Donor advised funds are on the rise, but are they right for you?
By Lou Carlozo Jan. 7, 2015 | 9:44 a.m. EST
When investors approach Pam Friedman about setting up a vehicle for charitable giving, she recommends a donor-advised fund. She’s such a fan that she plans to start one herself in 2015.
“For regular givers like me, a donor-advised fund is a planning tool that makes my giving more cost-efficient,” says Friedman, a partner at Silicon Hills Wealth Management in Austin, Texas. “And of course, everyone knows that a donor-advised fund is a tool to offset taxes, especially if you have a significant tax liability but don’t yet know which charities you want to support.”
Simply put, a donor-advised fund is a philanthropic vehicle established with a public charity. It allows donors to make a charitable contribution, and then recommend grants from the fund over time. The tax advantages of a donor-advised fund are substantial, which largely explains why they have exploded in popularity in recent years.
More than 217,000 donor-advised funds exist, up 34 percent over the past seven years, according to the National Philanthropic Trust’s 2014 Donor-Advised Fund Report, which uses 2013 data. The National Philanthropic Trust is a public charity dedicated to providing philanthropic expertise to donors, foundations and financial institutions. Charitable assets in donor-advised fund accounts totaled more than $50 billion for the first time in 2013, an increase of nearly 20 percent over the prior year.
Donors receive an immediate tax deduction when they make a charitable contribution to a donor-advised fund. The deduction represents up to 50 percent of adjusted gross income for gifts of cash and up to 30 percent of adjusted gross income for gifts of appreciated securities, mutual funds, real estate and other assets.
Investment firms such as Fidelity, Charles Schwab, Vanguard and Goldman Sachs have benefited from the growth of donor-advised funds. The charities created by these firms, often called “gift funds,” heavily market donor-advised funds as an easy alternative to setting up charitable foundations. The upshot for those firms is that they collect fees for administering donor-advised funds.
Donor-advised funds have come under fire in some circles. A giver can let the money sit in a donor-advised fund indefinitely, without a penny being distributed in a donor’s lifetime, even though those funds must ultimately be spent on charitable programs and services. In 2013, The Boston Globe called donor-advised funds the place “where charity goes to wait.”
Donors also lose direct control of the assets. As the name implies, the donor who establishes a fund becomes an advisor who can recommend but doesn’t control disbursements from the fund. Some critics have called for stricter federal oversight of donor-advised funds.
“To me, the best way to [donate money] is to pick a charity you like and give it directly to that charity,” says philanthropist Lewis Cullman, perhaps the most strident critic of donor-advised funds. “Why do you need a middle man?”
Cullman has given away close to $500 million to charities over the past 20 years, including the New York Public Library and the Museum of Modern Art. Because donor-advised funds don’t require an immediate distribution, he says Congress should pass a law “that penalizes funds for keeping the money too long or provide incentives for them to give it away.”
Cynthia Strauss, Fidelity Charitable’s director of research, counters that 64 percent of contributions to Fidelity donor-advised funds have gone out since 1991, totaling $17 billion. In the first half of 2014, Fidelity’s donor-advised funds gave $341 million to educational institutions through nearly 40,000 grants, making it the largest sector to which they donate.
“When we look at the landscape, we are passionate about helping our donors give,” Strauss says. “That’s why we exist. We see that typically, 90 percent of incoming contributions are extended as grants within a decade. It’s money in motion.”
Outside experts agree that donor-advised funds offer key advantages over and above the tax breaks.
“[Donor-advised funds] provide a much cheaper alternative to any companies or wealthy individuals running their own small foundations,” says Thomas Hall, associate professor of finance and economics at Christopher Newport University in Newport News, Virginia. He notes foundations often have high administrative costs and soak up time and energy from CEOs, board members and donors. “By collapsing them and reinvesting the proceeds into a [donor-advised fund], more money goes to the charitable cause as opposed to the administrative costs.”
Foundations also require much more in money and assets to start, whereas a donor-advised fund provides a charity structure for givers of more modest means. “Over the past six years, I’ve seen an increase in charitable gifting from my clients,” says Scott Michalek, principal and senior financial advisor at Wescott Financial Advisory Group in Philadelphia. “I think it’s directly correlated to an increased interest in [donor-advised funds]. It allows my clients to use appreciated securities for all of their charitable gifting needs, even with gifts as small as $50.”
Still, there are other, more meaningful reasons for choosing a donor-advised fund. When Bijan Golkar’s father passed away, he quickly concluded that a donor-advised fund would provide the best charitable channel to honor his memory.
“In the wake of my dad’s death, establishing a [donor-advised fund] allowed our family to help shape his legacy in a thoughtful, unhurried way,” says Golkar, CEO, principal and senior advisor at FPC Financial Advisory in Petaluma, California. “Now, with the fund established, we’re free to make pressure-free decisions about where the money will go and when.”