Volatility in the market always worries nonprofit organizations. Concerns over drops in donations only intensify as the year progresses toward Giving Season in November and December. If the market has not recovered by then, many charities could feel the strain. However, historically, donors who have already set up donor-advised funds (DAFs) are able to maintain their level of granting to charities – even when the market is down. In fact, sometimes it goes up.
Why is that? The assets donated to and invested in DAFs can only be used for granting to charitable organizations.
So, how can DAFs be beneficial to the charities donors support during times of market volatility?
How DAFs Can Weather the Economic Storm
Many donors have highly appreciated publicly traded securities and liquid assets they contribute to DAFs. Others donate appreciated illiquid assets, such as real estate, cryptocurrency, privately held stock, or limited partnership interests. Often, donors do not want to donate so much directly to an individual charity at one time. Charities could change their missions or leadership over time – or they might not be able to take a large, unanticipated donation right away.
Instead, donors establish DAF accounts that give them a tax deduction up front and allow for granting to their preferred charities over time. The assets in a DAF are committed to charitable purposes, so they can still grant during times of economic uncertainty. While there may be less appreciation when the economy is down, the already-donated funds are there, and the donor already received a tax benefit for the donation year.
How Donors Use DAFs During Market Downturns
Just because the market is down doesn’t mean donors lose their charitable tendencies. During periods of challenging markets, donors who have DAFs can take comfort in knowing they can still recommend grants to the charities that mean so much to them.
Typically, donors bunch their DAF contributions when their income is high, investments have appreciated, or retirement is approaching. Then, if the market takes a turn, they can still recommend grants from their DAF – for which they have already received a tax deduction – rather than dip into their wallets or investments.
Overall, donors with DAFs can help fund their favorite charities during good economic times and bad, both now and in the future.
How Financial Advisors Can Discuss DAFs During Economic Uncertainty
For financial advisors, there are always benefits to having charitable conversations with clients. When clients are doing well financially (regardless of market fluctuations), advisors can explain how opening a DAF will help them provide consistent support to charities even when they retire, when their income and investments decrease, when their businesses are not as profitable, or when the market takes a downturn.
When onboarding new clients during market volatility, advisors can encourage them to fund a DAF. Once donated, the advisors can liquidate and select new investments that are a better fit for the DAF account without creating a taxable event for the donors. Advisors might also suggest clients donate their assets not managed by the advisor into the DAF, allowing the advisors to reinvest and manage these assets.
Existing clients who are typically philanthropic may not reach out about charitable giving during a market downturn. However, they are often receptive to advisors’ ideas or suggestions about ways to continue providing generous support. By proactively discussing charitable giving, advisors give clients something positive to think about beyond the market decline.
Sometimes market volatility is the impetus for clients to open DAFs with advisors because they realize that if they’d already done so, they could have made grants to charities in their times of greatest need. Having the conversation early and often with clients can make a substantial impact.
How DAFs Support Charities No Matter the Market
Charities understand that donors may have less to give during a particularly bad year for the market and the economy. However, donors who have funded DAF accounts do not have to worry as much. This enables the charities they support to continue receiving grants.
For nonprofits and charities, DAFs are invaluable during challenging times. They provide organizations with a sense of stability – a source of consistent grants from their regular donors – even when the market is volatile.
Are You or Your Client Ready to Talk DAFs? Reach Out to American Endowment Foundation.
At American Endowment Foundation (AEF), we help donors and financial advisors alike set up DAFs regardless of what the market is doing. By funding a DAF account, you can ensure that the charities you support receive grants for years to come. Contact AEF now to start the conversation.