A particular anonymous couple, both Cornell University alumni, could be considered the proverbial advancement officer’s dream. They met in high school, attended college on scholarship, embarked on successful careers after graduation, and raised three children—all of whom attended their alma mater. Recently retired, they’ve now decided it is payback time.
They have joined other alumni, some fraternity and sorority groups, and a state grape growers association in choosing to channel their philanthropy through a donor-advised fund (DAF) account administered by Cornell.
Chip Bryce, director of the Office of Trusts, Estates, and Gift Planning at the university, is a huge fan of these funds. “Our experience shows that people who have donor-advised funds are extraordinarily more generous on scale than people who do not,” Bryce says.
DAFs are administered by nonprofits and affiliated with financial institutions, community foundations, and single-issue charities, including colleges and universities. The funds are set up and maintained separately for each donor, and they require a minimum initial donation and annual distribution determined by the fund administrator. DAFs allow donors to contribute cash or assets to the fund and claim an immediate charitable deduction, while deferring decisions about how the funds will be used. Donors request distributions to the charities of their choice.
Despite the lethargic economic recovery in the past few years, donor-advised funds are booming. The National Philanthropic Trust, in its 2012 Donor-Advised Fund Report, announced that these funds have become a major factor in the philanthropic sector, showing record-high growth. Assets in DAFs grew by $5.5 billion in 2011, to a total of $37.43 billion, an increase of 17.5 percent. Grantmaking reached $7.7 billion, a 13.6 percent increase. Funds administered by single-issue charities, the category that includes universities, experienced a 17.4 percent jump in assets to $6.46 billion, and a 29.6 percent increase in contributions.
In light of this activity, it should come as no surprise that nonprofit fundraising expert Robert Evans recommends colleges and universities include donor-advised funds in their gift planning strategies. The director of EHL Consulting Group and member of the editorial review board for Giving USA believes they offer a great opportunity to rethink how potential donors are approached. “DAFs are a bank account for donors who are ready to go shopping for great projects. You need to ask people whether they have a donor-advised fund and will use them to support your institution,” he says. “If they don’t have one, you are best served to offer DAFs to them.”
Nuts and Bolts of University DAFs
Donor-advised funds allow donors to designate grants of their funds to any legitimate charity. In that case, how do universities insure that a good portion of the assets is directed to the support of their institution?
First, they set a minimum contribution requirement. Although some of the commercial firms offer DAFs with minimums as low as $5,000, university funds usually set the bar quite a bit higher. The University of Florida’s Tigert Fund requires a minimum initial gift of $50,000, Cornell’s minimum is $100,000, and the University of Nebraska and Johns Hopkins University (Md.) require $250,000.
Second, the agreement with the donor stipulates that a percentage of the funds must be contributed to the university—for example, at least 50 percent at the U of Florida and Nebraska’s NU Donor Select fund, and 60 percent at Johns Hopkins.
Third, the universities outline a variety of other requirements ranging from frequency and amount of distributions, types of non-cash assets accepted, and family members designated to request distributions. Some agreements also stipulate any funds remaining in the account upon the death of the donor must all be directed to the university.
Finally, some universities charge the donor a small annual fee for administering the funds, while others do not charge at all. “It is really all about time and resources,” says Michelle Glennon, senior director of gift planning and senior philanthropic advisor at Johns Hopkins. “We already have a system and process in place for the administration and investment of planned gifts, and now we’re using them to help with the donor-advised funds.”
The Targeted Donor
As one of the first universities to administer its own donor-advised fund, Cornell officials know one thing for sure: the funds are not set up on a whim. “By and large, they attract people of means who almost invariably are already supporting the university at a high level,” says Bryce. “Often these donors are solving or abating noncharitable issues such as taxes or estate planning. They are ready to set up a DAF somewhere, and we want to give them a reason to do it with us.”
The University of Nebraska Foundation introduced the donor-advised fund option after missing out on a windfall. “A person with significant agricultural property was interested in giving most of it to us, with a small percentage going to other charities, and we were unable to assist him,” recalls Tracy Edgerton, associate vice president of the foundation. “We also had established relationships with other donors who, although their primary philanthropic interests were the university, had other charities of interest, as well.” In 2003, the NU Donor Select fund was established.
Johns Hopkins’ DAF option is brand new for interested donors, most of whom are already close and loyal to the institution and desire some simplicity in their giving. “Rather than dealing with the complexity of setting up a family foundation, they can realize the same tax benefits and achieve their philanthropic goals,” says Glennon. She reports that the people who establish these funds have typically experienced some kind of major income event—retirement or sale of property or a business—and while they are looking for that charitable deduction in the current tax year, they may not yet know exactly what they want their gift to be. “Our goal is to help donors make the type of gift that is right for them. Now we’ll have a new tool in place to offer that establishes an additional connection, and we’ll have the funds here at Hopkins,” she says.
