As inflation reaches levels not seen in 40 years, your charitably minded clients are likely worrying about the impact the economy is having on nonprofits they care about. At the same time, they might be wondering whether they should alter their plans for giving.
To complicate things more, the fact that it’s been four decades since we’ve seen similar inflation levels, many of your clients and some of your advisors have no experience weathering such storms.
Fortunately, there are ways to mitigate inflation’s impact on giving and to put your philanthropic clients in a position to give steadily through marketplace ups and downs.
Inflation’s impact on nonprofits
Nonprofits aren’t immune to inflation’s impact. Like for-profit businesses, they purchase goods and services, pay salaries and rent, and so on. Because they generally rely on philanthropic gifts rather than earned income, though, nonprofits experience inflation in some unique ways, such as:
- earlier this year that overall giving was up 4.7% in the first three quarters of 2022 – we shouldn’t assume it won’t. As Wisconsin’s Door County Community Foundation President and CEO Bret Bicoy
- Giving uncertainty. As one might expect, charitable giving typically declines during difficult economic times. For example, when a recession hit the U.S. in 2008, giving declined by 7% in inflation-adjusted dollars, and fell another 6.2% in 2009 according to a study by the Russell Sage Foundation and the Stanford Center on Poverty and Equality. While our more recent economic turbulence has not registered that kind of impact –
- , it could be months before we see the full impact of inflation on nonprofits.
- Decreased purchasing power. Charities can’t raise their prices to offset increased operating costs. While they can ask for more donations, they can’t completely rely on generosity to offset inflation’s impact. The good news is that donors gave more last year than ever before; the bad news is, thanks to inflation, nonprofits received less.
When gifts were adjusted for inflation, Giving USA points out, giving actually declined by .7% from 2021 to 2022, which means a donor needed to give $10,700 in 2022 to have the same impact as a $10,000 gift a year earlier. Because many donors give the same amount to nonprofits year after year, they’re effectively giving less and less over time.
- Changes in giving patterns. In its annual report on charitable giving, Giving USA noted that while giving in 2022 hit record levels, the number of individual donors fell, with the slack being taken up by larger donors and foundations. Giving USA’s report also notes that, as is often the case in harder economic times, donors are giving more to human services organizations and pulling back from arts and culture nonprofits. Such changes add to the uncertainty felt by nonprofits and make it difficult to plan for the future.
- Increased need. Logically, those living on the economic margins bear the brunt of inflation, and they often turn to charitable organizations for support. As Duke Haddad, a philanthropy consultant who serves as Executive Director of Development of the Salvation Army Indiana Division, writes, “The vulnerable will be hit the hardest by inflation and this will drive up demand for charitable services due to the cost-of-living squeeze.”
- Donor worries. Even though giving has stayed strong, donors are showing signs of concern about the future. The Philanthropy News Digest reported last year that more than half of donors had a negative view of the direction of the country, as well as anxiety about inflation and the volatile stock market.
With all these factors in play, it’s no surprise that nonprofits are worried about what the future might hold and that your philanthropically-minded clients might have similar concerns.
DAFs mitigate inflation’s impact on charitable clients
Offsetting inflation for clients who make charitable giving a central component of their holistic wealth plans requires both short-term and long-term strategies.
One short-term approach involves donating non-cash assets to charity. This will help those clients who need to offset capital gains due to asset growth sparked by inflation. By donating those complex assets such as appreciated stock, real estate, business interests, collectibles, and fine art to a nonprofit rather than selling them and donating the proceeds, the client can dispense of the asset without a taxable capital gain, which means more of their wealth can go to the causes they care about.
A donor-advised fund (DAF) provides a vehicle for making such a donation. Because a DAF is established for a donor by a public charity, it can receive and process non-cash gifts and create a fund from which grants can be made to nonprofit organizations. The donor can recommend how grants are distributed, and the funds can remain under your firm’s management and direction.
DAFs also provide benefits that serve as longer-term counterbalances to inflation and other economic ups and downs. Because assets are used to create a fund from which grants are distributed, donors can be confident that they can continue to give even when the economy makes them cautious about spending.
In fact, Giving USA and other observers have suggested that DAFs – which are the nation’s fastest-growing charitable vehicle – are one of the reasons giving has remained fairly consistent through the difficult past few years.
DAFs also provide donors with giving flexibility. Because a DAF doesn’t lock a donor into making a gift to a single charity, the donor can shift their priorities in response to the needs of their charities, their communities, and beyond.
Finally, through these measures, DAFs can put the donor in a better mindset, confident that they can continue to donate through challenging economic times and that they can continue to support the causes that matter to them.
Helping clients take action
Helping your clients access these solutions starts with making sure your advisors understand that clients want to talk about charitable giving.
A recent Bank of America study found that nine out of 10 high-net-worth clients believe charitable giving is so important that it should be a part of their first conversations with a financial advisor. However, only 23% of respondents to a recent Edward Jones survey said that their financial advisors ever discuss charitable giving with them.
So, make sure your advisors are asking about the client’s charitable ambitions, the causes that matter to them, and their expectations for giving to charity. Not only will this give the advisor more insight into the client’s priorities, but it will also demonstrate to the client that the advisor is interested in their total financial life.
The next step is equipping your wealth advisors to explain DAFs in simple terms. Make sure they understand how a DAF works and how it can make it easy for clients to make tax-deductible contributions on their timeline and to recommend grants to qualified charitable organizations.
Finally, make sure your wealth advisors know that your firm can facilitate the establishment of a DAF by working with a registered public charity and that the DAF will handle administrative matters such as providing tax documents, keeping records of contributions to the DAF, grant distributions, and more.
The good news for your firm is that providing this information and service not only will strengthen your relationship with the client but can also keep the assets donated to the DAF under your firm’s management.
Ren makes it possible
If your advisors don’t feel they have the expertise or tools necessary to explain DAFs, or the ability to smoothly facilitate the creation of a DAF, they might hesitate to bring the topic up. This is where Ren provides the services and support to help.
Ren has a number of resources for advisors including a free monthly newsletter that gives the latest news and information on tax-smart giving strategies. Advisors can also take advantage of our Education Center and our team provides them with the support and expertise needed to answer questions and establish a DAF account. These resources equip advisors to be the expert for their clients and gives them the confidence to initiate discussions about philanthropy.
Once the DAF is established, which can be done through our affiliated public charity, Renaissance Charitable Foundation (RCF), Ren can provide administration, client reporting, generation of tax documents, and other required activities.
Throughout this process, we put your firm and advisor in a lead role, underscoring your firm’s part in the process of making this possible.
With this expertise and suite of services at your firm’s fingertips, your advisors can help clients meet both their philanthropic and financial goals and ensure their long-term charitable ambitions can be fulfilled through virtually any economic tumult. And this is yet another way your firm can be an indispensable partner in your client’s financial life.
If you would like to equip your advisors to provide these services to clients, talk to our experts at Ren.