else is exhausted and dropped out of the race.
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