Written by Gregg Greenberg, InvestmentNews

Featuring Partner Stuart Weischel, Gallet Dreyer & Berkey, LLP

A bear market and inflationary pressures may have many Americans feeling less wealthy lately, but not necessarily less generous.

Don’t worry, kids, Santa Claus is still coming to town to support those in need. His bag, however, might be a little lighter due to the bear market.

With the S&P 500 sinking 15% since the start of 2022 and the Core U.S. Aggregate Bond index down 14%, it’s setting up to be a blue Christmas for charitable organizations. And it’s not just sinking stocks and bonds that will weigh on Americans’ abilities this year to dig as deep as they have in years past or deeper. Gold, real estate, and housing prices have also collapsed, all serving to make Americans feel less wealthy.

Not less charitable — to be clear — but less wealthy.

America has always been, and will always be, a philanthropic nation, no matter the direction of stocks in any given calendar year. In fact, the U.S. has been the world’s most generous country this past decade, according to the Charities Aid Foundation’s World Giving Index. Individuals, bequests, foundations, and corporations gave an estimated $484.85 billion to U.S. charities in 2021, up 4% from 2020, according to Giving USA.

How giving are Americans? Not only do we give money, but 72% of Americans help strangers, and 42% of us volunteer, cutting across religion, region, and age. Nearly 60% of Americans gave money last year, with an average donation of $574.

Still, as any behavioral economist or mall-bound teenager will confirm, if you feel rich, you spend. And if you don’t, you won’t, even for the best of causes.

Not helping the current donation situation is inflation, up 7.7% in October from last year. Runaway prices increase individuals’ immediate financial needs, leaving less for charitable gifts. They also boost the expenses of charitable organizations, making it more difficult for them to maintain their present level of benefits.

And if inflation isn’t infection enough to sap America’s altruistic strength, the cure for it might very well do the trick. The Federal Reserve is intent on playing the role of the Grinch this holiday season, its rate hike campaign threatening to slow the economy to a standstill or perhaps even throw it into reverse, with either result increasing layoffs and missed mortgage payments.

Of course, those who are worried about losing their jobs tend to give less, if at all. Charity, as we’ve long been told, begins at home, and home begins — and ends — with mortgage payments.

All those ugly economic and market statistics aside, this is the season of miracles, so there’s no reason to count out the American public’s generosity quite yet. Wall Street has been experiencing so-called “bear market rallies” all year, and maybe the fourth quarter will deliver one, bringing a spike in charity along with it. One never knows, and there’s no harm in hoping for the best.

But in the meantime, it’s well worth studying the current state of philanthropy in the country and reviewing the best ways for givers to give now that dollars need to be stretched as they haven’t been for a long time.

As they say on Wall Street, hope is not a strategy.

“With a bear market and rising inflation putting pressure on every American, every business and every nonprofit’s budget, charities and donors alike are feeling the adverse effects of market fluctuations,” said Jodi Rosen, director of business and product development at Vanguard Charitable. “It’s likely charities will find fundraising more difficult, and some donors may tighten their charitable giving budgets — whether they’re donating cash or appreciated stock.”

Not All Donors Are Alike

Despite these challenges, Rosen believes donors who use donor-advised funds are uniquely positioned to maintain their giving in the long term since DAFs are positioned to be counter-cyclical. The money in a DAF is already committed to charity, so even when stocks are down, and donors may not be able to contribute as much, they can continue to grant money from their DAF.

“We saw that happen in 2008 and 2009, and we’re encouraging our donors to continue granting at steady rates, especially coming off record granting years during the pandemic,” Rosen said.

She expects to see contributions of cash increase at a faster rate than gifts of securities in the short term as a result of the market’s wild swings. Rosen’s belief is that giving will most likely be hurried during the last few weeks of the year as donors attempt to wait for more certainty in the market.

Of course, advisers often say the most expensive way to give to charity is cash, both for the donor and for the receiving organization, which is what makes the gift of appreciated stock the preferable option.

That said, a bear market affects stock donations because investors feel they can’t afford to give as much given the lack of equity appreciation. Karla Valas, head of fundraising and distribution at Fidelity Charitable, calls this a “knee-jerk reaction” and said that for many, it’s a result of not taking enough time to examine long-term holdings and their current value compared to a year or more earlier.

