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Jul 14, 2013

Revisiting the purpose of donor-advised funds

I have long been intrigued at the contrasting messages about philanthropy revealed by the Giving USA annual survey and the IRS Statistics of Income.  Giving USA suggests philanthropy is surging based on data from individuals’ Form 1040 tax returns.  The IRS data based on nonprofits’ Form 990 returns suggest philanthropy has been flat as a share of nonprofit revenue for almost 30 years.  A recent essay in the Chronicle of Philanthropy by Alan M. Cantor may resolve this seeming contradiction.

He points toward the enormous growth in donor-advised funds sponsored by investment firms like Fidelity, Schwab, and Vanguard.  In the most recent report by the National Philanthropic Trust, almost $2 billion more went into donor-advised funds in 2010 and in 2011 than was coming out in grants to nonprofits.  Is this one reason why Giving USA sees expanded giving while the nonprofits don’t see similar growth in what they receive?

Is this growth in company-sponsored donor-advised funds beneficial?

Donor-advised funds are certainly beneficial for philanthropically-minded individuals who have a very large one-time event, such as sale of a business, when it would be impractical to knowledgably and responsibly give it away within the same tax year.

They are also beneficial if they induce a family to be more generous over time than if they had to make their charitable decisions solely based on each year’s financial and tax situation.

For society, however, one must wonder if some donor-advised funds are simply tax-sheltered money warehouses which pay sizable annual fees to the companies which sponsor the funds.  Typically the investment firm will have an administrative fee (perhaps 40 basis points or more) and an investment management fee (perhaps 100 basis points or more).  For the $2 billion that went into donor-advised funds in 2011 but was not distributed to charitable organizations in 2011, the investment firms would have earned more than $28 million in fees while the country’s charitable organizations received nothing.

Society could benefit if the time between putting money into a donor-advised fund and distributing it to charitable organizations was spent in learning about the charities and their mission accomplishments. Company-sponsored donor-advised funds provide no expertise to their donors on how to evaluate charities or identify pressing community needs.

How do donor-advised funds function during economic recessions when giving is most needed?  Data from the National Philanthropic Trust suggests that donor-advised funds are playing a helpful stabilizing role:  While contributions into donor-advised funds dropped by 8 and 37 percent in 2008 and 2009, grants from those funds actually grew 13 percent in 2008 and fell only ten percent in 2009, still remaining above pre-recession grant levels.

In the final analysis, however, society must ask if donor-advised funds are diverting charitable giving away from charities that actually provide services to their communities.  In the Chronicle of Philanthropy’s annual listing of charities that raise the most money, the donor-advised funds of Fidelity, Schwab, and Vanguard ranked 2, 12, and 22, respectively, in attracting tax-deductible contributions.  Can your favorite charity hope to compete with these heavily-marketed tax shelters?

If these donor-advised funds are good in attracting tax-deductible gifts, perhaps the rules should be changed to make sure they are just as good in distributing grants to charities.  Why not make grants by donor-advised funds subject to the same rules that mandate minimum annual grants by private foundations?  That change would counter the warehousing phenomenon while preserving the more positive traits of these company-sponsored donor-advised funds.

Then maybe the strength in tax-deductible contributions reported by Giving USA will match what our charitable organizations are actually receiving to serve our communities.