Should Your Small Foundation Convert to a Donor-Advised Fund?

In an investment environment that’s seen endowment assets drop and administrative costs climb, many families nationwide are eschewing the cache of small foundations for donor-advised funds. Why? Lower administrative costs and flexibility mean that more money goes to their charitable causes.

According to a recent article in Investment News, Fidelity Investments’ Charitable Gift Fund, the largest donor-advised fund with $5.6 billion in assets, took in about $30 million from foundations in the one-year period ended June 30, 2011, up from $16 million a year before. Similarly, Schwab Charitable, the second-largest donor-advised fund with $3.1 billion in assets, saw roughly $28 million converted from foundations to donor-advised funds, double the amount from last year.

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 your designated charity is a 501(c)3 in good standing.

The benefits of donor-advised funds I’ve long stressed for individuals also hold true for foundations. For example, whether an individual directs funds to a foundation or a donor-advised fund, they qualify for the charitable deduction that year, and can disperse the funds later, on their own timetable. (Note: There are some limitations on securities so be sure to check with your tax advisor.) Donor advised funds also facilitate donations of stock and other assets, allow donors to maintain privacy, and deliver the benefits of professional recordkeeping at a lower cost that a foundation can.

Of course, you need to consider your foundation’s goals before making the move to a donor-advised fund. Although you may realize tax and administrative benefits with a donor-advised fund, foundations do offer greater grant-making flexibility, allowing you, for example, to establish an endowed scholarship.

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