Trend toward Donor-Advised Funds
by Kelsey Luffman

The uncertain economy has required adjustment in the way many nonprofits operate – overall foundation assets dropped by an average of 28% in 2008, according to the Council on Foundations in Washington. As reported by Wall Street Journal writer Mike Spector, the market’s decline has sparked a philanthropist trend which entails the transferring of assets from private foundations to donor-advised funds. Spector defines donor-advised funds as funds which “invest assets and make grants to charities from individual accounts based largely on donors’ recommendations.” The conversion from foundation to fund can take months and typically involves a dissolution plan, notification of the state attorney general, a final grant of a foundation’s assets to a charity which includes a donor fund, and filing the last tax form. But the wide differences in cost and upkeep have caused many philanthropists to deem the switch worth the effort.

One of the driving factors in converting to a donor fund is lower maintenance. While foundation owners must keep up with tax forms, attorney and accountant fees, follow-up with charities, and the concern of how to diversify investments, donor-advised funds have staff which “pool investments on behalf of individual donors and attend to all necessary paperwork,” taking a large burden off of individual philanthropists. 

Perhaps the most relevant factor in light of the market is that “[d]onor-advised funds can cost thousands of dollars less to maintain than foundations.” Additionally, donor-advised funds allow for a larger tax deduction which donors may take immediately after making a contribution. And while foundations are obligated to donate at least 5% of assets annually regardless of the economic situation, donor-advised funds come with no annual distribution requirements, although that may change: the Treasury Department is working on a report which aims, in part, to determine if these funds should have distribution requirements. Many donor-advised funds which have been founded by large investment firms (for example The Fidelity Charitable Gift Fund, The Vanguard Charitable Endowment Program, and the Schwab Charitable Fund) report that their annual contributions exceed 20% of their assets. 

Of course, donor-advised funds come with some limitations. Though, as their name indicates, these funds are generally led by donors’ choices, the fund, by law, makes the final decision of where to give. If a donor wishes to contribute toward a specialized cause, such as specific research, a foundation may allow more freedom.

 

Information taken from: Mike Spector. “Family Charities Shift Assets to Donor Funds.” The Wall Street Journal.

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