Giving The Gift of Love – How to Use Donor-Advised Funds with LGBTQIA Clients

"I am a firm believer that you don’t achieve greatness on your own. There is always someone there to lend a hand." — Greg Louganis

Members of the LGBTQIA community have always been very good about making charitable donations to our community and to other charities that support progressive causes. One of the giving vehicles promoted by financial professionals is donor-advised funds or DAFs. However, recent reporting in the financial services industry has sounded the alarm that donor-advised funds are being used to fund organizations that are bent on erasing LGBTQIA and Trans rights and fighting other progressive causes.

Rather than sit back and throw up my hands on this strategy, I decided to dig in and see how I can help advisors make sure their clients who have donor advice funds are using them to support charities that share their values. Before I do that, I need to set the stage and talk about what donor-advised funds are and how they work.

What is a Donor Advised Fund or DAF?

A donor-advised fund or DAF is?a separately identified fund or account that is maintained and operated by a section 501(c)(3) organization or sponsor. Each account is composed of contributions made by individual donors. And of course, because the industry likes to do everything with acronyms, we refer to donor-advised funds as DAF.

Donor-advised funds have been around since 1931 when the The New York Community Trust was established.[1] Their popularity grew steadily and as of 2015, they became the fastest-growing charity giving vehicle. In fact, the Gift Fund established in 1991 by 富达 is now the largest nonprofit by revenue.[2] Why are they so popular? Two reasons, contributions are tax deductible and both the contributions and the charitable donations remain anonymous.

How do they work?

The donor sets up a DAF by completing a short application and by making an initial charitable contribution to the 501(c)(3) organization or sponsor. The contributions to the account are irrevocable and must be used for grant-making (donations) to charities.

The donation is tax-deductible as directed by the current IRS rules. Typically, if one contributes securities or appreciating assets to a donor-advised fund, they can deduct up to 30% of their adjusted gross income (AGI).?If they can’t get the full deduction in a single year, they have five years to claim the unused deductions. However, these rules may change from year to year as they did during the Covid pandemic. Always check with your tax professional to determine the rules for charitable donations.

Once the account is established, the donor can make grants to 501(c)(3) organizations that are in good standing with the IRS. We'll put a pin on this and get back to these grants but one thing to know is that the grants are not tax deductible themselves. It is helpful to read the IRS's explanation of donor advice funds because it lays out all the rules for these accounts.[3]

Are they easy to set up?

Generally, they are easy to set up, however, not all donor-advised funds are the same. Donors really need to discuss the objective of their gift-giving with their advisors. There are several reasons for this.

Licensing. If you are an advisor working with a client to set up a DAF, you must have your securities licenses in your state, the donor's resident state, and the state of the sponsor. It's not always that obvious. For example, the two main DAFs Cambridge Investment Research, Inc. uses are in Ohio and Indiana. For me to use them, I must have my licenses in those states. The DAF I most recently used is in Maryland, so I have had to maintain a license there to stay compliant.

Minimum Initial Donation. Most traditional DAFs have initial contribution limits with the lowest being around $5000. The one that I use has a $25,000 minimum if you go direct to the fund or a $100,000 minimum if I use them through AssetMark . Recently, new apps have hit the mobile market that are like mobile savings apps in that they automate the process of saving and making grants. These apps have much lower limits on contributions and grants.

Contributions can be made in the form of cash, stocks, bonds, mutual funds, and other investment products depending on the rules of the sponsor. Some DAFs are now even accepting cryptocurrency. I can help somebody open a DAF and consult with them on their investment holdings if they are covered by my license. I can't consult on cryptocurrency, so if the client wants to have cryptocurrency in their DAF, they will have to work directly with the sponsor.

Investment Selection. For the most part, most individuals who use DAFs set up accounts that have stocks, bonds, mutual funds, ETFs, and index funds. As I mentioned above if you want to hold alternative investments you need to make sure that you are licensed to do so.

The types of funds are another story. Some of them have a restricted list or have turnkey investment models. Others will allow you to use whatever investments you want. For example, if I use AssetMark for the DAF I can use any of the investment solutions on the AssetMark platform provided I meet that platform’s minimum or the DAF’s $100,000 minimum. AssetMark does offer ESG and socially responsible funds.

That is not the case for all DAFs. Some Investment platforms do not offer ESG. Likewise, some Advisors just refuse to work with ESG. Others are restricted by the state. Last month, Missouri passed a rule that put up another hurdle advisers must take to set up an ESG. It's a disclosure document that they are going to have to provide to any client who wants to invest in ESG.[4] This is a new rule, so we really don't know how it's going to play out but one thing we do know is that if it's happening in Missouri, it's likely to start happening in other states as well.