“We know that, despite volatility over the past year, the current value of some stocks may still be significantly higher than when they were purchased due to the long-term bull market prior to the pandemic,” Valas said. “The most impactful way to give is to donate your most appreciated, long-term asset, which, depending on the portfolio, can come in the form of stock.”

And not all stocks have been pummeled into the loss category this year, even if it feels like it, noted Hope Carlson, principal at CI Dowling & Yahnke Private Wealth. There are still relative winners that are ripe for donation to a good cause.

“Bear markets don’t affect all donors in the same way. Many who have been long-term investors still own appreciated stocks in their portfolios since the markets have been strong until this year, and not all securities have dropped,” Carlson said, adding that she is indeed seeing donations of appreciated stock from clients.

Just as not all securities are alike, not all donors are alike either. Clearly, some have more capacity to give than others — in some cases, much more.

Marta Ferro, managing director and head of philanthropy at ultra-high-net-worth adviser Angeles Wealth Management, believes some philanthropists will dig deep because they recognize the organizations they support need them more than ever in today’s economic and societal situations. She cited increased giving during the pandemic and the Black Lives Matter movement as times when the philanthropic community rose up and gave more, spending down significantly in some cases, to ensure that organizations survived and thrived.

Along those lines, Fred Kaynor, managing director of business development, marketing, and strategic partnerships at Schwab Charitable, recounted the story of a donor spurred by the Ukraine situation to increase his giving to support relief efforts in the war-torn country.

Other deep-pocketed donors may pick up the slack during a bear market not for a specific cause but out of a sense of obligation.

Debra Brennan Tagg, president of BFS Advisory Group in Texas, has found that in challenging economic times, well-heeled donors recognize that “community members need even more help than usual and tend to rise to the occasion.”

As proof, she points to the results of this year’s North Texas Giving Day, the largest one-day giving campaign in the country. In 2021, the event raised just over $66 million in charitable donations. This year, despite a more than 20% drop in the stock market and rapidly rising inflation, donors still contributed an impressive $62.6 million, a relatively benign 5% drop-off.

All that said, Angeles’ Ferro admitted that she is “very much sensing” that everyday people, and people who rely on their incomes and smaller asset bases to give and give generously, are pulling back due to inflation, losses in the market and concern about the foreseeable economic and market future.

How to Give this Giving Season

Vanguard’s Rosen points to donor-advised funds as being the most tax-advantageous ways for donors to give due to their flexibility. Donor contributions to DAFs are tax-deductible, and those funds can be donated immediately or invested and donated after growing tax-free. Also, donors can contribute nontraditional, complex assets to a DAF, reducing the impact of capital gains taxes while increasing the amount they can give to charity.

CI Dowling & Yahnke’s Carlson also recommends a technique called a qualified charitable distribution, or QCD, for some donors — after they check with their CPA, of course. Carlson believes QCDs are especially tax-efficient for clients who must take a required minimum distribution from their IRAs.

Instead of taking their full RMD and paying ordinary income taxes on it, clients will often donate all or part of their RMD to charity as a QCD. This entails having a check made payable from the IRA directly to the 501(c)(3) charity. Not only does the QCD fulfill that part of their RMD, but it is never included in their gross income.

“They don’t pay taxes on the QCD, which is like getting a tax deduction even if they don’t itemize,” Carlson said. “Since a QCD reduces a donor’s adjusted gross income, it can potentially reduce their Medicare premiums, net investment income surtax, and Social Security taxes, too.”

There’s the catch of qualification for this method, though. Donors must be at least 70.5 years old to use this strategy and can only give up to $100,000 per year via QCDs, regardless of how much their RMD is.

“For clients that are over the age of 70.5, a qualified charitable distribution from an IRA is a powerful charitable giving tool. A person can donate to one or more charities directly from their taxable IRA. Since the funds go directly to the charity, the funds are not reportable for federal or state income tax purposes,” said Peter Salkins, a financial planner at Integrated Financial Partners. “It is especially useful if the clients do not need the funds for living expenses and would have been forced to withdraw funds due to the required minimum distributions rules anyway.”

What about stuffing a charity’s stocking with fixed-income securities? Could bonds be the gifts that keep on giving even as stocks turn to coal?

