Category Archives: Fundraiser

The Advantages and Potential Drawbacks of Donor-Advised Funds

The Advantages and Potential Drawbacks of Donor-Advised Funds

While most people probably think of philanthropy as direct gifts to charities and nonprofit organizations, there are several financial vehicles that can help individuals make donations. One of the most prominent vehicles for people with significant wealth is a foundation. However, several other options are worth considering as well. Another potential option is a donor-advised fund, which offers some tax benefits and allows donations to be pooled and invested, potentially creating a larger impact.

With a donor-advised fund, money earmarked for contributions to 501(c)(3) public charities are invested by the fund for tax-free growth. Donors to these funds provide guidance on which charitable organizations should receive grants from the fund. Individuals can also choose how their donations are invested, so that their contribution can grow as they decide which charities they want to support. The initial donation to the fund is tax-deductible and all growth is free from any tax liability.

Donor-advised funds have been in operation since the 1930s, although the legal structure by which they now operate was not officially created by Congress until 1969. These funds have been growing in popularity since the 1990s, although the general public tends is less aware of them. In recent years, they have emerged as the fastest-growing vehicle for donations. Today, about 3 percent of all charitable gifts come from these funds. While donor-advised funds have some obvious benefits, they also pose some clear issues for the philanthropy sector.

When Are Donor-Advised Funds Appropriate?

People may choose to contribute to donor-advised funds rather than making a direct donation to a charity for a variety of reasons. For example, suppose that a wealthy individual has a very financially successful year and wants to support a few charities. These organizations are small and lack the infrastructure necessary to handle large donations effectively. By contributing to a donor-advised fund, the person can make five smaller grants instead of one large donation, with the added benefit of tax-free growth potential that could increase the impact of their donation.

In this situation, some people may suggest creating a private foundation, but this structure faces a 30-percent limitation for gifts and thus would not provide the same tax deductions as a donor-advised fund. In addition, private foundations require significant time and expense to establish and manage. On the other hand, a donor-advised fund is run by an entity that is technically classified as a public charity, although they are typically affiliated with major finance companies. The donor’s tax-deductible contribution is made to this entity, which then disburses grants to charities according to donor guidance. Donors should note that these entities are not obligated to follow their suggestions, although they have a strong incentive to do so—the resulting bad press would dissuade others from contributing to the fund.

The other major advantage of donor-advised funds is that the donation to the charity comes from the fund, not the individual. In this sense, the donation can be made anonymously, which is preferable for some donors.

What Are the Downsides of Donor-Advised Funds?

While donor-advised funds offer several benefits, they also have some downsides that philanthropists should consider. Perhaps the biggest issue with this type of vehicle is that it is not obligated to make a certain number of disbursements each year. Private foundations must distribute at least 5 percent of their assets each year, but donor-advised funds are not subject to this regulation. Sometimes, the managers of these funds encourage people to let their donations sit in the fund and grow, rather than grant them to charitable organizations. In this situation, the donor may begin to think of their gift as less as a donation and more as an asset that needs to be protected. As a result, the donor can become less likely to authorize the donation. Behavioral economists have coined the phrase “the endowment effect” to describe this behavior.

Individuals should keep in mind that the managers of donor-advised funds are not truly charitable foundations themselves, but rather organizations established by large financial management companies. For example, Fidelity Charitable is one of the largest recipients of donations as a donor-advised fund. However, $4.6 billion came into Fidelity Charitable in 2015, according to tax records, but only $2.8 billion was disbursed to charities. Altogether, Fidelity Charitable has about $15 billion under control. This sum essentially represents donations that are being kept away from charities that could benefit from them.

Donors have the ability to direct their investments in donor-advised funds and typically receive regular statements about how the investment is growing. These statements can encourage a feeling of ownership over the money, even though the donor won’t receive anything back and the funds are intended for charity. Ownership feelings lead to the endowment effect. The matter becomes even more complicated because donors can pass their accounts to children and grandchildren to create a charitable legacy. Donor-advised funds have an incentive to encourage hoarding behavior, because they can collect management fees for longer periods of time.

