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 Last month, Emma Kieran wrote that nonprofits receive 30-40 percent of annual gifts in the last few weeks of the year. Among end-of-year donor groups, High Net Worth Individuals (HNWIs) are the most important source of donor revenue. As a nonprofit Chief Financial Officer and former Development Committee Chair, I know that HNWIs give about 58 percent of all donation revenue and that their largest gifts are often concentrated in the last few weeks of the year.
Research and interviews indicate that 2013 will be a good year for HNWIs. Top level compensation and bonuses are expected to remain robust and year-to-date investment returns are in the 10-20 percent range. Therefore, OAI expects HNWI donors to remain generous in 2013.
But this good news does not mean we should relax, because a few things have changed since 2012.
Specifically, capital gains rates have changed. As we would expect, media articles and conversations indicate HNWIs will respond by giving relatively more "appreciated" stocks to nonprofits or to Donor Advised Funds in 2013. These changes are not insurmountable and you can prepare for them quickly and easily.
Appreciated Stock and Donor Advised Fund Basics
An Appreciated Stock is a stock that has gained in value; that has been owned for at least 12 months; and that would be subject to federal and/or state capital gains taxes when sold. Since the investor portfolios are up in 2013, there are more appreciated stocks than there used to be.
Appreciated Stocks generally matter to HNWIs because donating stocks enables HNWIs to avoid capital gains taxes while supporting their favorite charities. In 2013, Appreciated Stocks will matter even more because HNWIs are subject to 8.8 percent more tax (23.8 percent vs. 15 percent) on capital gains through the higher 20 percent capital gains tax rate and the new 3.8 percent Medicare surtax on net investment income.
Nonprofits are not always as organized as they should be concerning stock gifts. I have lost count of the number of times I have seen a nonprofit hand out a poorly scanned photocopy of an old "How to Donate Stock" brochure, and I am still saddened to hear board directors ask if their nonprofit accepts stock donations. If there are questions about your nonprofit's ability to accept Appreciated Stock, your HNWI donors might not give to your nonprofit or might unnecessarily pay capital gains taxes.
To capitalize on the Appreciated Stock donation trend, you should, at the minimum, update your fundraising materials and get your staff prepared for these donations. Specifically you should:
- Educate your staff about this opportunity.
- Review and update your "How to Donate Stock" brochure and then ask your broker to review and approve the data.
- Reach out and remind your board directors and HNWI donors that your nonprofit eagerly accepts stock donations; that the process is easy; and that there are tax benefits.
A Donor Advised Fund (DAF) is a charitable account that accepts tax deductible gifts from donors and that is administered as a public charity by an investment company or nonprofit. After funding a DAF, the donor "advises" or "requests" that the DAF distribute grants to qualifying nonprofits. Technically, the donor cannot force/instruct the DAF to make a grant/gift.
DAFs matter to nonprofits because they were the fastest growing source of donations in 2012 and because they help HNWIs with donating Appreciated Stocks. Unfortunately, getting a donation from a DAF might not be as easy as you think because the organizations behind DAFs have formal and sometimes quirky rules. Also, while an HNWI might simply have written a check after being cultivated by your staff, most DAFs will need to research your nonprofit and undergo a formal approval process using their unique criteria.
Nonprofits are also not always as organized as they should be concerning DAFs. On multiple occasions, I have had to explain to fundraisers that most DAFs will not "fund" an event or donation that involves "goods and services" used by the donor. Moreover, some fundraisers and donors are surprised to learn that DAFs cannot legally fulfill pledges made by donors.
To capitalize on the DAF trend, you should, at the minimum, streamline and improve the process for your donors and DAFs. Specifically you should:
- Educate your staff and volunteer fundraisers about DAFs, especially personal pledge fulfillment issues and goods and services restrictions.
- Determine the DAF groups that might receive requests to give to your nonprofit and get to know their specific requirements.
- Create a DAF section in your nonprofit's "Donate Now" page that includes your IRS designation, legal name, address, EIN/TIN, mission, and point of contact for DAF questions.
- Ensure that you get the right name, address and acknowledgement process for the DAF gift; because you might want to thank multiple HNWIs who made the request while not -- per instructions from the DAF -- sending any letters/receipts to the DAF that actually made the gift.
Making the most of your stock donation and DAF resources and abilities will increase your nonprofit's revenue from HNWIs during the final weeks of 2013 and in years to come.
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Michael Cantacuz�ne joined the OAI team in 2006, bringing more than 20 years of banking, finance, investment, and organizational management experience with him. At OAI, Michael is responsible for OAI's nonprofit management services including finance & accounting, audit management, budgeting, tax reporting, regulatory filing, board and committee management, policy development, and front office staffing.
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