12 Dec Donor Advised Funds Are Really Good for Charity
Recently, you may have read one of the many articles shedding a negative light on Donor Advised Funds and calling them “warehouses of wealth.” I disagree with this characterization. Donor Advised Funds are very good for charities and help to increase charitable giving. I am not defending these funds because I am in the business of promoting the use of Donor Advised Funds; my opinion comes from seeing the incredible impact Donor Advised Funds have on our community.
Some of you may wonder, “What is a Donor Advised Fund?”
A Donor Advised Fund is a giving fund that donors establish with a gift of cash or assets and use for charitable giving. A donor can make one gift to the fund and give it out over time. The donor gets an immediate tax deduction for the gift to set up the fund and each time a contribution is made to the fund. It is similar but (much easier) than starting a private foundation.
The difference is that when a donor establishes a Donor Advised Fund, they do so by giving the money or asset away to a community foundation or in some cases, a commercial Donor Advised Fund company. When donors start a Private Foundation, they retain the asset, oversee the investment, oversee the grant programs, pay salaries and expenses out of the foundation, file their own 990, and manage the foundation’s governance and due diligence. A gift to a private foundation is usually limited to 30% of AGI. Private foundations do not give all their money away at once. They give it over time, pass it down within the family, and can designate others to manage it.
With a Donor Advised Fund, the donor gives the asset – in this case, to the community foundation and the community foundation will then oversee the investment management. The donor can request grants to be made but the community foundation has to approve it. The community foundation handles the grant making, sends out the checks, and files the 990 for the community foundation as a whole, not each fund. A very small fee is charged to the fund to help offset the costs of the grants management. Donors do not pay salaries or expenses and can take up to a maximum charitable deduction of 60% of AGI in some cases for the gift.
With both a private foundation and a Donor Advised Fund, the donor does not need to grant out all the funds out at once. The funds can be invested to grow the assets and have even more charitable dollars to grant. In a way, you can treat a Donor Advised Fund like a long term source of sustainable funding. The negative news Donor Advised Funds have been receiving centers around high net worth individuals setting up funds. The bad rap is that donors are sitting on this money and not gifting it out. These same donors could open up a private foundation instead and continue to control the gift, deduct travel expenses, pay salaries to administer it, among other costs; but instead, they have chosen to gift the money to a community foundation where more of the funds will benefit more of the community.
The low fee that is paid to the community foundation helps cover the operating costs of the community foundation. In addition to managing these funds and vetting grantee organizations, this fee helps the community foundation do its important work such as organize major giving campaigns to benefit local nonprofits, for instance, the Great Fish Community Challenge.
If you review the grant programs of community foundations around the country, you will find that the percent of each individual donor fund spent on grants annually is far higher than the 5% that is required to be spent from a private foundation. In 2017, Whitefish Community Foundation ranked #1 of the top 100 foundations for gifts per capita and #9 in grant distribution rate in the Columbus Survey of 269 community foundations surveyed nationwide. Whitefish Community Foundation distributed 20% of its assets in 2017, 15% more than is required of a private foundation.
High net worth, philanthropic individuals are strategic about their gifting. Those that open a Donor Advised Fund use it to gift from over time. In some years, they may gift more than in other years depending on the needs. Having a fund to grant from allows them to answer the call in the time of a disaster. These donors also use the resources of the community foundation to stay in touch with the needs of the community.
This is probably the single most important point to note: community foundations stay in touch with local nonprofits. They visit with nonprofit staff, board, and volunteers. They know where the needs are, what good things the nonprofits are doing to benefit the local community, and they are here to be a resource when disaster strikes. Community foundations have their finger on the pulse of the community and they are effective because they have dedicated, philanthropic minded donors ready and willing to help where there is a need.
On the other hand, commercial Donor Advised Fund companies, while very convenient to use, are not in touch with a community, not in touch with the donors, and not putting their fees back to work for the community. In many of the Donor Advised fund articles published lately in the Atlantic Monthly, Bloomberg, and the Wall Street Journal, these commercial fund holders are pointed out as prime examples for Donor Advised funds. More than $44 billion is held by commercial funds. Commercial fund holders are more interested in retaining the asset to invest and earn fees. Community foundations are here to serve the community they are located in and are interested in planned giving. Commercial fund holders give Donor Advised Funds a bad name.
There is a very good reason donors use Donor Advised Funds: starting a Donor Advised Fund with appreciated assets rather than selling stock out right allows the donor to avoid capital gains and a large tax bill. By donating the appreciated asset to a Donor Advised Fund, the donor will forgo the capital gain and have more money to give to charity over the year or in years to come. This is smart giving and allows for a sustainable source of funding. If the donor were to sell the same appreciated asset and then distribute it directly to charity, he/she would most likely give less to avoid the gains and thus the tax.
In the end, a Donor Advised Fund will allow a donor to give bigger gifts, more frequent gifts, and sustain giving over a longer period of time to help their favorite charities. In the end, the charities really do win and provide help to our community.
~Linda Engh-Grady, President, Whitefish Community Foundation