Irrevocable. The other thing to remember is that the DAF account does not belong to the client. Once the irrevocable contribution is made, the account must be managed according to the rules of the sponsor. The only role the donor plays is in working with the sponsor and advisor to select the investments and charities for their grants. That is why it is important to be selective in the sponsors and make sure that they are a good fit with the donor.

When I called Cambridge to set up my first DAF, they suggested that I use the Cambridge Charitable Gift Fund or the other one listed on the platform. After looking at the websites, I realized these sponsors would not be a good fit for my client. She wanted a sponsor whose values aligned with hers both in the investments the fund held and their charitable mission. She wanted to donate to charities that promoted gender equity, racial equity, climate justice, social justice, health access, and progressive causes in general. She also did not want to open accounts in Ohio or Indiana if she did not have to. Fortunately, I am not restricted to what I can use and found a sponsor in Maryland that has a mission to work with several progressive charities.

Grants: That brings us back to grant-making. I put a pin in this one because many advisors focus on setting up the account so the client can get a tax deduction but don't talk about the giving part.

To make a grant what you must do is submit a grant request to the sponsor naming the charity and the amount of the donation. The grant team at the donor advice fund then vets the grant. Most of them use one or more of the available databases like GuideStar , Charity Navigator , or go directly to the Internal Revenue Service Website (https://apps.irs.gov/app/eos/) to make sure that the charity is in good standing with the IRS. Once the sponsor approves the grant, they cut a check made out to the charity and send it directly to the charity.

One of the criticisms of DAFs is that it takes too long for the money to get from the donor to the charity. This happens because too much emphasis is put on the tax savings for the clients and assets under management for the investment advisors. Often, after the initial contribution is made and the donor gets their tax deductions, the money sits in these funds untouched. The advisor never tells the donor that they should be making grants or that it is recommended that they give at least 5% of the account value out in grants during the first five years. Instead, the account is treated like an investment account that has the same objectives as their other savings and investment accounts. They feel like they can’t spend it down because that would be depleting their savings. That's not the case, in fact, once the contributions are made it is no longer part of their investment portfolio or included in their net worth.

Another criticism is that because the contributions and grants are anonymous, they are being used as dark money to fund causes on both sides of the culture war. There is no way to tell who is making contributions to a donor-advised fund and the only way to know which charities are receiving grants is to go through the sponsor's Form 990. That only lists the charities, it doesn't list the donor who gave to the charity.

A couple of years ago, it was discovered that some of the donor-advised funds were issuing donations to charities for organizations that are listed on the Southern Poverty Law Center ’s Hate Map. A group called Unmasking Fidelity[5] sent a letter demanding that Fidelity, the nation’s largest DAF, to:

1)?????Disclose past contributions to organizations perpetuating white supremacy and fascism.

2)?????Divest from the violence of white supremacy and fascism by developing a public screening policy.

3)?????Repair this harm by redistributing these funds to the communities most impacted by white supremacist and fascist violence.

“We are writing to you about our continuing concern that Fidelity Charitable’s?Donor-Advised Funds?(FC DAFs) contribute to tax-exempt non-profits that promote anti-immigrant, anti-Muslim, anti-Black or anti-LGBTQ rhetoric and policies that enable white supremacist and fascist violence,” the Unmasking Fidelity petition reads.[6]?

Of course, once Unmasking Fidelity sent their petition to Fidelity, 1800 financial professionals, investment advisors, and grant recipients got together and sent a letter to counter the letter sent by Unmasking. They urged them not to bow to a petition they received from Unmasking Fidelity and other organizations who were pressuring them not to make grants to 501(c)(3)s that promoted hate.[7]?Fidelity, for their part, responded to both groups that they were “cause neutral.”

One sponsor, Amalgamated Bank , decided to take a different approach. They realized that they had to address this at the sponsor level and started a campaign called Hate is Not Charitable.[8] Instead of making demands of the DAFs, they added an extra layer to the grant process and vetted the organizations against the Southern Poverty Law Center Hate List (https://www.splcenter.org/hate-map) and organizations like Color Of Change , Change the Terms, and GLAAD . A few sponsors like ImpactAssets joined the AMALGAMATED CHARITABLE FOUNDATION INC and added that extra layer of vetting their grants, too!

