Making Charity Part of Your Portfolio

By Evan Sparks

For Devon Bank, a journey to donor-advised funds began in a seemingly small way: with a charitable change roundup product.

The Chicago-based lender—which has won an ABA Foundation Community Commitment Award for its religiously compliant bank services—developed a charitable roundup program for its debit card offering. It was a way to add value to the clients without paying interest, as is forbidden in some religious traditions.

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Under this program, debit card users can choose from six different themed “charity buckets”; the spare change on each transaction gets contributed to a specific bucket, and Devon Bank makes sure the pooled money goes to the relevant causes and charities.

It was the journey of creating a structure for these “micro-contributions,” as Devon Bank Chairman David Loundy calls them, that put Devon on a path to offering donor-advised funds, a fast-growing philanthropic vehicle that accounts for a mega-share of U.S. charitable giving.

DAF basics

Donor-advised funds can be thought of in a couple ways very familiar to bankers. “It is effectively a charitable savings account,” says Loundy. “We refer to it as a charitable checkbook,” explains Kurt Thompson, SVP and managing director for family office services at South Bend, Indiana-based 1st Source Bank.

For those unfamiliar with them, DAFs are individual philanthropic giving accounts sponsored by a 501(c)(3) charity. The donor makes an irrevocable contribution to the account and is eligible for a tax deduction for the gift in the year it goes into the DAF. The donor may then “recommend” grants to other charities from the account—and that language is key, because the donor no longer has any ownership interest in that money. (While DAF sponsors almost always honor the donors’ recommendations, they are not obligated to and indeed cannot promise that they will.)

DAF sponsors tout a few key benefits for donors, including convenience, privacy, investment returns and cost savings. Using a DAF as a charitable checkbook, as Thompson points out, allows donors to get a single tax receipt versus tracking down several, and donors can set up recurring transactions and review past gifts through the DAF’s digital interface. It can also stop the cycle of charitable junk mail, Loundy notes. “I was getting so many solicitations for environmental charities that it was enough to deforest a small, underdeveloped country!” he chuckles. “I don’t need the water bottle, I don’t need the tote bag.”

DAFs also offer more privacy than checkbook giving or private foundations. Unlike personal gifts, DAFs allow donors to make anonymous gifts to charities (which the medieval Jewish sage Maimonides considered the second highest of eight levels of giving). And unlike private foundations, which file IRS Form 990 documenting each gift, the organization’s assets and staff and board salaries, DAF sponsors report these figures in aggregate, keeping individual donors’ activity private.

Funds contributed to DAFs may be invested and grow tax-free before they are given, in many cases providing a larger return before the money goes to charity. And the cost savings over a private foundation can be substantial. Donors may pay three to five times more in overhead and administrative fees for a foundation than for a DAF, according to the National Philanthropic Trust.

Democratizing philanthropy?

The growth of DAFs confirms the conceptual appeal of the product. In 2020, there were over a million DAF accounts, up 16.3 percent from 2019, according to the National Philanthropic Trust. Total DAF assets were nearly $160 billion in 2020, up almost 10 percent from the year before. And while the DAF sector remains dwarfed by the $1.1 trillion-asset foundation sector, the number of DAF accounts outpaces the number of foundations by 10 to 1.

The Bank of America Charitable Gift Fund has $3 billion in assets, notes Don Greene, national philanthropic and family office executive at Bank of America Private Bank and Merrill. “We’ve seen an aggressive continual growth of over 20 percent year-over-year looking back as far as you can imagine,” he says. “In terms of the number of grants going to charities [are]up over 40 percent year over year.”

The growth of DAFs is due in large part to the low minimums that DAF sponsors require. Some of the largest DAF sponsors are charities with links to large asset managers like Schwab and Fidelity, both of which set no minimum contribution to open an account. The minimum varies from $5,000 at U.S. Bank to $10,000 at 1st Source to $25,000 at the Bank of America Charitable Gift Fund. Regardless of where the number lands, it’s well short of the millions in assets experts consider necessary to make a private foundation useful.

In addition to low minimums, DAFs are growing thanks to a shift in workplace giving programs, says Eileen Heisman, president and CEO of National Philanthropic Trust. “Instead of United Way campaigns, they do payroll deductions to go into DAFs,” she notes. Workplace givers used to “used to surrender the giving decisions to the boards and staffs of United Ways,” she notes; now, “you’re seeing people saying I’d rather control what I’m giving to.” Companies like Benevity and CharityVest allow employers to offer DAFs as an employee benefit and supplement those funds with matching gifts, which is fueling the growth in smaller DAF accounts.

For younger workers, the federated funders feel like the past, Heisman adds. “It’s a very different model, if you think about this collective giving versus people wanting to really see where their philanthropy’s going, personally reflecting their values, their needs, their interests.”

This desire to democratize giving was a big part of what pushed Devon Bank to explore DAFs, Loundy says. The underlying architecture of its “Well-Rounded Debit series” is the Loundy Charitable Foundation, which receives the pooled contributions from Devon Bank. (Debit card customers receive a charitable gift receipt from the foundation at tax time for their donations.) “There were no other charities we could find that were willing to do donor-advised funds with micro-contributions.”

