What Increased Oversight of Donor-Advised Funds Means for Nonprofits in 2020

January 11, 2020  |  Grace Duginski

Donor-advised funds, investment accounts designed to incentivize wealthy individuals or corporations to make charitable donations by offering an immediate tax break upon depositing funds, are the Great Gatsby of nonprofit income sources: appearing suddenly, possessing great wealth, and ultimately fairly mysterious.

Two things happened in late 2019 that should prompt progressive nonprofits to take note of the current DAF landscape: 

  • First, two major donor-advised fund (DAF) advisors, Fidelity Charitable and Schwab Charitable, publicly cut off new gifts to the NRA’s affiliated nonprofits due to an ongoing investigation by the IRS; 

  • Second, advocacy groups like the Southern Poverty Law Center called out the fact that Fidelity Charitable allowed their DAFs to send millions of dollars to known hate groups. 

Despite the general lack of oversight surrounding DAFs, anyone who serves in or alongside nonprofits should examine the green light at the end of the dock: how these developments could affect progressive nonprofits’ ability and likelihood to attract DAF support, given the revelations about where funding has been going. 

First: Fidelity Charitable and Schwab Charitable very recently banned new gifts to the NRA’s affiliated charities. 

The Chronicle of Philanthropy and CBS reported recently that the two largest DAF advisors, Fidelity Charitable and Schwab Charitable, paused all new donations to the National Rifle Association’s charities due to ongoing IRS investigations. (The New York Times reported shortly thereafter that the office of the state Attorney General was expanding their own investigation into the NRA as well.) In 2018, DAFs managed by these institutions received over $12 billion, so their decision to cease funding could pack a punch to any nonprofit. 

What’s significant is that this happened just before #GivingTuesday 2019, one of the biggest giving days of the year. When asked, Fidelity Charitable and Schwab Charitable stated that they were simply following their internal policies by suspending donations to groups who are accused of abusing their nonprofit status. 

While ultimately, cutting off donations to groups accused of misconduct is a net gain for the nonprofit sphere (and the world in general), this news of the Great NRA DAF Cutoff of 2019 has led to curiosity around who actually gets financial support from DAFs – and what the rules are. 

Second: Advocacy groups called out  Fidelity Charitable's DAFs (again) for sending donations to known hate groups. 

Though they’re not the first advocacy group to do so – CAIR sounded the alarm back in May, and anti-corruption media group Sludge did as well back in February – Southern Poverty Law Center recently raised concerns about donors making tax-deductible gifts to clearly-identified hate groups through Fidelity Charitable. Here's what you need to now about this:

Fidelity Charitable 101: 

In charge of administering the Fidelity Investments Charitable Gift Fund, they manage $30 billion in future donations for nonprofits. (Fidelity Charitable is distinct from Fidelity’s corporate account.) And Fidelity Charitable is big – the Fidelity Charitable Gift Fund received more than $9 billion in the 12 months ended June 2018, or nearly triple the donations made to the United Way that year. 

What the SPLC is calling on Fidelity Charitable to do: 

Despite receiving about $3 million in donations through Fidelity Charitable DAFs themselves, the SPLC felt compelled to ask the financial juggernaut to halt all gifts to known hate groups. These included organizations like the Family Research Council, an aggressively homophobic and Islamophobic group, and the Center for Immigration Studies, a white nationalist organization classified as a hate group primarily due to promoting scientific racism and Holocaust-denier conspiracy theories. 

This isn’t the only time a DAF administrator has come under scrutiny for charitable giving practices:  

The Charlotte Observer reported in November of 2019 that the Foundation for the Carolinas had sent over $20 million in charitable funds to anti-immigration groups – at least two of which were classified as hate groups by the SPLC. Despite the fact that DAF sponsor institutions ultimately retain legal control over funds – courts have found that once donors deposit money into a DAF, those dollars are the property of the sponsor institution and not the donor; upon opening a DAF, donors agree to advise gifts, and though their wishes are usually followed, sponsoring institutions’ policies generally state that they are not required to follow their wishes – the foundation’s board chair hesitated to alter the guidelines under which these gifts were allowed to be made: “It’s a pretty slippery slope when we start overlaying our judgment on the wishes of our fund-holders.” 

So, why is the SLPC troubled by how DAFs disseminate funds? 

