Increase in Donor-Advised Funds Worth Greater Vigilance

There has certainly been a lot of talk about the increase in giving to donor-advised funds, such as this article from the Investors Business Daily.  We can’t help but wonder what affect this might have for our communities in the future.  At first glance, one would think that growth in giving is good news.  

Is this growth in giving driven by new and first time major donors?  If so, then the lure of tax-wise giving to donor-advised funds is a real benefit for the third sector.  But we also wonder what affect this trend may have on the organizations and communities that have historically been supported by these donors.  Will these individual donors continue to serve on charity boards, and will they continue their active volunteerism? Or, will they begin to separate and distance themselves?  Certainly this trend in giving is worth our vigilance.    

Charitable Giving: Growing Appeal Of Donor-Advised Funds –

Charitable Giving: Appeal Of Donor-Advised Funds

Posted 11/18/2014 06:43 PM ET

Earlier this year, he gave some of his Apple (NASDAQ:AAPL) stock that had surged in value to the Jacobson Jewish Community Foundation, in Boca Raton, Fla., which administers donor-advised funds.

For Rosenfarb, it was a win-win: Proceeds from the sale of his gifted stock go into his DAF account at the foundation. In turn, he reaps the same tax benefits as on gifts to any IRS-qualified public charity: an income-tax deduction this year and no capital-gains tax on the donated shares. And any time he wants, he can recommend which nonprofits should receive gifts from his DAF account. “This is a great way to support charities,” asserts Rosenfarb, a certified public accountant, who has been using DAFs for 10 years.

Over the three years ended 2013, outlays to DAFs hit record levels, as evidently more people — workers and retirees alike — discovered their draws. Gifts to these funds, which are administered by community foundations, national charities and single-issue charities, get immediate tax benefits. But donors can decide later which charities they’d like to fund from their accounts.

Moreover, since DAF assets are invested, accounts can grow through investment gains and additional contributions. With larger accounts, holders can make bigger charitable gifts and/or aid multiple causes, experts say.

Evidently, such allures, along with a galloping stock market and other factors, have made DAF assets the fastest-growing of charitable-giving vehicles. Many people use them “because they have appreciated securities, an inheritance, a bonus or other big taxable event in their life,” observes Eileen Heisman, president and CEO of the National Philanthropic Trust, a donor-advised fund sponsor.

In 2013, contributions to DAFs — which can be cash, securities or “complex” assets, such as real estate or limited partnership interests — surged 23.5% to a record $17.28 billion, or 5.2% of all U.S. giving, according to the National Philanthropic Trust. Last year, total DAF assets jumped 20% to $53.74 billion, says the NPT.

The sector could be in for another banner year, signs suggest. Indeed, Fidelity Charitable, the $13.2 billion independent public charity affiliated with Fidelity Investments, saw contributions to its DAF rocket 57% in this year’s first nine months. And this year the Miami Foundation is seeing “very strong” contributions to its DAF program, following last year’s record inflow, says Javier Soto, the foundation’s president and CEO.

Of course, DAFs’ growth may slow if the economy dips and/or the stock market cools and donors have fewer financial windfalls.

Some Drawbacks?

Some DAF features have been criticized. Among them: the funds’ administrators (also called sponsors) charge fees, which donors would avoid by giving directly to charities. Moreover, the ability to postpone distributions from DAF accounts means that charities potentially could wait years for gifts from them, notes Ray Madoff, a law professor at Boston College Law School, citing one of her concerns.

But evidently, at least some DAF proponents don’t see such a threat. Over its 23-year history, Fidelity Charitable has made more than $17 billion of donor-recommended grants. This year through September, its $1.6 billion of these grants was up 27% over the comparable period last year. Says Amy Danforth, Fidelity Charitable’s president: “Rather than displacing charities, we feel we are supporting them.”