Bernadette Starzee, The Daily Record Newswire
Many wealthy people and corporations set up foundations including some with famous names that give away money for years or decades. But lately, billions of dollars are flowing into donor-advised funds, which are quickly becoming the charitable vehicle of choice for many Americans.
Donor-advised funds let people obtain charitable deductions upfront for contributions such as cash or stock without determining the final destination right away. People donate now and decide later exactly what should be done with the money, instructing funds over time about how much to donate, and to whom.
The funds, which are technically public charities, typically take only small management fees, rather than the larger administrative expenses of foundations. And donor-advised funds invest numerous people's money collectively, rather than requiring delicate investment choices by each donor. Since funds often are run by entities such as Fidelity, Vanguard and Charles Schwab, the money is typically managed by skilled investors who can grow the principal.
Just as people routinely pour retirement funds into their 401(K) plans and education money into 529 plans, they're increasingly putting philanthropic money into donor-advised funds.
"We're seeing more moderate and middle-income people using donor-advised funds, because of the ease of doing it and the lack of expenses," said Robert Spielman, a partner of Marcum. "All you have to do is call them up, set up an account and send them securities or a check."
Funds are more flexible than foundations, which are required to donate 5 percent of assets annually or face higher taxes. Private foundations also require their own tax returns and cause donors to incur other costs that donor-advised funds take care of.
"There are no tax returns, bookkeeping or administration," Spielman said. "Because donor-advised funds are deemed to be public charities, there are fewer limitations than if you make donations to private foundations."
People can move money into a donor-advised fund at Schwab, for instance, literally with a click.
"The alternative is to create your own private foundation," said Scott Sanders, managing partner of Sanders Thaler Viola & Katz. "You have to fill out a form, go to the attorney general. There's an accounting and legal cost. You can avoid all those administrative costs with donor-advised funds."
Although these funds have existed for many years, they're only catching on now as people become more aware of them, Sanders said.
Melville-based Long Island Community Foundation, a $5- million entity, is run as part of the $2 billion Manhattan-based New York Community Trust. The foundation comprises donor-advised funds as well as designated and unrestricted donations. (With designated donations, the donor indicates where the money goes upfront, while with unrestricted funds, the foundation makes the determination.)
Spokeswoman Marie Smith called the foundation "the best-kept secret on Long Island," because "people don't know about the model." But that's changing, with the donor-advised funds becoming the most popular of the foundation's offerings.
Appreciated stock and chunks of cash from sales of businesses and other windfalls that could go to individual charities now often go into donor-advised funds.
"For moderate-income people, it replaces a foundation," Spielman said. "It's not as direct as if you write a check, because they write the checks. They send out the donations with a letter, saying it's recommended by you."
Since each person's donations are part of a larger charity in this give-now-grant-later approach, the costs are spread over a bigger base.
Smith sees the funds as a way of investing in charity or creating "a charitable bank account." And many Americans agree this is a practical path to philanthropy.
The Chronicle for Philanthropy reported that in 2013, donor-advised funds ousted many single-cause charities as the biggest recipients of contributions. United Way Worldwide was the biggest recipient of donations in the United States in 2013, followed by Fidelity Charitable, the nation's biggest donor-advised fund operator, with $3.67 billion, which was just $200 million shy of United Way.
Schwab Charitable rose to fourth from 18th, rocketing 165 percent to $1.86 billion.
The Silicon Valley Community Foundation, including donor-advised and unrestricted funds, finished eighth at $1.38 billion.
And Vanguard Charitable ranked 10th, outperforming nonprofit giant Goodwill Industries, which ranked 12th.
"We do a little more than Vanguard. We vet charities, look at their financials and make introductions," Smith said. "We partner nonprofits with donors, if they're interested in a site visit."
Although people are flocking to funds, they're not for everybody. Someone making a single, large donation to a hospital or other entity may not benefit from this route.
"You don't really control the investments in most donor-advised funds," Spielman said. "If you've got significant wealth, people want more control. They think they can do better."
Nevertheless, these funds are attracting big donations. The Silicon Valley Community Foundation in 2013 received nearly $1 billion from Facebook CEO Mark Zuckerberg and his wife, Priscilla Chan, in the form of 18 million shares of Facebook stock.
And Schwab's donor-advised fund in 2013 received two contributions larger than $100 million.
These funds are pipelines for philanthropy, doing a lot of good. Long Island Community Foundation has granted $150 million since it was founded in 1978.
But even though these funds are 501(c)3 organizations, that doesn't mean money reaches causes quickly. Funds aren't required to make minimum annual distributions, so money can sit there for years.
Fidelity, which requires donors to distribute $250 over seven years, said donors on average make eight grants annually of $4,000 each. Most contributions are given to charities over a decade. But U.S. Rep. Dave Camp, R-Mich., has proposed legislation that would require the funds to distribute contributions within five years.
Even if regulations could speed money to charities, it may undermine the motivation of funds.
"It could be a billionaire or a regular Joe," Smith said. "They get their full tax deduction if they put [their donation] into a donor-advised fund. But they don't know what charity to give to. It's a placeholder. [The money] grows while they decide what charity to give to."
Published: Mon, Nov 24, 2014
