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Donors were again very generous in their support of their favorite charities in 2022 despite inflation and poor performance across the financial markets. A recent report by the Fundraising Effectiveness Project, however, showed that fewer people made donations in the first nine months of the year, which continued a trend in recent years. Fortunately, high-end donors continued to make generous donations, and this helped to explain the 4.7% increase in overall dollars contributed. Forbes just reported that the nation’s top 25 philanthropists donated $27 billion in 2022 and MacKenzie Scott alone has contributed $14 billion in the past three years.
Thankfully, donors who had established and contributed to donor-advised fund (DAF) accounts in recent years provided badly needed grants. As was true during the initial COVID surge when galas were cancelled and fundraisers could not meet with donors, many of the one million donors with DAF accounts have continued to recommend grants and have maintained and often increased their grantmaking to help address needs in their communities and elsewhere. Schwab Charitable just reported that the dollars granted by its donors increased by 7% and the number of grants recommended by donors at the American Endowment Foundation, the DAF sponsor for which I work, increased by 13% in the past year.
And though returns in the financial markets were poor and some donors were less likely to donate publicly traded securities, donors were still determined to contribute directly to their favorite charities or initially to their DAF accounts. In talking with financial advisors, attorneys, and other DAF sponsors at the recent Heckerling conference, I learned that more donors than usual donated cash than in previous years. (Typically, the percentage of non-cash assets donated is 60-70%.) Additionally, donors continued to contribute other assets including real estate, privately held business interests, or restricted stock. Many of these alternative illiquid assets were donated to DAF sponsors since those sponsors are often more used to accepting them than individual operating charities.
Many donors turned to their financial advisors to help determine which assets they should donate, and this trend will continue in the new year and beyond. Because donors want to provide support to charities now and in the future, they want to become more strategic about how their charitable dollars are invested and increasingly rely upon their advisors to manage these investments that will be used for grantmaking. Donors are especially dependent upon their advisors during times of market volatility or negative returns since they are striving to maintain their levels of grantmaking.
Since some donors have bunched their contributions to their DAF accounts or to charities directly, it may be time for them to make a contribution this year since the balance in the accounts may have decreased due to grantmaking and market performance. Advisors are often able to help their clients identify assets they should donate, including those that the advisors may not manage.
The trend of older clients contributing up to $100,000 of their required minimum distributions (RMDs) from their IRAs directly to charities (qualified charitable distributions) continues, though direct distributions to DAFs or private foundations are still not allowed. Many donors are also becoming more strategic about which assets to give to charities and which to leave for heirs. By naming their DAF accounts as the charitable beneficiaries of their retirement accounts, they often avoid significant taxes. Some leave other assets previously designated for the charities to their heirs. Some set up legacy DAF accounts that are not funded until death.
The outlook for charitable giving this year is concerning. Many charities are dependent upon small donations from middle-income donors. But with fewer people giving, these types of organizations will suffer. Additionally, a Foundation Mark study indicated that foundation assets dropped 15.5% in 2022. And since foundations must make charitable distributions of at least 5% of the value of year-end assets, many foundations that only give the required 5% will be giving less in 2023 than they did in 2022.
Fortunately, DAF donors grant at a much higher rate than foundation donors, partially because they are not required to give away a certain percentage. The average DAF payout rate in the latest NPT study was 27% as compared with single-digit payout rate averages for foundations, and certain expenses can count towards the foundation payout requirement.
As there has been for many years, there continues to be discussion in Congress that would require that DAFs grant a percentage of assets each year to charities or restrict giving from foundations to DAFs. But many in the advisor, non-profit, and donor communities agree that those additional rules and requirements would decrease the amount of charitable giving. If enacted, many wealthy clients would keep more assets and not allocate these assets to charity. Should foundation to DAF grants be limited, more foundation donors would simply convert their foundations to DAFs while others would initially open DAFs instead of foundations.
Hopefully markets will recover, inflation will subside, donors will continue to be generous, and non-profit organizations will be able to continue their efforts. If there is a recession or economic uncertainty, most donors will strive to continue their giving and will need to work closely with their financial advisors to determine how best to provide support during their lifetimes and beyond. Planning early in the year for various scenarios is helpful for clients, advisors, and charities and helps donors determine how much, which assets, and at what time they should provide their support.
Ken Nopar is the vice president and senior philanthropic advisor for the American Endowment Foundation, the country’s leading independent donor-advised fund since 1993 with $6 billion in assets. AEF works with donors and their wealth, legal and tax advisors in all 50 states.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.