In a transitioning market, whether you are shopping for groceries or planning your summer vacation, you want more bang for your buck. In the philanthropic arena, this new-found frugality has many families converting their family foundations into donor-advised funds, a more cost-effective and flexible charitable investment vehicle.
A donor-advised fund is an account established at a sponsoring charity. You make irrevocable contributions of cash, securities, or other assets to the giving account and receive an immediate tax deduction. As the account advisor, you then make distributions from the account to other operating non-profits, such as hospitals, schools, environmental organizations, or the Red Cross. The fund handles all the due diligence, tax filing, compliance, and administration. Approval of your grant recommendations is essentially automatic as long as the designated charity is a 501(c) 3 in good standing. Of course, you may make subsequent donations to your account.
While all donor-advised funds are classified as “independent non-profits,” many are sponsored by financial-services companies. With more than $3 billion under management, the Fidelity Charitable Gift Fund, launched in 1991, is our nation’s third-largest charity, behind United Way and the Salvation Army. Other money management firms offering donor-advised funds include Vanguard, Schwab, and Bank of America. Additionally, other funds are administered by community foundations, non-profit organizations, and colleges and universities.
Historically, the model for donor-advised funds has been to present a menu of mutual funds from one fund family and require account owners to invest their contributions among those funds. Today, particularly with donor-advised funds attracting higher-balance accounts transferred from family foundations, many sponsoring charities offer a more customizable approach to investing, and even allow account holders to work with their financial advisors.
Unlike the industry giants Fidelity and Vanguard, the American Endowment Foundation (AEF) has never operated with a restricted list of investment products and has always permitted advisors to manage a client’s donor-advised fund assets. Founded in 1992, AEF is unaffiliated with financial institutions and accrues no benefit from brokerage services, commissions, finder fees, or product sales. As the leading “independent” donor-advised fund program, AEF accepted $31 million in new contributions to donor-advised funds in 2009 to push total assets invested to $161 million. AEF donors, whose funds range in value from $10,000 to $10 million, recommended $18 million in grants in 2009.
With flexibility, cost-effectiveness and operational efficiencies emerging as real benefits for charitable individuals and families, donor-advised funds are among the fastest growing charitable giving vehicles. According to the National Philanthropic Trust’s Donor-Advised Fund Market Report 2008, new accounts increased 12.2 percent from 2006 to 2007. Additionally, in January 2008, donor-advised funds held approximately $27.7 billion in assets, an annual increase of 21.1 percent.
Compared to a foundation, a donor-advised fund enjoys greater freedom from federal reporting rules. What’s more, there is no minimum annual payout rule, although most donor-advised accounts make annual contributions far exceeding the five percent minimum for foundations. Donor-advised funds also offer greater flexibility and efficiency over simply writing checks to support your favorite charity, allowing you to:
Donate now, decide later. A contribution to a donor-advised fund separates the tax event from the grant making event. That is, you direct funds to your account, qualify for the charitable deduction that year, and can disperse the funds later on your own timetable.
Facilitate donations of stock and other assets. While many charities you want to support may not have the capacity to accept gifts of stock and other appreciated assets, you can contribute a wide variety of assets to most donor-advised funds.
Maximize your charitable dollars. With most donor-advised funds, you can choose from an array of investment options. Because asset growth is tax-free, you leverage the impact of your charitable dollars.
Maintain privacy. Because charitable giving can be quite personal, you may want a buffer between yourself and grant-seekers. Donor-advised funds enable you to select whether to be recognized for your gift or to remain anonymous.
Benefit from professional recordkeeping. Donor-advised funds provide consolidated reporting and record keeping, eliminating the frustrating exercise of collecting cancelled checks or gift acknowledgement letters for tax purposes. If you choose to make grants to multiple charities, you require only one tax substantiation letter for Uncle Sam. Also, the ability to review your grant-making history can help you to evaluate future gifts.
Donors who establish a donor-advised fund often view it as the centerpiece of their multigenerational charitable giving plan. If your children are of legal age, you can designate them as additional grant-makers to your donor-advised fund or name them as successors to the account. Either way, it is important to set up a governance structure that reflects your family’s interests and needs. Over the long-term, by bringing your family together for grant-making decisions, your donor advised fund can help you cultivate a philanthropic passion in your children and create an enduring family legacy.