Part Three of College Giving in the Age of COVID-19: Donor Advised Funds
July 06, 2020 | Emily Koons Jae
With enrollment plummeting in the wake of the coronavirus pandemic, universities face the most difficult budget cycle in recent memory. The American Council on Education predicts that colleges will see a $45 billion decline in revenue from tuition, room and board, and other services. To put that figure in perspective, in 2018, donors gave a total of $46 billion to higher education. College giving would need to double in the coming year to fill the shortfall.
During times of economic downturn, Donor Advised Funds (DAF), which many donors find as a tax-friendly way to simplify their giving, grow in importance. These giving vehicles have exploded in popularity over the past decade. In 2016, Fidelity Charitable gave out more than $3.5 billion in grants, becoming the largest grant-maker in the nation behind the Bill & Melinda Gates Foundation.
Because donors can make a gift into a DAF and receive an immediate tax write-off, DAF giving tends to run countercyclically. When the economy falters, giving from DAFs increases. Donor Advised Funds have other advantages, too, for thoughtful donors, and in many ways, their rapid growth comes as no surprise. They confer some of the same benefits as a private foundation, but without the administrative burden.
Most DAFs have a gift minimum that is required to establish a new account, typically ranging from $5,000 to $25,000, but they do not require donors to file with the IRS or establish a board of directors. Nearly every large financial institution—Fidelity, Prudential, Schwab—offers DAFs. National Philanthropic Trust is another choice. For conservative donors, Donors Trust may be a particularly attractive option, given its deep knowledge of nonprofits in this space and a commitment to preserving donor intent.
The Fund for Academic Renewal (FAR) will gladly help college donors identify which DAF would best serve their needs. We can also help groups of donors who wish to pool their funds, simplifying the donation process.
FAR cautions donors against endowment gifts, given the risks involved with any gift made in perpetuity, which are only magnified during times of economic uncertainty. For university donors, a DAF can help mitigate this risk. With minimal administrative burden, donors could direct their DAF to make an annual gift to the university initiative of their choice. If the university veers off course, shutters a program beloved by the donor as part of budget cuts, or fails to honor the gift agreement, donors could direct the DAF to stop payments.
Of course, DAFs are not without their own risks. Technically, the donor cedes control of the gift once it is transferred to a DAF account. A DAF does have the power to decline to make a charitable contribution from the donor’s account even if directed to do so. However, once a DAF approves a grant to an institution, it is unlikely to refuse to continue to make grants, as long as the institution continues to meet the DAF’s qualifications. Donors should also be aware of fees associated with DAFs, which vary by account size and institution.
Just as with private foundations, intelligent college donors can set up rules within a DAF to guide their college giving. ACTA Board Chair Edwin Williamson has explored the possibility of making a commitment to an institution to instruct a DAF to make annual grants, as long as the institution continues to respect the donor’s intent. For example, donors could leave instructions to release to a college an annual amount (e.g., 5% of a subaccount) only when a specific requirement is met—such as signaling a commitment to free expression by adopting the Chicago Principles on Freedom of Expression and maintaining that commitment. Although we have not tested this with an institution, we believe that a gift structured this way should be treated as part of the institution’s endowment according to guidelines set by the Council for Advancement and Support of Education, once the institution complies with the threshold commitment.
Mr. Williamson, in coordination with Schwab Charitable, has developed a model letter of intent outlining policies for Donors Advised Funds. If you are interested in learning more, please contact me at ejae@AcademicRenewal.org.