“Bonds are down, and many are in loss positions for the donor because price moves opposite to market yield. No one donates a loss position security since it could be sold to harvest the loss,” said Stuart Weichsel, a partner with the law firm Gallet Dreyer & Berkey. “Also, almost every charity sells securities immediately on receipt to avoid market risk, and since they’re tax-exempt, there are no capital gains on sale. So bonds really don’t ‘keep on giving’ at all.”

Not All Charities Are Alike

Falling stocks are the first punch slamming charitable organizations this holiday season. Rising inflation is the second wallop in the devastating combination. 

“Inflation will have a disadvantageous effect on charitable giving. Not only will individuals’ immediate financial needs increase, leaving less for charitable gifts, but the expenses of the charities will similarly increase, making it more difficult for charities to maintain their present level of charitable benefits,” said Robert Barnett, partner at Capell Barnett Matalon & Schoenfeld.

To support nonprofits during inflationary periods like the current one, Vanguard’s Rosen is encouraging donors to put their trust in the hands of nonprofit leadership and give unrestricted grants, allowing nonprofits to prioritize their spending as they see best. Unrestricted giving has become very popular among donors in recent years, making up 50% of grants issued by Vanguard’s donors during fiscal year 2022, Rosen said.

Charities are also in a particularly difficult position because they can’t respond to inflation the way a business might, by raising prices or trying to grow sales.

Tony Bowen, vice president of the Trustees’ Philanthropy Fund at Fidelity Charitable, said he’s already seeing data from AFP Global’s Fundraising Effectiveness Project showing charitable giving levels are returning to their pre-pandemic levels and not keeping track with inflation. Combine that with rising costs and the cliff in pandemic relief from the government, and the result is that many nonprofits are running deficits this year while seeing an increase in demand for services. That’s a dangerous combination, especially heading into a potential recession.

“Unfortunately, most nonprofits will not have a choice of saving the revenue they receive to make it through a recession versus having to spend it immediately,” Bowen said. “More than 90% of nonprofits have budgets under $1 million, and most must navigate donations with strings attached that don’t allow for saving for a rainy day. Many are struggling to keep up with the wages needed to retain the staff who are central to solving our communities’ more pressing problems.”

Furthermore, local and state governments won’t be in a position to bail nonprofits out in coming years given budget cuts and higher expenses of their own. Bowen points out that local governments are the primary funding source for thousands of nonprofits serving communities’ most critical needs. From food banks to afterschool programs to shelters for the unhoused, nonprofits and the people they support will face extreme difficulty if municipalities cut their funding.

“To the extent that charities are recipients of government contracts as service providers, tighter state and local budgets will reduce these contracts and result in layoffs of actual service providers,” said Gallet Dreyer & Berkey’s Weichsel. “Unfortunately, this has happened repeatedly in the past in a counter-cyclical manner — when most needed, the social services provided by nonprofits are actually cut.”

Doing More With Less

Ultimately the bear market will force a number of nonprofits and charities to close or merge. Every organization staying in business will be forced to innovate, steward their existing donors and cultivate new ones while building their support base by growing their boards and creating new task forces and advisory teams.

They will also do more with less by partnering with each other and figuring out ways to raise funds together or perhaps providing programming to each other’s stakeholders. Nonprofits could also create in-kind relationships with businesses, and these corporate and local business relationships will be key for some organizations, especially smaller ones.

“Donated space to run programs or business offices, donated food and other supplies, donated legal and other services will all allow organizations to make it through this time in our economy,” said Angeles’ Ferro.

Vanguard’s Rosen said she’s well aware of the challenges charities face, especially during difficult market conditions. Even in recent years of record fundraising, nonprofits want those dollars to go further to help more people and to make more of a difference.

“We expect nonprofit organizations to continue to maximize their effectiveness with the operating budgets they do have,” Rosen said. “Overall, we believe that nonprofits will navigate market uncertainty to the best of their ability in order to remain steadfast in their commitment to the cause areas they serve.”

Fidelity’s Bowen echoed her confidence in the resiliency and resourcefulness of nonprofit leaders.

“You want to solve a complex problem in your community when times are tough? Ask a nonprofit leader. They are constantly asked to do more with less,” Bowen said.

“It is critical that board members and donors have their backs during the next few years,” he said. “Like so many people did across the country at the start of the pandemic, now is this time to ramp up giving to our community nonprofits, not decrease during this uncertainty.”