Last week, I talked about the $110 billion treasure trove for nonprofits that is sitting in donor-advised funds (DAFs).  And there’s already enough for an update on current events.

First, the day after that post, the New York Times reported on a lawsuit that has the potential to change the DAF landscape (thanks to Liz Kincheloe and others who requested an Agitator take on this).  Plaintiffs are suing Fidelity because they say Fidelity promised not to sell their stock all at once to keep price stability.  Because Fidelity sold en masse, there was (allegedly) tens of millions of dollars loss that should have gone to charity but did not.

Fidelity is disputing this, saying no such promises were made and the funds are theirs once the donation is made.  Further, it is their policy to liquidate non-cash assets immediately (including one instance in which someone donated a saddle?!).

(Take what you are going to read with not only the fact that I am not a lawyer; know also that if I were a lawyer, this isn’t necessarily the area of law I’d be good at…)

On the one hand, a request not to sell all at once seems like a simple condition.  Nonprofits deal with restricted gifts frequently.  Whether Fidelity should or should not have liquidated the assets immediately in this case, it seems like an acceptable thing to ask.  Further, in the Times piece, they discuss how other organizations do slow-sell to maximize value.

On the other hand (and I’m indebted once again to Jack Doyle for his knowledge), the assets are Fidelity’s once donated.  It’s the donor’s responsibility to know what they were doing with their stock and if they wanted it sold in increments, it is easy enough to donate it in increments.  DAFs need to liquidate within days to give the donor a tax-deductible receipt.  And if the donor can do anything and everything with the money after the gift, then it isn’t a gift – it’s a tax-exempt savings account.

The implications of this for DAF giving are larger.  We could see a slow down in DAF giving if donors are not able to effectively guide the structure of inflows and outflows.  Further, if Fidelity is able to ignore the wishes of a donor upon donation (if that is in fact what happened in this case – I don’t know), you could have it say it refuses to donate organizations with a certain political slant (e.g., ACLU or Heritage Foundation) or religious bent or the like. They likely wouldn’t do that, because they want the fees that come with donations, but it’s possible.

Second, Robert Tigner brought a study to my attention about the functioning of DAFs in recessions.  First, an interesting tidbit: 18% of donor-advised funds do not donate 5% or more of their assets in a given year.  This is an interesting threshold because private foundations are required to spend five percent of their endowments on charitable activity.  So a minority of DAFs are doing worse than their foundation equivalents would have to do.  My spidey-sense says that if DAF regulations start coming down the pipe, they will likely include provisos to require a minimum threshold of payment per year.  That said, at Fidelity, at least, accounts that are inactive for five years are distributed in full to charities, so that money is distributed one way or the other.

In addition, this tidbit means that 82% of funds are distributing more than 5%; the active ones are usually doing far more than this.  The onus is on us to inspire and facilitate gifts from these accounts.

DAFs also function as a recession hedge.  That is, during a recession – in this case, 2007-2008 – the amounts donated to DAFs went down substantially.  No surprise there.  However, the payout rate (% of assets being donated) peaked in 2008 and the flow rate – the % of money coming in during the year that goes out the door – peaked in 2009 at 103% (meaning more money was going out than coming in).  This was at the same time as general and foundation donations were decreasing; as someone who started fundraising in mid-2007, I can attest to this.

Could it be that DAFs serve a rainy day fund for donors to give to nonprofits when times are tough?  This could be an interesting function for these instruments and help us smooth out funding fluctuations associated with macroeconomic trends (aka it could make sucky times suck less).

Thanks to the Agitator family for the updates, thoughts, and studies – keep them coming!

Nick