Donor-Advised Funds

Maximize giving power through this low-cost,
versatile philanthropic tool.

By Brendan Coffey

Charitable giving has long been a priority for Donna Morris and Bill Sweat, starting before their marriage 25 years ago and continuing through their time as financial service professionals and into their second careers as owners of Oregon’s Winderlea Vineyard and Winery.

Over the years, the pair has relied on donor-advised funds (DAFs) as an efficient and convenient way to manage philanthropy and make donations to their alma maters, Habitat for Humanity, the Boys & Girls Clubs of America and others. “We see donor-advised funds as a way of directing our dollars to organizations we want to support rather than into the costs and time associated with running a foundation of our own,” explains Morris.

The couple discovered early on what many others have since—that DAFs provide many of the benefits of a private foundation at a fraction of the cost, while boasting superior tax advantages. Donor-advised funds are the fastest-growing vehicles for charitable giving. They’ve risen 21% annually since 1995 to $17 billion in assets at the start of this year, according to data from the Council on Foundations and the three largest national donor-advised funds.

A donor-advised fund is a philanthropic fund in your name administered by a charitable organization, which in Morris and Sweat’s case is the Fidelity Charitable Gift Fund, the nation’s largest DAF with $4 billion in assets. With DAFs, you decide when and how much to contribute to your fund, taking the tax deduction immediately. The IRS doesn’t obligate a disbursement of DAF assets annually, as it does with a private foundation, so you have time to decide which charities to support. The administrator ensures that the charity is an eligible 501(c)(3), sends out the checks either in your name or anonymously, and manages your DAF assets in one of a selection of investment pools you choose.

“One of the things I find most useful about the charitable giving account is that it allows you to think about your giving several years in advance,” explains Sweat. “Basically, you pre-fund giving you’ll do in the future.” That has been a boon to Sweat and Morris. Launching their new business has tied up disposable income, yet they remain able to support their favorite causes at the same levels, having funded their DAF earlier.

Ensuring Your Charity Goes Further
Another hallmark of donor-advised funds is their low operating expenses—frequently well under 1% of assets, even for accounts at the typical $5,000 minimum donation. By comparison, a private foundation requires filing time-consuming public IRS documents, hiring an administrator and finding a board of trustees. These are all costs that erode giving power. The Fidelity Charitable Gift Fund estimates its donors can save 22% annually on administrative and investment expenses, meaning more money goes to charity. For those wanting greater individual control over their assets, donors with $250,000 or more in DAF assets at Fidelity Charitable Gift Fund can elect to have their own investment advisor manage a portion of the funds.

Donors also find that DAFs can bolster tax and financial planning. Cash donations to a DAF are deductible up to 50% of adjusted gross income, compared to 30% with a private foundation. Gifts of appreciated securities are deductible at full market value (with some exceptions) up to 30% of adjusted gross income, versus 20% with a foundation. And, of course, no capital gains tax is paid on donated securities.

“Donors can start their giving and grow and branch out as they get
more ideas from their circle of influence in the donor-advised structure.”

Sarah C. Libbey, President, Fidelity Charitable Gift Fund

Make Giving a Family Tradition

People also find that DAFs are an easy way to engage one’s family in philanthropy and create a tradition of giving. “Our donors are very interested in involving their families,” says Sarah C. Libbey, president of the Fidelity Charitable Gift Fund. “You can have more than one donor on an account; you can name various successors and even set up and seed a fund for children and grandchildren.” The Fidelity Charitable Gift Fund recently introduced an even simpler way to make philanthropy a family event through its Gift4Gifting℠ program.

Gift4Gifting allows donors to issue an eGift for as little as $50 from their account, enabling recipients to choose what charity receives the grant. They can research and request the gift online through the Gift Fund’s Web site. Both donors and their families benefit from extending the tradition of charitable giving to spouses, children and friends. As Libbey notes, “Donors can start their giving and grow and branch out as they get more ideas from their circle of influence in the donor-advised structure.”

Gifting Illiquid and Privately Held Assets
A unique option afforded by many DAFs, including the Fidelity Charitable Gift Fund, is willingness to accept illiquid and private assets such as S-corp stock, C-corp shares, residential and commercial real estate, and even cash-value life insurance policies. People with a sizeable portion of their wealth tied up in their companies, such as family business owners and start-up company executives, have found that donating special assets generates immediate tax deductions at full current market value, streamlines estate planning and, most important, supports good causes when cash flow otherwise would delay philanthropy. In these times, when charitable needs are greater than ever, the special-assets option is generating heightened interest. “Donors are being very thoughtful about exploring other ways they might be able to fulfill their giving and not let the economy affect them too much,” explains Libbey. The charity’s grants through the first three quarters of 2009 were more than $650 million. As Libbey notes, “People use their donor-advised funds as a ready reserve to support their favorite charities.”.