Mutual fund companies have already snuck across the border between business and philanthropy. And now banks, which normally grant loans, are beginning to make grants.
Both fund managers and lenders are offering Donor Advised Funds, a longtime staple of foundations, as private-label plans that differ from those offered by philanthropic groups.
A Donor Advised Fund, or DAF, is one that allows a donor to deposit money or assets, such as stock shares, in a special charitable account and receive an immediate tax deduction for the gift.
In the past, a donor would give assets to be used for charitable purposes to a foundation and form a smaller component foundation with the larger foundation. Then the foundation would administer the fund and help the donor decide where those assets should go.
This process worked for a long time because foundation officials usually are the ones who know where the gift will be put to the best use.
In the commercial version, the financial institution that buys a DAF for a client doesn’t have to administer the funds. Whoever markets the plan does that, and does so for a fee. And, in some cases, donors are directing where the gift goes.
Fidelity Investments was the first to offer DAFs by incorporating a not-for-profit arm. Others, like Salomon Smith Barney, are doing the same. National City Bank in Cleveland has jumped on the DAF bandwagon, too. Last year, these private-label plans held $12.3 billion in assets, and distributed over $2 billion to charities from donors.
“This has been a growing trend with commercial-type entities,” said Diana Sieger, president of Grand Rapids Community Foundation. “A lot of this has to do with trying to retain the assets they have under management.”
It is expected that an inter-generational transfer of private assets will be at least $25 billion nationwide in the coming years, and that total could reach as much as $50 billion.
“I think what is happening with some of the investment firms, in particular, is that they’re not real wild about losing those assets. That might be one reason why they are interested in creating a product that will keep that asset under their management, but then give a donor the ability to make some distributions from that,” said Sieger.
Nonprofit community foundations, such as GRCF, haven’t pressed the panic button or sounded an alarm yet, but are concerned about these private-label plans especially with giving having declined last year. (See related story.)
Some nonprofits aren’t sure if it makes sense to flood the market with DAFs when the legal guidelines that govern these plans aren’t crystal clear. Others are uneasy that too many dollars designated for charity will end up sitting in the plans instead of being used.
Others are worried that private-label plans for large nonprofits, such as universities and hospitals, will draw even more charitable dollars from the pool that might otherwise go to human services organizations.
Another apprehension is that gift funds, especially those that give a donor a lot latitude in saying who should get the money, will have fund raisers raising money that will benefit other groups more than the ones for which they are raising the funds.
Instead of trying to fight the competition, foundations are meeting with each other in an attempt to find a way that they can work with investment firms and lenders, which have far more marketing money and clout than the nonprofits. But a fear is that coming out of those meetings foundations may become more like fund managers.
The Internal Revenue Service is keeping a close eye on this commercialization of DAFs and here’s why: When donors give to a gift fund, they have to give up control of that gift in order to get the full federal tax deduction for the donation. If a donor doesn’t relinquish control of where the gift should go, then he or she isn’t entitled to a tax break. And that’s why foundations, not donors, administer the gifts.
“We have to say nay or yea as to whether the grants they want to make should be made or not. And we have to do due diligence to make sure that organization is actually a 501c3. That is part of the donor control,” said Sieger.
“There are some organizations, like Fidelity, where by direction from the donor they just automatically send those checks out. That is where the (IRS) scrutiny is,” she added.
For Sieger and her cohorts at GRCF, this issue has been hanging over their heads for a while now.
“I don’t fear it, though. I’m getting a good night’s sleep,” she said.
Still, a concern exists.
“What is of concern to some, and I’m not saying here locally, is that with all the commercial enterprises creating these funds it could mean that donors would be giving through those funds versus donating and using the community foundations in that capacity.”
Sieger said that she has not tweaked the foundation to become more like a fund manager because she believes that isn’t the business GRCF should be in. Rather, she wants GRCF to remain a leading endowment organization for the community. But she also knows that her goal might not be laudable enough to sway some donors from the advice of their brokers.
“I contend that if we can just get in front of a particular donor and say this is what we can do, or not do, they ought to have the ability to pick and choose where best their needs can be met. And we may sometimes be that organization, and sometimes we may not be.”