RECENTLY, A CLIENT CAME TO Matt Syverson, a certified financial planner in Overland Park, Kan., with a problem. The client, a pastor from Iowa, had inherited some Coca-Cola stock from relatives who had originally bought the shares at the bargain-basement price of 50 cents each. The pastor was intent on giving a chunk of his inherited windfall to charity, but he didn’t want to give the money out all at once, he wanted to support a number of different organizations, and he didn’t want to get creamed by capital gains taxes.
Syverson, principal and founder of Syverson Co., a firm that specializes in helping clients support charitable causes, advised the pastor to channel the greatly appreciated stock into an increasingly popular philanthropic vehicle known as the donor-advised fund. With roots in the community foundations first launched in major cities around the United States in the 1930s, donor-advised funds are private funds administered by a third party with the mission of managing charitable donations on behalf of families, organizations, or individuals. They are offered today by financial services companies such as Vanguard, Smith Barney, and Charles Schwab, as well as universities, professional associations like the Rotary Foundation, and even charities themselves. These funds offer a simple and flexible way to donate to charity while easing capital gains taxes and record-keeping confusion.
Using a donor-advised fund is quite different from giving directly to a charity. Take the Fidelity Charitable Gift Fund, the country’s largest, as an example. A donor makes an initial irrevocable contribution of cash, stocks, or some other asset in order to set up what the company calls a Giving Account. (Fidelity requires a minimum initial contribution of $10,000; some funds require less, others more.) Establishing an account allows a donor to both choose how the money is invested and, over time, make grant recommendations when he or she wants money disbursed to a selected charity. Fidelity then sends the checks directly to the nonprofits.
![“You can make [a donor-advised] contribution and receive the immediate tax deduction, and then carefully and thoughtfully grant over time based on the causes you are most passionate about.” — DAVID GIUNTA, FIDELITY CHARITABLE GIFT FUND](../../../images/2006_apr/idea-moment/ideamoment_textbox1.gif)
Proponents of donor-advised funds tout them as a simple, effective way to pursue philanthropic goals. And there are certainly distinct advantages to using them. For one, contributions to donor-advised funds are instantly tax-deductible; you don’t have to grant the money to a charity before you receive the tax benefit. “You can make that contribution and receive the immediate tax deduction, and then carefully and thoughtfully grant over time based on the causes you are most passionate about,” says David Giunta, president of the Fidelity Charitable Gift Fund. “Donor-advised funds give you the time to research and make sure the dollars will have the greatest effect.”
Equally appealing, and the reason Syverson steered his pastor client toward a donor-advised fund, is its potential to avoid what could be daunting capital gains taxes. “Let’s say you bought Google a couple of years ago at $100 a share, and now it’s $400 plus,” says Ben Pierce, executive director of the Vanguard Charitable Endowment Program. “Well, you’ve got a big capital gain, and by giving those shares to a charity, like our donor-advised program, you avoid that capital gain and get a tax deduction.”
For people who give money to a variety of organizations, donor-advised funds can also eliminate the headaches that come with record keeping. “As opposed to donating to 20 different charities directly and having to keep 20 different pieces of paperwork, with one donation to the charitable gift fund, all you have is one piece of paper that actually backs up the tax deduction,” says Giunta. “From a record-keeping and administration standpoint, it makes things a lot simpler.”
Under the best circumstances, donor-advised funds can also enable people to give more money to charity than they actually contribute to the fund. That’s because donors decide how the money is invested before it’s granted to the nonprofits. Fidelity offers 11 different pools of mutual funds (Vanguard offers six), ranging from safe money-market type funds to aggressive equity investments. “Those can appreciate over time, so the $10,000 or $20,000 or $100,000 or whatever is given can grow, and you can actually grant out more to charities,” says Giunta.
The benefits aren’t just for donors, either, says Vanguard’s Pierce. Many small charities, particularly those that take in less than $25,000 per year and don’t have to register with the IRS, aren’t equipped to accept appreciated stock directly. Using a donor-advised fund, says Pierce, is a way to get much-needed money to a small nonprofit while still reaping substantial tax benefits. “You set up a fund and dump the appreciated stock into it and get those tax breaks. And then you instruct us to send grant checks out to those small charities,” he says. “You get what you need, and small charities get what they need.”
Still, while donor-advised funds are attractive in many ways, there are issues to consider before choosing one as a philanthropic tool. One is fees; institutions operating
donor-advised funds charge to administer them as well as to manage your money. For people whose charitable giving is uncomplicated, there’s little reason to pursue a donor-
advised fund. “If it turns out that you just want to support one institution,
a single charity,” says Pierce, “just give to them directly and don’t worry about setting up a fund.”
A second caution is one that comes with any investment of this sort: it may lose money. “You have no guarantee that what you invest in your
donor-advised fund is going to increase,” says Syverson. “It could end up the opposite way and you could end up giving less.”
And while you can control the distribution of the fund’s assets, once
you make a contribution to a donor-advised fund it is, in fact, irrevocable. The money is no longer technically yours, and the grant recommendations you make are just that — recommendations, which need approval by the administrators of the fund. In practice, most requests go through quickly and easily, provided they’re directed
to a legitimate charity. There are, however, faith-based and politically inclined foundations that have guidelines on what charities they are willing to support. “You have to make sure you agree with the positions of the foundation holding your money,” says Syverson.
Judging by recent history, though, plenty of people are finding reason to
use donor-advised funds. The Fidelity Charitable Gift Fund, which has more than $3 billion in assets, has seen a steady increase in both contributions and disbursements since its founding in 1992. In 2005, contributions to the fund were up 21 percent over 2004; grants to nonprofits were also up substantially, from $697 million to $846 million.
A sizable chunk of those grants came in response to some serious need. According to Fidelity, money directed specifically to relief efforts around Hurricane Katrina and the 2004 Asian tsunami totaled $38 million by the end of 2005; $10 million was granted in the first week following Katrina alone.
To Fidelity’s Giunta, these statistics say a lot. “If you look at our overall numbers, our grants are up 24 percent year over year,” he says. “Even if you take out the hurricane relief efforts, the numbers are still up quite a bit. American generosity has amazed me this year.”
—Chris Warren
