January 23, 2013; Source: Financial Advisor
Amidst all the uncertainty around the fate of the charitable deduction, marginal tax rates, and capital gains taxes, something happened with the major national donor-advised fund (DAF) managers. Schwab Charitable, for example, reported a tripling of contributions and a doubling of new donor-advised fund accounts in the fourth quarter of 2012 compared to the same period of 2011. Distributions from the new accounts weren’t quite as robust, but still surpassed the fourth quarter in 2011 by 70 percent. Schwab Charitable President Kim Laughton added that the new accounts created in 2012 would probably lead to a higher level of distributions in 2013.
In the highly competitive world of donor-advised funds, Schwab people might suggest that this increase is partly due to the quality services and low costs of the Schwab products. However, other managers of donor-advised funds are also reporting good results for 2012. Through the first three quarters of 2012, the Fidelity Charitable Gift Fund received $1.2 billion in contributions, a 63 percent increase over the same period in 2011. The Boston Foundation, one of the largest community foundations in the nation, is doing well with its donor-advised fund products and it predicted that it would end 2012 with between $80 million and $100 million in donations as compared to $60 million the previous year.
What explains the powerful performance of the bigger DAF managers? Overall, philanthropic donors are discovering the flexibility and ease of investing through donor-advised funds, particularly those managed by financial firms such as Schwab, Fidelity Investments, and T. Rowe Price. These firms can generally offer sort of a one-stop shop for someone to manage their investments and move money to and through charitable accounts to support organizations and causes. But the robust 2012 numbers suggest other factors are also at play.
One factor is the improving economic picture. No matter what charitable incentives are on the table, charitable giving stagnates when the economy isn’t moving and improves when people have more discretionary cash in their pockets to give away.
In the instance of giving this past year, however, it seems that the unique fiscal climate may also have affected charitable giving. By putting money into a Schwab or Fidelity donor-advised fund, a donor receives the full value as a charitable deduction even if distributions from the DAF to other charities move slowly or in small denominations. 2012 was an uncertain tax year, as the charitable sector sounded the alarm that the fiscal cliff could have resulted in a significant change in charitable deductibility, such as presidential candidate Mitt Romney’s off-the-cuff suggestion of a quantitatively capped amount of itemized donations per taxpayer, not to mention the scare that Congress might eliminate the deduction entirely, though that never appeared to be an item on any lawmaker’s agenda. An additional factor was the fear, largely unrealized, of a major increase in the capital gains tax rate. DAF managers like Schwab and Fidelity are very appealing to donors facing capital gains taxes.
It would have been an out-of-character philanthropic advisor who wouldn’t have mentioned to his or her clients the potential of a major change in itemized deductions or a major increase in the capital gains tax rate. The feeling among many was that the fall over the cliff would be painful, suggesting to donors and their advisors that they step up the implementation of their charitable strategies during the tax environment that they all knew in 2012 rather than waiting for a risky, volatile set of tax decisions in 2013.
Articulating a feeling that many philanthropic advisors undoubtedly share, Thomas Lee of Lee, Sipe and Associates, declared the fiscal cliff legislation “overwhelmingly positive for charitable planning.” Leading up to the cliff, charitable advisors were touting strategies for “navigating the uncertain outlook for taxes given the expiration of the Bush-era tax cuts.” Pre- and post-cliff, flexible instruments for charitable giving such as DAFs fit the bill for advisors to pitch and donors to use.
Toward the end of 2012, the Seattle Foundation advised donors, “If you are concerned about the future of the charitable tax deduction, [opening a donor-advised fund] may address your fears.” No wonder. A donor can set up an account at Schwab, Fidelity or any number of corporate-affiliated DAF managers or local community foundations with relative ease and without having to have fully determined how they want their charitable dollars distributed. Schwab, Fidelity, and the Boston Foundation might have benefitted from the uncertainty of the future of the charitable deduction as 2012 came to a close. These institutions and others like them had DAF products to offer that could accommodate a donor’s quick decision to seek charitable tax benefits while still allowing the donor time to chart his or her charitable distribution strategy.—Rick Cohen