However, between the foundation and its trust department, Devon Bank was well-positioned to offer that service itself. “We can already manage savings accounts and investment accounts and we’re already giving to these charities,” says Loundy. “For us it was a simple accretion onto our existing banking business that just plain fit perfectly. We didn’t have a lot of new infrastructure to create for DAFs that we weren’t already creating for other reasons.”

As part of its commitment to democratized giving, Devon built its DAF model with a low minimum account size of $2,500. It charges based on services used, with basic fees per grant (after two free per year) to cover software and staffing, plus additional fees if staff need to handle complex gifts or charities. The bank’s strategy targets three segments: middle-class givers (those likely to itemize but who may not be affluent), higher-net-worth individuals “who don’t need lots of bells and whistles,” says Loundy, and communities that Devon specializes in serving with religiously compliant or ESG-focused DAF investment options.

The nuts and bolts of bank DAFs

The irony of the growing appeal of DAFs as part of the bank product set is that banks were the ones who pioneered the DAF concept a century ago. In the late 19th century, many charitable funds were held in trust accounts at banks. “The community foundation industry really cropped up around banks that had these old charitable trusts,” says Heisman. At the time, bankers weren’t as skilled at making grants from the income those trusts generated. In 1914, a Cleveland lawyer and bank executive named Frederick Goff led the Cleveland Trust Company to spin off the grantmaking function to the new Cleveland Foundation—the first community foundation.

Then, in 1931, the first DAF was launched at New York Community Trust, which had been formed by 11 New York banks to manage the giving from their charitable trusts. “The banks were the backbone of how donor-advised funds got started,” says Heisman. “It’s an interesting marriage; charitable services and banks really go back a very long way.” Today, she notes, “technology has made them so much easier to manage,” and many banks are building closer relationships with charitable giving vehicles.

Banks have a few different strategies in this space. Some banks—as large as Bank of America and as small as Devon, with $364 million in assets—create a charity to serve as a DAF sponsor. Others may partner with a community foundation. San Antonio-based Frost Bank offers DAFs to its clients through the Southwest Community Foundation, for instance.

With $6.9 billion in assets, 1st Source Bank launched its DAF offering two to three years ago and partnered with Renaissance Charitable, an Indianapolis-based fund sponsor that provides charitable distributions, mobile-friendly digital platform and back-office services on a white-label basis. 1st Source manages the investments held by the DAF accounts, which amount to about $6 million thus far. “It’s important for us to be able to private-label it and put our name out there,” says Thompson.

One unique feature of DAFs is that they can accept complex gifts, including real estate, art and illiquid business interests. This is especially helpful for appreciated assets; the asset is valued for charitable gift purposes at its fair market value, but neither the DAF nor the donor pay tax on the capital gains unrealized before the gift. However, bank-managed DAFs make their own decisions about the assets they accept. “We are not going to keep esoteric assets,” Loundy notes. “We are not going to take into a DAF an asset that is not capable of reasonably expeditious liquidation.”

Greene agrees: While Bank of America Charitable Gift Fund will take complex assets, “we look for assets that have a relatively reasonable liquidation timeframe, and where we have the ability to take them in directly, we will take them in directly with the goal of liquidating them as expeditiously as possible.” Bank of America also works with partners that enable the fund to volatile assets like bitcoin and hard-to-value assets like art. (Greene adds that this capability to receive complex assets helps generate more money for charity, since most nonprofits are not capable of receiving gifts like thinly traded stock or intangibles.)

In the case of 1st Source, working with a third-party provider allows their DAF offering to accept these kinds of complex gifts—but Thompson says donors haven’t yet pursued that, focusing instead on the convenience for routine charitable giving. “Not having to keep track of writing a bunch of checks to a bunch of organizations, we do all that for them, we do the record-keeping—they just make one charitable gift, for example, and fund it, and then, once it’s set up, they can continue to fund it. It’s really like their charitable checkbook, and the tax reporting is part of this, so it becomes much easier for them with their CPA or tax preparer.”

Since the gift to the DAF is irrevocable, DAFs may place restrictions on the kinds of recipients. Obviously grants cannot personally benefit the donor advisers or their families, and they cannot be used to satisfy personal pledges or for grants where the recipient receives a personal benefit, such as gala tickets. Sponsors generally specify that recipients be 501(c)(3) charities or houses of worship (which are not required to register with the IRS). Some DAF sponsors put additional restrictions on giving; the Bank of America Charitable Gift Fund would refuse recommendations for grants to nonprofits on a list maintained by the Southern Poverty Law Center, Greene says. However, rejected recommendations are very rare in the bank DAF world, in part because of the client relationship, he adds. “Our clients are working so closely with us and their advisers [that]normally these things come to us before they become a formal request, so we’re able to answer those questions and confirm for them what they can and can’t do.”

To avoid concerns expressed by some policymakers and activists that DAF funds may not go straight to charity, Devon Bank imposes a 5 percent annual payout requirement on its DAF accounts (which aligns with the IRS’ payout requirement for private foundations). This is unusual among DAFs, most of which have no payout requirement.

