Donor-Advised Funds

By Brendan Coffey

Donor-advised funds have become the favored vehicle of high-net-worth givers because of the giving leverage their structure and tax benefits provide.

Americans donated over $303 billion to charity last year, according to the Giving USA Foundation, to educational institutions, churches, and a myriad of other esteemed causes. Yet effective philanthropy means more than writing a check. The same principles that apply to investing also apply to giving: keep taxes low, maintain control of costs, and ensure that your time and money are well spent toward reaching your goals—supporting your most-cherished causes and building a legacy.

Flexibility and Control

People and institutions are increasingly choosing donor-advised funds (DAFs) as their vehicle of choice when it comes to ensuring that their gifts attain their maximum potential. With over 122,000 account holders, DAFs outnumber private foundations, charitable trusts and pooled-income funds combined in the U.S., according to data compiled by the National Philanthropic Trust (NPT), a national DAF based in Pennsylvania.

“The beauty of a donor-advised fund is that it is flexible enough to meet the needs of a variety of charitable givers, whether it is a wealthy business owner, a donor who is trying to consolidate his or her charitable outreach, or a family interested in building a legacy for future generations,” explains Sarah C. Libbey, president of the Fidelity Charitable Gift Fund, the largest DAF program with $4.4 billion in assets.

A DAF is a charitable fund in your name at a nonprofit that distributes funds at your recommendation. You advise when to give, how much and to what charity. The fund administrator ensures that the charity is qualified under IRS rules, sends the checks in your name (or, if you prefer, ensures that your gift is anonymous) and provides investment guidance of your charitable funds.

Unique to DAFs is the ability to gain an immediate tax deduction by making a gift to your fund without immediate disbursement of the money to a charity. Such a feature relieves the year-end stress of allocating charitable assets while allowing your contributions to the fund to grow. This is in contrast to private foundations, which must disburse 5% of assets, regardless of investment returns. Quite simply, DAFs leave time for thoughtful decision-making while allowing donors to contribute on their own financial and tax planning timetable.

“The beauty of a donor-advised fund is that it is flexible enough to meet the needs of a variety of charitable givers, whether it is a wealthy business owner, a donor who is trying to consolidate his or her charitable outreach, or a family interested in building a legacy for future generations.”

Sarah C. Libbey, President, Fidelity Charitable Gift Fund

DAFs Are Well Suited For a Variety of Investors

There are thousands of DAF sponsors in the U.S., the vast majority of which specialize in local charities. Only a few DAFs offer a program that allows you to donate effectively both nationwide and locally. One of these is the Fidelity Charitable Gift Fund (the Gift Fund), which has a wide array of donors: Some are parents who established a fund to teach their children philanthropic values. Others are multimillion-dollar investors who shifted from private foundations to gain the lower expenses and streamlined IRS paperwork that a DAF offers. The Gift Fund estimates that DAFs can shave 22% off the annual cost of operating a private foundation.

The Gift Fund was established in 1991 by Fidelity Investments as an independent public charity and has disbursed over $10 billion to 136,000 organizations over its history. As just one example of its effectiveness, the Gift Fund has seen its donor base grow from 9,000 accounts to more than 50,000 in just a dozen years.

“Ensuring that their grants are executed in a timely manner and reach the nonprofits for the purposes they express is something our donors have been able to rely on us for,” says Libbey.

The Gift Fund has also been on the cutting edge of enabling its donors to be more effective with their gifting. For instance, through its Web site—CharitableGift.org —donors can research potential charities, find advice on how to most effectively donate assets and maximize tax benefits, and make disbursement requests online. Donors can open an individual DAF with as little as $5,000, and can make grant recommendations for as little as $50. Through the Gift Fund’s unique Gift4Giving program, a donor can make an eGift of $50 or more to a recipient, who then decides what charity receives the funds, providing a powerful lesson in giving.

For those with more significant assets, the Gift Fund offers low administrative expenses for large asset bases—0.6% for balances up to $500,000 and 0.15% for assets over $2.5 million. While most donors choose to have the assets invested in just one of over a dozen options, those with more than $250,000 in their DAF can nominate their own financial advisors to provide asset management as well.

Global Giving Made Easy

NPT pioneered the concept of donor-advised charitable investing at its founding in 1996. Donors with $10 million plus in assets in its DAF have the option of open-architecture asset management. Donors and their advisors can craft an asset-management plan for up to 100% of their funds, subject to approval from the NPT board. Of course, many donors opt to invest their funds in one of the investment-pool options offered by NPT.

Adding to donor flexibility, NPT accepts donations of illiquid assets and allows people to make direct gifts to foreign charities, an unusual option with a DAF.

“We realize a lot of our high-net-worth donors have traveled the world, seeing things they feel are important and want
to support, and the only way to do so is to make direct charitable gifts. We feel we should support them in that,” says Eileen Heisman, CEO of the NPT.

The fund goes through extensive lengths to ensure that foreign charities meet U.S. government guidelines, from background checks of board members to annual reports detailing how the donor’s funds were used, down to the dollar.

Build a Legacy of Charitable Giving

Don’t let the popularity of DAFs fool you: While they are well suited for small donors looking to build a giving tradition, DAFs are robust enough for the most sophisticated investor. They provide immediacy— the ability to quickly make gifts of appreciated securities and illiquid assets, capturing beneficial tax advantages— while providing the structure to build a legacy and craft a charitable vehicle that will live in perpetuity. The ultimate advantage of a DAF is flexibility.

FIDELITY CHARITABLE GIFT FUND
www.charitablegift.org

NATIONAL PHILANTHROPIC TRUST
www.npt.org