University fund administrators report that philanthropists enjoy the simplicity and convenience DAFs offer. “One donor invested significant resources in our Nebraska University Select Fund with the intention of supporting some of our major projects, and he’s used his fund as a charitable checkbook. He’s content to know his assets are being controlled by an organization he has faith in,” says Edgerton.
Uncertainties in future tax laws are also likely to be a contributing factor to the current popularity of DAFs. “Given the possibility of changes to charitable deduction rules, I wouldn’t be surprised if donors who plan to make significant gifts in the next few years, but have yet to decide on specific amounts and purposes, opt to make a contribution to a donor-advised fund,” concludes David Bass, director of foundation programs and research at the Association of Governing Boards of Universities and Colleges.
Fans of DAFs point out a number of key advantages for the universities that offer them. Cornell’s Bryce claims that the biggest advantage is the opportunity they give you for another high-touch, high-service connection to the people who can make a difference in your institution. “There’s no question that these funds promote long-term commitments from donors,” he notes.
Edgerton agrees. “This is a service we offer that has definitely enhanced our relationships with Nebraska’s key donors.”
Since contributions from donor-advised funds can be made anonymously, those administered by other organizations do not allow development officers to know about assets available and donors’ interests. However, when the funds are administered by the university, that information is more forthcoming. At U of Florida, Fifty percent of the transaction is locked up for them. “It gives us the opportunity to know whom our development officers should cultivate, and the ask is easier since the money is already here,” says Leslie Bram, associate vice president for the University of Florida Foundation.
DAF assets also offer the advantage of serving as a rainy day bailout. “We all hated what happened in 2008, with the economic downturn,” recalls Bryce, “but a lot of people with money already in DAFs were able to help us out.”
Donor-advised funds can provide the flexibility to support current needs or requirements that more restricted endowments might not. Nebraska used distributions to support the new Pinnacle Bank Arena—which will benefit the community by creating a vibrant commercial and entertainment district and the university by serving as the new home of men’s and women’s basketball.
These funds can also help move the thermometer on fundraising goals. As Hopkins introduces its first DAFs, the office of gift planning is making sure that the donations are not competing with but will actually boost the university’s capital campaign. “If donors establish a DAF during campaign, the portion
of the donation they select to go to Hopkins will receive campaign credit,” Glennon explains.
Worth the Effort?
Some experts and foundation officers characterize DAFs as being more trouble than they’re worth. “When I’ve spoken with foundation executives about DAFs, some report establishing them, but not having a lot of success,” Bass says. “They entail significant administrative and reporting burdens and don’t appear to have been a major draw for donors who can accomplish the same ends through one of the other commercial providers.”
Over the years, Ed Davis, president of the Texas A&M Foundation, has chosen not to offer DAFs for three reasons: “Donors already have many such options elsewhere; we are chartered to support Texas A&M University only and thus do not consider it appropriate to hold funds the donor may wish to distribute more broadly; and we do not want to take on the costs and staff time necessary to properly administer such funds.”
Perhaps the way universities promote their DAFs can tip the balance in their favor. Edgerton views DAFs as an on-the-shelf vehicle introduced only to donors interested in starting a fund somewhere—so it might as well be at Nebraska. Johns Hopkins also plans to provide the funds as “the right vehicle for the right donor in the right circumstance,” Glennon says.
In the past, University of Florida handled DAFs as a must-do service they should provide to board members and other major donors, since they were receiving more and more grants from external DAFs. They are now experiencing a sea change in their attitude. “Today, there is clearly a huge market demand for these funds, and they offer a lot of potential. We’ve missed an opportunity in not marketing them aggressively,” Bram says.
Bryce measures the success of Cornell’s funds based on the assets coming their way. “We have seen a growth of from 0 to 120 accounts in 12 years, with $80 million in these funds at any given time, and a high of $180 million. We’ve found that almost 70 percent of the assets eventually ends up at Cornell, while overhead costs just pennies,” he says.
Finger in the Pie
By their nature, donor-advised funds encourage more thoughtful philanthropy. Tax and financial issues are separated from charitable decisions. “The numbers of questions donors are asking of the organizations they support are more intense; they are no longer making gifts based on faith or good warm feelings,” says Evans.
But do problems arise as a result of encouraging donor advice? According to Bryce, “these funds are not taking us in directions we don’t want to go. The intent must fit into our priorities. On the other hand, donors do enjoy the fact that we view then as a friend and a partner and expect that their intentions will not be ignored.”
At Nebraska, Edgerton finds that “people are open to having a conversation and are waiting out the decision concerning what they want to fund. If anything, it is a positive opportunity for donors to feel that a project they’re interested in is vetted and needed at the university level. Fund distributions have supported athletics, the business schools, and innovative projects involving all areas of the university.”
The National Philanthropic Trust reports that donor-advised funds have had a major impact on the philanthropic market, now accounting for 3.2 percent of total U.S. giving, and predicts that the growth in these funds will continue and may accelerate. Whatever their rate of growth, Chip Bryce advocates giving them due respect and attention. “Donor-advised funds are good for an institution. They take friends and make them cherished friends,” he says. “This is a strategic tool for garnering major support.”