As many nonprofits already know, DAFs have been around for many years and used to be primarily housed at community foundations. However, big financial institutions like Fidelity, Schwab, and Vanguard now run them too – in 2014 there was $70 billion in DAFs, but they now hold $121 billion. They’re growing, and fast. 

The appeal of a DAF lies, of course, in its instant gratification: donors who set up DAFs receive immediate tax breaks for the funds deposited in the account – even if they don’t direct a donation from it. The sponsoring institution’s job is to invest the donor’s DAF money until they decide to advise donations to specific nonprofits. (And, technically, a DAF can exist in perpetuity without making any required payouts.) This has earned the financial institutions criticism from academics and philanthropy consultants: firms earn fees from managing DAFs and facilitating their transactions, and the fees can add up. (Fidelity Charitable alone made almost $60 million last year in fees from administering DAFs.) 

There are still more benefits for donors who choose to direct gifts through a DAF. Sludge also reported that when individuals donated appreciated assets rather than cash, they received a double tax break: a charitable tax deduction, and a capital gains tax exemption. Another DAF benefit is the high level of anonymity they afford – a frustrating thing for nonprofit Development department staff to grapple with, especially when trying to steward donors. In theory, anyone with enough cash to open a DAF (minimum balance thresholds vary among institutions) can fund hate groups, receive at least one type of tax break, and never be held accountable. 

Unfortunately, it appears there’s not a strong built-in incentive for large financial institutions to cut off donations to hate groups, because ultimately DAF funds will generate fees regardless of where they are donated.

Fidelity Charitable’s guidelines for grantees: giving money to “virtually any” nonprofit. 

The firm’s charitable wing lists guidelines for grantees receiving funds from DAFs, and they also put together recommended guidelines for donors looking to advise donations from their DAF. However, the degree to which these rules and guidelines are binding appears to vary. 

Fidelity Charitable states that they do not make grants to an organization if they “may be engaged in illegal or non-charitable activity (such as terrorism, money laundering, hate crimes, or fraud), or if a grant may otherwise be used for improper purposes (such as personal benefit)” [emphasis ours]. 

The institution also proactively offers characteristics of an effective nonprofit, one of which is that it’s “staffed and managed by good people” – that is, boards especially “should be diverse, talent-rich, informed, responsible about stewardship, dedicated to the nonprofit and not their self-interest, and, above all, engaged.” However, these guidelines do not appear to be binding, and Fidelity Charitable suggests that donors contact the IRS or state regulators with concerns about grantees. 

So, what could these developments mean for progressive nonprofits? 

Increased transparency from DAFs = more clues for nonprofits. 

As large financial institutions who manage DAFs become more candid about their policies for directing funds to grantees, nonprofits can learn about trends in their internal structure – and since DAFs tend to be pretty private, more information is always helpful. 

Knowing a DAF administrator’s policies = a better chance at identifying those with a higher chance of donating to your organization. 

As institutions begin to examine their policies for acceptable grantees, some may begin to make some changes. Some have already identified the Marin Community Foundation as an example of a starting place for DAF administrator internal policy changes, as they require every nonprofitreceiving charitable funds from their DAFs to certify that they have a nondiscrimination policy in place. 

Good policies = good positioning for progressive organizations. 

If a trend emerges of DAFs requiring grantees to certify that they have a nondiscrimination policy, or they don’t allow their organization to conduct hate speech, progressive charities are more strongly positioned to receive funds from DAFs. The Amalgamated Foundation, for example, launched the Hate is Not Charitable campaign in March of 2019, in response to prior reporting on hate groups receiving funding from DAFs – and those who signed on to the campaign have made their names public. Knowing which entities in the nonprofit and mission-based space have aligned themselves with these priorities could give nonprofits an added edge in discovering funders who might like to support their work. 

Continued DAF growth = more nonprofit donations. 

As we’ve said, DAFs have grown a lot in the past year alone. As people with wealth will likely continue to take advantage of the multiple tax benefits of DAFs, it stands to reason that the number and amount of grants made will increase. This, combined with new public attention on the recipients of DAF grants, translates to potential financial benefits for nonprofits. 

Increased transparency and awareness = a more positive changemaking experience for everyone. 

If you’re a forward-thinking, mission-based organization, you already know that no person and no action exists in a vacuum. Making meaningful change is reliant in part on taking a stand against hate in every single space – even the ones we may not have expected.

 

Want to learn more about working with donor-advised funds? Download our complete guide to attracting and managing these gifts!