Though the intent of these groups was valid, it was not able to fix the problem. A recent article written by Tobias Salinger for Financial Planning Magazine, Are Christian donor advised-funds pushing anti-LGBTQ politics? and a recording for the Queer Money Podcast Here's What's Funding Anti-LGBTQ+ Hate in America | Kingdom Advisors | Queer Money addressed the issue of how the funds are still getting to groups pushing anti – LGBTQ causes. They specifically referenced the ”He Gets Us” ad campaign during the 2023 Superbowl. The campaign was funded by a donor-advised fund called The Signatry . If you look at their 2022 Form 990 you'll see that they gave $57,750,000 to the “He Gets Us Campaign” and several religious groups including $40,537,850 to Every Home for Christ/World Literature Crusade (listed as a church). They also gave money to at least one group on the SPLC Hate Map, the Alliance Defending Freedom received $15,641,254.00.[9] Though you can’t trace the donation there are also ties to Hobby Lobby ’s David Green.[10]

The response by a couple of broker-dealers to this article in Financial Planning Magazine was to announce that their DAFs would not contribute to any of the charities listed on the SPLC hate list. I was skeptical because of the anonymity of the donations and grants. There is no way to police this and the path to these hate groups is not always direct, so I did some research.

There are 1225 groups on the Southern Poverty Law Center ’s Hate map. Of the 65 organizations listed as anti LGBT 39 were 501(c)(3) organizations and 13 were churches. What was interesting was the DAFs and foundations mentioned in the above-mentioned article and podcast were not groups listed on the SPLC.

I tried to see if I could find a money trail by looking at Form 990s. First, I started looking at a couple of the bigger donor-advised funds to see who was giving to the Alliance Defending Freedom, one of the groups on the SPLC Hate List. I had already discovered that The Signatry gave them $15,641,254.00.[11] But so did the FIDELITY INVESTMENTS CHARITABLE GIFT FUND FOUNDATION INC Fund (FIGF). They gave them $2,051,760.00 in grants to the group in 2021.[12]

Then I noticed something else. When I looked at the Fidelity Investments Gift Fund (FIGF) 2021 Form 990 on their website, it showed that the top grant recipient was another DAF, the National Philanthropic Trust (NPT) with $308,361,255.00. They also gave grant money to the American Endowment Foundation (AEF) $37,511,954.00 and The Signatry $285,853.00.[13] Then I looked at the National Philanthropic Trust . They have not updated their Form 990s, but in 2020 they made grants to the AEF of $54,709,554.00 and The Signatry of $30K. They also gave FIGF $33,897,712.00.[14] Up next was the American Endowment Foundation . On their 2021 Form 990, it shows they gave FIGF $26, 435, 642, NPT $593,751.00, and $1,944,243.00 to The Servant Foundation via The Signatry.[15] ?For their part, The Signatry gave FIGF $398,447.[16] ImpactAssets also gave grants to FIGF $4,523,089.00 and NPT $3,096,667.00[17]

What I was seeing was a tangled web of DAFs giving to DAFs. Though a sponsor like ImpactAssets does not give to hate groups, they give to DAFS that do. I also don’t think the sponsors are going to be able to stop the flow of money to hate groups if DAFs can give to DAFs. In the chart above, I try to sum up the flow of funds between four sponsors: 富达 Gift Fund, the National Philanthropic Trust , the American Endowment Foundation , and The Signatry . Don’t forget these are just the grants from sponsors to charities, there is no way to track these back to individual donors. When it comes to churches it is even worse as the trail ends at the initial grant as churches are not required to file Form 990. I cannot see how firms will be able to trace the money trail especially since there are 1.5 million charities that qualify as 501(c)(3). I doubt if anyone is going to search all the Form 990s to make sure that money does not go to hate groups.

Instead, what financial professionals need to do is advise their LGBTQIA clients to give the grant directly to the charity. If they want to give the grant to a church or foundation, verify that the organization uses the funds. In fact, I would go one step further and recommend making grants to local charities. The other way to make sure that the grants get to the charities the donor supports is to make sure you set up a proper succession plan for the account.

Succession planning. There are no rules that require you to make grants if you have donor-advised funds. However, most funds suggest that you give 5% every 5 years. That is a recommendation worth considering because of what happens if the donor when the donor passes away. If the donor has set up a beneficiary or a succession plan, then the sponsor may let the funds go to a specific charity or their heirs in the form of a philanthropic inheritance. That means they don’t get the money. It means they can use the DAF for their own giving.

If the donor did not set up a beneficiary, then the sponsor gets to decide what happens to the fund. Some keep it going to perpetuity. Others may liquidate and make grants based on the donor’s giving history.

