Charitable without a Cause

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By Ed Sluga, Also published by Hilborn Charity eNews

As more research and analysis on Donor Advised Funds (DAFs) is becoming public, the ultimate reality of what donor advised funds are meant to do is becoming clear.  

In a previous article about DAFs, I highlighted what charities need to do to emphasize their superior market position when it comes to engagement of donors. As a quick review, these were:

  1. Build your compelling case for support.
  2. Take steps to build trust with your donors and the public. 
  3. Make it easy for people to make their philanthropic wishes come true by partnering with your charity.

In general, this is still good advice, but we are gathering a deeper understanding of the purpose of DAFs. Put simply, a DAF is a way for an individual to buy tax relief. With a DAF they can do that from their financial institution – one they likely already bank and/or invest with – and without any real interest in charity.

Last year, I had a conversation with a leading Canadian donor advised fund professional. They told me that their research and anecdotal experience showed that many of their high-net-worth clients, as well as their clients seeking tax and estate planning advice, did not have a “charity of choice” where they donate. They did not feel close to any cause in a significant way. So, the financial institution provided them with an opportunity—to create a donor advised fund within the financial institution.

That seems like a good idea, doesn’t it? If you aren’t close to a charity so why not make a donation to the sponsoring donee? (In this case the bank’s charitable foundation.)

But here’s the problem. The individual still doesn’t have a charity they’re close to. That issue hasn’t changed. What has happened is that an asset or cash transaction has occurred and a CHARITABLE tax receipt has been issued. The charitable purpose of the transaction will be sorted out – perhaps – after the fact. The problem is that this transaction doesn’t seem like an actual “charitable” contribution.

This isn’t just a Canada problem

Recently, on the “Nonprofit Law Prof Blog,” a similar circumstance was highlighted by Darryll K. Jones, Professor of Law at Florida A&M University College of Law. 

He described similar realities in the donor advised fund marketplace in the U.S. There, the facts are the same. The commercial donor sponsor in his article is not at all concerned with where the charitable contribution is directed. They state very clearly that it doesn’t matter to them at all. (In defense of the commercial sponsor, they may have been trying to impart that they do not discriminate, that all charitable causes in good standing are able to have funds directed to them.)

What Professor Jones is highlighting is that the commercial sponsor (the defacto charity) is absolutely uninterested in any charitable cause. It doesn’t matter today and it likely won’t matter to them in the future.

Why is this important?

We know that when operating and raising funds for a charity, we are mandated to have a charitable purpose. That charitable purpose is stated in our legal documents and promoted in our messaging to the community. It is our reason for our being and drives our mission in the world and it is why, in this country, the CRA allows us to take donor’s money (or assets) and hand out charitable tax receipts.

Professor Jones highlights that the issuers of donor advised funds don’t have that mandate. But, in the end, they do control the money donated and hand out the tax receipts. It can be concluded that donations are being made to, and tax receipts are being issued from, institutions with absolutely no charitable purpose. So, is this a charitable transaction or is this simply the sale of tax receipt?

Recently, I have been having conversations with professionals working in the financial sector who are heavily involved with the sale of donor advised funds. What I can say is, that each of them is a community-focused and philanthropically-minded person. They are obviously passionate about the use of DAFs as a way to promote giving to their clients. It doesn’t hurt that there is a payoff for them, but financial motivated giving opportunities are common in the market place. Just think of life insurance gifts.

We need professionals that want to talk to their clients about making a contribution to charity. And we need them to focus on the charitable purpose.

What You Can Do

To circle back, here is where fundraisers need to lean into their obvious advantage. Make connections and provide compelling reasons for individuals and families to partner with your cause directly to maximize the impact of donated dollars. Build trust so that donors feel their money is safe. Build your knowledge so that when financial people begin to speak in that language they have developed, you can translate and provide informed counter points. And don’t be afraid to compete directly with DAFs—challenge anyone that says DAFs are the better alternative.

You will win in the end because you have the upper hand. You represent an actual charity.  

Ready to build your competitive edge and make the case for your charity as a worthy place for donors to make a planned gift commitment? Contact us at [email protected] and we’ll be happy to talk more about how your organization can put its best fundraising foot forward.

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