Feature Story

The Changing Currents in Philanthropy

December 2018 / 4 min read
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The world of philanthropy is facing some major shifts for a variety of reasons with 2018 seen as a year of transition for many in the sector. The new tax law passed in late 2017 will likely impact charities, foundations, and nonprofits. Meanwhile, a growing desire among donors, especially younger, tech-savvy donors, to be more directly engaged with their charities is disrupting the giving landscape.

Americans have a strong tradition of being generous. In 2017, philanthropic donations surpassed $400 billion for the first time. A booming stock market and a continuing strong economy helped boost donations by 5% from the previous year, according to the annual Giving USA study.

Of the record $410 billion Americans gave to charity last year, 70% came from individuals, 16% foundations, 9% bequests, and 5% corporations. Of the total, the largest amounts went to religious groups, followed by education and human services organizations.

As boomers and the generation before them start to retire, how are charities bringing millennials on board?

But changes in the U.S. tax code from the 2017 Tax Cuts and Jobs Act (TCJA) eliminate the incentive for tens of millions of Americans, mostly middle- and upper-middle-income earners, to itemize deductions. That makes charities nervous. Analysts estimate the loss of the charitable deduction benefit could reduce giving by several billion dollars a year.

"We know people will continue to give to the causes they care about without a tax incentive—that's not why people give," says Amy Silver O'Leary, director of resource development for the National Council of Nonprofits. "But research shows that the charitable giving tax incentive is a powerful tool in motivating people to give more."

Closeup of people holding hands

For the first six months of 2018, donations to nonprofits are down about 2% from same period a year ago, according to the Growth in Giving Database representing over 13,000 U.S. charitable organizations.

"The impact of the tax law is not across the board," O'Leary says. "Past research from when states have limited deductions has shown that it has often been worse for local organizations that provide social services like food banks, homeless shelters, and youth programs. They take more of a hit than larger institutions like hospitals and universities.

"What I'm telling donors is it's more important than ever when you're making your charitable giving plans to include local organizations that are meeting local needs," O'Leary adds.

DAFs and bunching

Other trends for charitable funds that industry experts are watching this year are the timing of donations and the continued growth in the use of donor-advised funds (DAFs).

Una Osili, professor of economics at Indiana University's Lilly Family School of Philanthropy, says more tax rule changes in the TCJA are likely to encourage some givers to "bunch" their giving—making several years of donations in one year—to maximize their tax deduction, then skip the next year or two and revert to take the standard deduction.

DAFs, on the other hand, were already growing in popularity before the new tax law because of their convenience. Instead of giving directly to a charity or setting up a foundation, a donor sets up a charitable fund administered by a money manager. That allows donors to pool donations into one pot, deduct the entire contribution in one year and advise the manager over time on the charities to donate to.

Fidelity Charitable, one of William Blair's DAF partners, in 2017 reported an 83% increase in new DAF donors over the previous year, with the new tax law a significant factor.

Blending investing and giving

Another big change that charities are facing is a more hands-on attitude by donors.

For many decades, experts say, donors gave money primarily driven by a sense of social and moral responsibility—the belief that those who do well in their lives should give back to their church, their schools, their communities.

But many charities are finding the next generation of philanthropists placing more emphasis on being actively engaged. They also want to see their donations have measurable impacts, whether the goal is higher reading scores, lower incidence of disease, better water quality, more trees planted or a thousand other yard sticks tailored to the projects they fund.

"As boomers and the generation before them start to retire, how are charities bringing millennials on board?" says Osili of Indiana University. "It's a big challenge."

Laura Coy, director of philanthropy at William Blair, says the growing number of "next gen" philanthropists is driving change within nonprofits and charities. Young donors want to do more than just write a check. They want to volunteer or advocate for the cause.

"There is an exciting blurring of boundaries for them between charitable giving, impact investing, choosing the companies they work for, and choosing the companies they buy from," Coy says.

Osili said such active commitment is a rising and notable trend.

"We see that especially with a lot of younger donors and women through the investment marketplace."

Helene Gayle, who heads the Chicago Community Trust, agrees.

"It means we have to be even better about how we engage our donors, how we make sure that we're giving them opportunities to be engaged, how we make sure we are giving them information that allows them to make smart choices about where they make their investments," Gayle says.