What happens when a donor doesn’t have a giving history? One sponsor told me if the donor has not made any grants, they will take the case to the board and have the board decide where they will give the charitable donations. This can be an issue if the board is conservative-leaning and wants to give donations to organizations the donor might not want to support. ??

Remember, our industry on the whole trends conservative so it stands to reason that many of these boards would not even think of funding progressive causes like LGBTQIA rights, gender equity, social justice, climate change, etc. Even when I spoke to a DAF that screens according to the “Hate is Not Charitable” campaign, I was told they must tread lightly because there are too many Financial Professionals on the platform who use their DAF that fit the industry stereotype of having very religious conservative views.

Compounding this is the fact that some advisors look at DAFs as Assets Under Management (AUM). As far as they are concerned, they do not care if you make any grants. If the funds stay in the DAF, they earn fees. If the account is liquidated and paid out to a charity when the donor dies, then where it goes depends on the grant history or beneficiary designation. The best way to assure that you're giving continues the same way as it did after you pass is to make sure you give while you are still alive.

To sum it up, here are the five steps you can take to make sure your LGBTQIA and other progressive clients are giving to charities they support:

1.??????Find out what options are available for you to use. It will depend on your licensing and broker-dealer as Donor Advised Funds are often treated like 401(k) plans where you must receive authorization to be an advisor on the plan. If you are not permitted to be the advisor on the account, consider these two options:

a.??????Work collaboratively with an investment advisor who works in this space. Make sure that the advisor’s values align with the client. It is okay to ask!

b.??????A second way is to advise the client as part of the scope of your financial planning engagement just like you do with their retirement accounts and high-interest savings. Check with your broker-dealer first.

2.??????Find a sponsor whose DAF aligns with the client’s values, investment choices, and gifting objectives.

3.??????Plan your contributions with your CPA. There are strategies such as deduction bunching that can work well with this strategy.

4.??????Make grants and make them often! Once you make the contribution, you get your tax deduction, and the balance of this account has no bearing on your net worth. If you want another deduction, then add another contribution.

5.??????Remember, by making grants you are helping the causes you want to help and are establishing a grant pattern that can serve as your succession plan.

I still believe donor advice funds are a great way to manage your charitable contributions. ?If we can help our clients manage these accounts, and quite frankly, if we can manage our own donor-advised funds, then we can make sure that funds get into the hands of the charities that are supporting LGBT rights and other progressive causes we feel strongly about. If we leave this up to advisors who don't share our values, they will probably still go to very generic organizations or may even get into the hands of organizations who are trying to erase our rights. Let’s make sure every charitable dollar we give counts and helps our LGBT, Transgender, and Non-binary communities as well as other progressive causes!

[1] https://www.nycommunitytrust.org/and

[2] https://nonprofitnewsfeed.com/resource/top-100-nonprofits/

[3] https://www.irs.gov/pub/irs-tege/donor_advised_explanation_073108.pdf

[4] https://www.reuters.com/sustainability/sustainable-finance-reporting/new-anti-esg-rule-missouri-offers-us-republicans-another-path-away-wokeness-2023-07-10/

[5] https://unmaskingfidelity.org/about-us/

[6] https://www.dailysignal.com/2022/01/25/1800-sign-letter-urging-fidelity-charitable-not-to-bow-to-leftists-demands/

[7] https://www.dailysignal.com/2022/01/25/1800-sign-letter-urging-fidelity-charitable-not-to-bow-to-leftists-demands/

[8] https://amalgamatedfoundation.org/insights-and-initiatives/hate-is-not-charitable

[9] https://beta.candid.org/profile/7663207?keyword=The+signatry&action=Search

[10] https://www.forbes.com/sites/kerryadolan/2023/02/13/this-billionaire-is-a-donor-behind-the-jesus-focused-super-bowl-ads/?sh=4eb7254d7b29

[11] https://beta.candid.org/profile/7663207?keyword=The+signatry&action=Search

[12] https://www.fidelitycharitable.org/content/dam/fc-public/docs/fc/fc-990-fy-2022-schedule-i.pdf

[13] https://www.fidelitycharitable.org/content/dam/fc-public/docs/fc/fc-990-fy-2022-schedule-i.pdf

[14] https://beta.candid.org/profile/7270691?keyword=National+Philanthropic

[15] https://beta.candid.org/profile/7420508?keyword=American+Endowment

[16] https://beta.candid.org/profile/7663207?keyword=The+signatry

[17] https://beta.candid.org/profile/8835376?keyword=ImpactAssets