However, DAFs generally contribute substantially above this level. Greene notes that DAF payout rate across the industry ranges from 15 to 40 percent. In 2020, DAFs paid out 23.8 percent of their assets, according to an annual survey by the National Philanthropic Trust; while DAF assets amount to 14 percent of the assets of foundations, they add up to 54 percent of foundation grants—punching well above their weight class. Total DAF grants rose by 27 percent in 2020 as donors put their DAFs to work during the pandemic.

The flexibility to separate the tax deduction and the charitable payout is part of the benefit of using a DAF. It allows donors to “smooth out their charitable giving,” Loundy notes. To take one example on the high-net-worth end, a family that experiences a liquidity event from a business sale can get the full tax benefit from committing funds to charity without having to make a mad dash to identify charitable recipients in one year. In an example applicable to upper-to-middle-income donors, they might use a DAF to set aside funds over a few years to make a larger contribution to a capital campaign than they might otherwise.

Part of a balanced wealth management strategy

For 1st Source, DAFs are less about democratizing philanthropy and more about enhancing the bank’s suite of wealth management offerings. The service is designed for clients with $10 million and up in net worth—often local business owners and white-collar service providers. “We saw a number of years ago [that]they were setting up donor-advised funds at larger providers, maybe a bigger bank or most likely in our case a Schwab, Vanguard or Fidelity kind of donor-advised fund where assets were leaving our bank,” says Thompson. “We saw it as first of all a key retention tool.”

The bank already had an in-house investment group, “which is a bit unique for a bank our size,” he adds, which made it possible for 1st Source to dive into the world of DAFs.

While there is obviously a revenue component to a DAF offering, Greene agrees with Thompson about the holistic value proposition. “The nature of these accounts is not to drive a ton of asset management fees for the bank; it’s really to facilitate people’s giving,” he says. “We’re really offering this as an extended capability of who we are, as our core business, as opposed to selling this as a one-off solution. . . . Ours is part of a larger way that we think about client relationships and how we engage them.”

Another benefit for banks with wealth management services is that DAFs can be a multi-generational product touchpoint. “We saw a huge demand for people becoming with their legacy wanting to be more and more charitable and philanthropic,” Thompson says. “It was a tool that we could use for next-generation planning, and donor-advised funds could become part of the family legacy and mission.”

Many DAFs allow the donors to designate additional family members as advisers who can recommend grants, making philanthropy into a family business even with smaller balances than a traditional foundation—and helping donors train their descendants in their philanthropic priorities and values.

“We have a lot of families that will break donor-advised funds out as a way to engage their kids or their grandkids with a defined set of funds, as a way to almost train them or get them acclimated before they’re ready to turn them on to the broader foundation asset pool,” remarks Greene.

“We had a number of families who to form this family legacy were looking into setting up a family foundations,” adds Justin Cohee, a trust officer at 1st Source Bank. “As they were doing research, they were starting to find out the complications of doing that—having to do the tax returns, getting attorneys involved—so it’s nice for us to be able to offer a donor-advised fund [where]we can have you fill out an application online and have it open today.”

Growth prospects

Banks offering DAFs expect it to continue to grow substantially. “We have a number of clients who you know started with you know $10,000, $15,000 or $20,000 just to see if they like the service and have discovered how easy it is to use and how much they like it, and they’ve continued to add to add to it,” remarks Cohee. “With a lot of our older clients having liquidity events and looking for that income tax deduction, we’re going to continue to see that.”

While to date DAFs have been part of 1st Source’s family office product suite, but the bank’s retail network can be a vehicle for broader adoption, Thompson adds—extending participation in philanthropy down the income ladder. “That hasn’t really caught on yet, and more education needs to be done with our internal referral sources, but I can see that that will grow the asset basis.”

“We see more and more demand—part of it has been by design in regard to the appreciation that’s happened in the stock market over the last 10 to 12 years,” says Thompson. “There’s a lot of built-in appreciation in people’s assets and we’re just seeing more and more people being sensitive as a family to charitable needs, so I think it’s going to continue to explode.”

As banks increasingly enter the DAF sector, they’re coming full circle as an industry—returning to the days of a century ago when charity flowed through accounts at banks, but this time with a digital customer experience and a support staff that can help donors with their giving decisions.

“We’ve been around a long, long time as an independent institution for bank our size and we’ve been very committed to the community,” says Thompson. “We encourage employees to be committed to the communities that they’re serving, from a volunteering standpoint and also a monetary standpoint, so it really fit well into the bank’s community mission this donor-advised fund that allows people to give within their own community to various charities.”

In the end, offering DAFs can help banks’ wealth advisers “think about their clients more fully,” Greene says. “A large part of people’s lives and how they think about themselves and their values is embedded in the charities that they work with. . . . It gives our advisers a chance to really engage with families, to be closer to them and understand but also to support them at the right time in the right place with the right solutions.”

Disclosure: The author gives personally through a non-bank-affiliated DAF.


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