The role of donor-advised funds during bad markets and recessions
When markets drop significantly or when businesses aren’t as profitable, the charities wealthy families and business owners support are adversely impacted. Because donors are passionate about the causes they support, the last thing they want to do is to send a much smaller contribution than in previous years.
Fortunately, those donors who’ve previously donated assets to a donor-advised fund (DAF) are able to continue to provide generous and consistent funding to their favorite charities, even when their investments drop in value or when their income decreases.
Some would assert that private foundations (PFs) can serve the same purpose, and generally, they’re correct. But many PFs only give away the mandatory 5 percent annually, so their giving would decrease when markets drop. Because donors with DAF accounts give away a much higher percentage of the value of their DAF accounts because there’s not a minimum required level of giving, they don’t feel restricted and can be more generous with their grants.
Though most people primarily donate because of their interest in a cause or charity, as a result of the Tax Cuts and Jobs Act, far fewer people currently itemize their deductions, and some smaller donors have reduced or eliminated some of their contributions. Furthermore, when donations from individuals decrease during an economic downturn, and when government and corporate support drops as well, the concern within the non-profit community increases significantly.
Knowing that other donors may decrease their contributions during these times, some DAF donors strive to provide the same or even larger levels of support.