Donor-Advised Funds

Jo* is the director of a small nonprofit organisation providing care and skills training for physically disabled adults. Much of her time is spent on fundraising and the pressure to raise the R5 million they need each year just to keep the doors open is mounting. The organisation has a handful of corporate and individual donors but they do not want to fund administration, utilities or salaries even though these are the main costs of providing care. Short and unpredictable funding cycles mean that every year is a new struggle. All the experience and goodwill Jo’s organisation has built up over the years is in danger of being lost altogether if they are forced to close.

On the other side of the equation is Danie*, a successful Stellenbosch entrepreneur. He has invested wisely and accumulated enough to cover his own retirement needs and leave a legacy for his family. Danie has a disabled son and wants to share some of his good fortune with a good disability charity. He thinks about setting up a family foundation but it all seems like a lot of effort and he really is not sure about which organisations to support and how it will all work. Although he could afford more, Danie ends up making a quick R25 000 donation to his local church instead.

Jo’s organisation could really do with a wealthy benefactor like Danie. And Danie’s generosity would have a huge impact if invested in Jo’s organisation. How can these two be brought together to balance the equation?

Increasing Wealth

The number of wealthy individuals like Danie is rising - New World Wealth research predicts a 78 percent increase in South African dollar millionaires by 2030 - but giving by high net worth individuals appears to have slowed. The research also found that only four percent use a trust or foundation for their giving and 80 percent of givers have not made provision for giving after their death. This is in contrast to developed countries where the wealthiest 10 percent of people account for around 50 percent of all individual giving in the United States of America and just over  20 percent in the United Kingdom (Charities Aid Foundation). Giving in a will is well established because it offers substantial tax benefits and serves as a lasting legacy for donors and their families.

Negative Experience

What is holding South Africa’s wealthy individuals back from giving substantially and meaningfully? “Being able to give is in itself a wonderful gift,” says Alan Wellburn from Citadel Wealth’s Philanthropy Foundation. “Yet too often donors are disappointed to learn that the funds they have contributed have not been appropriately spent and are reluctant to support other genuinely worthy projects.” The Giving Report II concurs: “The most common reason for not giving was a negative previous experience.”

There is also the hassle factor - wealthy individuals do not want to spend their time on assessing charities and navigating all the administration of setting up a trust or foundation. And many ask themselves, “What do I know about social impact and nonprofit governance?”

Enter the donor-advised fund.

A donor-advised fund allows donors to make a charitable contribution, receive an immediate tax benefit and then make grants to organisations from the fund over time.

According to Forbes magazine, “Donor-advised funds are fast becoming the most popular vehicle for charitable giving in the US.”

Benefits and Sustainability

Funds have been offered globally for some time by leading financial services providers such as Vanguard, Fidelity, Franklin Templeton and Merrill Lynch but in South Africa, there is just one - the Citadel Philanthropy Foundation. A recent development, and the first of its kind in South Africa, the Citadel donor-advised fund offers all the benefits of a private foundation, but with lower associated costs and no administrative hassle.

A fund like this also affords tax deduction against income and carries no capital gains tax, estate duty or donations tax. And, crucially for wealthy individuals who value their privacy, it allows philanthropists to choose what and how much information about them is disclosed to the charitable organisations that will receive the funding.

So far, so good for the wealthy philanthropist. But what about social impact and the survival of organisations like Jo’s?

Removing Barriers

Again, the donor-advised fund has benefits over ad-hoc giving because it vets and assesses organisations on behalf of philanthropists, pooling the costs associated with this and providing organisations with a long-term, sustainable funding stream that covers core costs. “With our partners GreaterCapital, we provide advice on which organisations are well run, manage their resources effectively and deliver on their social mission,” says Wellburn, “Because we believe this really helps to remove barriers to giving among high-net worth individuals.”

GreaterCapital combines social research methodologies with tools we have developed in-house over 10 years to establish the credibility, sustainability and social impact of organisations and assess any potential risks. “It gives us a good understanding of the potential impact of a development intervention as well as providing assurance to donors that their money will be well-spent,” says GreaterCapital chief executive officer, Bridgit Evans.

Once they are vetted by the fund, organisations are able to receive potentially substantial donations that are not restricted to a particular project or budget line item. A donor-advised fund helps to balance the equation by bringing effective and experienced organisations into contact with philanthropists looking to make a difference, without any of the hassle and at a vastly reduced cost. And that has got to be a good thing.

* Not their real names.

  • This article first appeared on the GreaterGood South Africa website

Photo Courtesy:  Wall Street Journal

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