Donor-advised funds have been around for decades, but they have grown dramatically in the past 10 years, thanks largely to the creation of funds by commercial investment companies, such as Fidelity, Goldman Sachs, Schwab, and Vanguard. In fact, for the past two years Fidelity Charitable has claimed the top spot, above the United Way, as the nation’s largest charity when measured by private donations.
From 2008 to 2013, annual contributions to the largest 85 funds nearly tripled in value, according to analysis by The Chronicle.
The rise of these funds has many fundraisers wondering how accepting gifts from these funds differs from more traditional giving mechanisms and what they need to know to be conversant about DAFs.
Here we define some key terms and concepts to get you started.
Tax Deductions
Someone who makes a gift to a donor-advised fund can take an immediate tax deduction. The contribution, whether it is cash, stock, or another asset, is transferred to a sponsoring nonprofit organization. Such groups are created to manage charitable accounts, and once an asset is transferred, they legally control it.
At the direction of the donor, the sponsor will invest money in the accounts with the expectation that the assets will increase in value. When the donor wants to make a donation from the account to a charity, he “advises” the sponsoring organization to make the gift. Technically, the donor’s advice is not binding because the sponsoring organization controls the asset, but in practice, the gifts are made according to the fund holder’s direction as long as they are bound for qualifying charities.
Sponsoring Organizations
There are three types of sponsoring organizations:
National funds
Often called commercial funds, these organizations are created by financial-services companies, including Fidelity, Goldman Sachs, and Vanguard. Technically, they are separate from the commercial firms, but the for-profit entities usually handle the investment of the assets and charge a management fee for doing so.
Issue-focused sponsors
Some DAFs are nationwide in scope but let donors give to a specific issue. For instance, DonorsTrust offers funds for people who want to support conservative causes.
Community foundations
The first donor-advised fund was established in 1914 by the New York Community Trust. Since then, the funds have been a mainstay at local and regional grant makers. Often, most of a community foundation’s assets consist of funds started by donors with an interest in the region but who can generally direct gifts to any qualifying nonprofit regardless of its location.
What Charities Should Know
Payout. This term refers to the withdrawal of money to be given as a gift to a nonprofit. Unlike a foundation, which is required by federal law to direct at least 5 percent of its assets to charitable activity each year, DAFs have no similar payout requirement. Money in the accounts may be invested until the donor prompts the sponsoring organization to make a grant to a charity. When the grant is made, the donor does not receive a second tax deduction. For that reason, charities need to take special care in how they acknowledge gifts from donor-advised funds.
Thanking donors. When sending a gift acknowledgment to someone who gives from a donor-advised fund, charities should not indicate that the donor can deduct the gift for income-tax purposes. Remember: Donors presumably took a tax deduction when they put the money in the fund. Instead, nonprofits should simply thank them for their generosity.
Pledges. Donors may not use a fund to fulfill a pledge, because the sponsoring organization legally controls the money in the account. Even though most grants are made according to a donor’s wishes, the donor cannot make a legally binding pledge to give assets that have been contributed to a fund because, in the eyes of the law, the donor irrevocably lost control of the money or other asset when it was transferred to the account.
Galas. Donors are prohibited from purchasing gala tickets from these funds. Money given to donor-advised funds has already received a tax benefit and must go entirely to charitable purposes. Galas usually provide a personal benefit, such as food or entertainment, and therefore do not qualify.
Successors. When someone creates a donor-advised fund, he is asked who will succeed him as the adviser if he dies with money still in the account. Often people split the responsibility for their funds among several heirs. If no successors are named, a donor often directs that any remaining money go to the sponsoring organization’s general fund. Grants from general funds usually are made periodically by a panel of advisers selected by the sponsoring organization.
Have we missed some terms or concepts? Please tell us what you’d like to know about donor-advised funds.
Correction: An earlier version of this article included a reference to a fund called FJC. That reference improperly identified FJC as a single-issue donor-advised-fund sponsor. FJC, formerly the Foundation for the Jewish Community, allows donors to give to a full scope of causes. The FJC example has been replaced with one about DonorsTrust.