The Bottom Line

When it comes to donor-advised funds, the bottom line is that these vehicles have some serious tax advantages that can make them more appealing than other options, such as foundations. At the same time, individuals need to make sure that contributions to donor-advised funds are actually granted to charities. While it can be tempting to see how much the money can grow, funds that sit in an account will not make a real impact.

World Vision Addresses the East African Hunger Crisis

World Vision Addresses the East African Hunger Crisis

Eugene Chrinian’s foundation is driven by a desire to make a tangible impact at home and abroad. In addition to supporting local organizations such as Jericho Road Men’s Home, Eugene Chrinian and his wife offer substantial support through the foundation to nonprofits that are working to address some of the most pressing issues around the… Continue Reading

Jeff Bezos Crowdsources Charity Ideas on Twitter: What You Need to Know

Jeff Bezos Crowdsources Charity Ideas on Twitter: What You Need to Know

While many of the nation’s leading philanthropists simply fly underneath the radar, some make a major splash with their giving. Recently, Jeff Bezos, the founder of Amazon, sparked an incredible amount of discussion when he turned to Twitter to ask the world where he should concentrate his philanthropic efforts. Bezos created a flurry of activity… Continue Reading

7 Ways Entrepreneurs Can Benefit from Engaging in Philanthropy

7 Ways Entrepreneurs Can Benefit from Engaging in Philanthropy

Entrepreneurship is physically, mentally, and emotionally trying. To establish a business, individuals need to work around the clock and overcome seemingly insurmountable hurdles. Should a business succeed, however, the payoff can be great. Often, these individuals bring the same passion to their philanthropy, despite the fact that there’s no such promise of a material payoff.… Continue Reading

A Look at 5 of the Most Inspiring, Yet Little-Known, Philanthropists

A Look at 5 of the Most Inspiring, Yet Little-Known, Philanthropists

Many people have misconceptions when it comes to philanthropy. The word itself often conjures up images of rich and famous people making large contributions. While this is certainly one part of philanthropy, and an important one, it’s not the entire story. In fact, philanthropy simply means “love of mankind,” and this love can be expressed… Continue Reading

5 of the Wounded Warrior Project’s Legislative Priorities for 2017

5 of the Wounded Warrior Project’s Legislative Priorities for 2017

The Wounded Warrior Project (WWP) is one of the most important organizations in support of American veterans. Through the organization, veterans have access to free programs that fill in many of the gaps left by government initiatives. When the organization began, a handful of injured veterans were helped. Tens of thousands of individuals each year,… Continue Reading

Ford Foundation Pledges $1 Billion to Impact Investing

Ford Foundation Pledges $1 Billion to Impact Investing

Recently, the Ford Foundation announced that it would invest $1 billion from its endowment to fight poverty and injustice in a unique way. This money, which comes from an endowment valued at $12 billion, is earmarked for mission-related investments and will be made through private funds focused on affordable housing in the United States as… Continue Reading

A Look at the Life and Philanthropy of David Rockefeller

A Look at the Life and Philanthropy of David Rockefeller

In late March, celebrated businessman and philanthropist David Rockefeller died at the age of 101. David was the last living grandson of John D. Rockefeller, one of the forefathers of philanthropy in the United States. In many ways, David carried on the legacy of his grandfather and his family name. He lived a life devoted… Continue Reading

9 Apps that Can Help People Get Philanthropically Engaged Today

9 Apps that Can Help People Get Philanthropically Engaged Today

Modern technology is redefining the ways in which we give. From wearable devices that enable charitable giving to one-click donations, it is easier than ever to get involved with philanthropy. Today, there are a number of excellent apps that help people support their favorite causes. People who want an easy, fun way to make a… Continue Reading