The following is excerpted from Family Philanthropy and Donor Advised Funds, by Joseph Foote



WHY FAMILIES LIKE DONOR-ADVISED FUNDS

When James E. MacVicar retired from ophthalmology in Kalamazoo, Michigan, he and his wife “wanted to show our appreciation. Kalamazoo had been good to us.”

The MacVicars established a donor-advised fund — the James E. and Nancy E. MacVicar Fund — at the Kalamazoo Foundation, a community foundation. During the MacVicars’ lifetimes, and the lifetimes of their children, the family will recommend how proceeds from the fund can benefit the people of Kalamazoo. The principal will eventually become part of the community foundation’s discretionary fund, but it will retain the MacVicar name.

Like the MacVicars, other family donors enter formal philanthropy with the spirit of doing good works, of giving back to the community, of bringing about social change, of memorializing a loved one, and for other reasons. Their decision to give voice to their philanthropic impulse usually comes first, their decision to enter formal philanthropy follows.

Like the MacVicars, other family donors also face choices in formal philanthropy. Some families want a convenient management structure for their giving program. Others already have a private foundation or other fund, but want to expand or broaden their giving options. Still other families want a means of giving that accommodates geographically dispersed family members or helps train the next generation in philanthropy. For each of these families, an advised fund may be a useful giving vehicle.

What Advised Funds Are and How They Work

The Internal Revenue Code does not define advised funds, which are a bit of a legal hybrid. The donor sets up a fund with a host organization, usually in a few hours and perhaps even online through the Internet. The donor can give a lump sum to endow the fund, build an endowment over time, or make periodic contributions as the fund needs more money or the donor has funds available.   The donor, or a committee the donor designates, recommends grants from the fund. The host organization is not legally obligated to accept recommendations, but usually takes them very seriously.

WHAT IS A DONOR-ADVISED FUND?

An advised fund is a fund established by a donor in a host organization that is recognized as a public charity. Donor- advised funds allow a donor or persons designated by the donor to recommend recipients for grants from the fund. Donor recommendations are advisory—the governing body of the host organization is free to accept or reject them—but are generally given full consideration, provided that the suggested recipient is eligible to receive such a donation.

Advised funds offer some private foundation-like advantages, including a fund in the donor’s name and the ability to recommend grants. In addition, they provide maximum tax advantages, and flexibility in funding — without the taxes, required payout, and administrative responsibility of running a private foundation. 

COMPARING A DONOR- ADVISED FUND WITH A PRIVATE FOUNDATION

Advised Funds Are Growing

Donor-advised funds are among the fastest growing segments of formal philanthropy. Community foundations have promoted interest in advised funds. In 1992, donor-advised funds accounted for 25 percent of gifts to permanent funds in community foundations in the United States. (Community Foundations in the United States: 1992 Status, 1994, p. 49.) By 1996, that figure had risen to 31 percent of all gifts. (Community Foundations in the United States: 1996 Status, 1998, p. 19.) Impetus for growth has also come from the commercial sector, spearheaded by brokerages and other financial institutions. By the end of 1999, the pioneer in the field, Fidelity Investment’s Charitable Gift Fund, had accumulated $2.2 billion in advised funds since it was launched in 1992.  Public foundations, religious institutions, and colleges and universities have become major host organizations of advised funds.

“This definitely is a growing field,” says Stuart Comstock-Gay, director of programs at the New Hampshire Charitable Foundation.  “There have always been family funds, but the use of donor-advised funds is definitely building. Both donors and host organizations are learning how to do it better all the time. One key consideration is that donor families don’t have to worry about administering a fund. They can turn that over to us. They don’t get tied up in the nitty gritty. They can focus on what they want to do, which is to be charitable. And particularly for families, that’s a useful thing, because they are trying to pass on charity, not an administrative structure.”

Families Should Educate Themselves About Host Organizations

Once family donors have settled on a donor-advised fund, they will likely want to learn about their options for host organizations. Many host organizations provide elaborate literature, website information, telephone access, and in-person counseling.

TYPES OF HOST ORGANIZATIONS
Donors face an exciting and broadening array of choices in host organizations for advised funds. The options include, in no particular order:

•        Community Foundations. More than 000 of these now operate in communities across the United States. They range in size from a few million dollars to more than $4 billion in assets.
•        Banks and Trust Departments. These traditional custodians of philanthropic dollars are increasingly showing interest in donor-advised funds.
•        Religious Organizations. All the major denominations appear to offer advised funds, or may be planning to offer them.
•       Public Foundations and Special-Interest Funds. These funds focus on a special interest, such as women’s issues, the environment, etc., and offer the opportunity to pool grant recommendations with other like-minded donors.
•        Educational Institutions. Many colleges and universities have added advised funds to their offerings for support of alumni and friends.
•        Commercial or Proprietary Funds . Pioneered by Fidelity Investments, these commercial entities now include Merrill Lynch, Schwab, and others and are growing rapidly in size and number. This category also includes noncommercial proprietary funds, such as The National Philanthropic Trust.

Commercial brokerages, banks, and many community foundations offer extensive materials designed to educate donors (and professional advisors such as lawyers or financial planners). The Community Foundation for Greater Atlanta, for example, posts excellent materials and guidance for donors on its website (www.atlcf.org).  CFGA’s site provides technical information and useful case studies.

Many community foundations, public foundations, and commercial host organizations market aggressively to reach both donor families and professional advisors to persons of wealth. The Ms. Foundation for Women, Peace Development Fund, and hundreds of others publish flyers and post websites that describe the organization’s mission, advised-fund program, fee schedule, and policy on donor publicity versus anonymity. Some organizations have special services for families, while others do not. An important consideration is how family-friendly the host organization is.

BEST PRACTICES IN WORKING WITH DONORS

Donors contemplating a donor-advised fund might consider these issues before picking a host organization. Some host organizations offer donor-advised programs that are of maximum attractiveness to donors, meet all legal requirements, adhere to practical administrative practices, and are in sync with the host organization’s charitable goals:

1.     Donor Education. Donor education promotes responsible philanthropy. Grantmaking, successor generation, and estate planning workshops and donor leadership roles all serve as means for educating donors.
2.     Donor Recognition (or Anonymity). Recognition (or anonymity, if the donor wishes) can come through funds that donors name for themselves, relatives, or other persons or organizations; ceremonies or plaques to honor donors for their interest in projects; requests for suggestions on nonprofit agencies or the fields of interest to which distributions may be made; and write-ups in donor profiles, as well as in publicity about the host organization.
3.        Simplified Paperwork. Simplifying reporting of multiple gifts and consolidating timing of distributions facilitates efficient philanthropy. Host organizations can serve donors by supplying them with periodic reports on the activities in the funds they established and by aggregating reports where the donor has made multiple gifts.
4.        Provision for Succeeding Generations. Host organizations and donors both benefit by future generations in philanthropy—the host organization maintains the funds over the long term, while the donor develops a family tradition of philanthropy and commitment to long-term support of particular causes
5.        Friendly to Donor Advisors . Host organizations have a strong interest in persuading donors to maintain commitments to them. An open, welcoming and continuing relationship, characterized by substantial flow of information, is a promising way to maintain such a relationship. Many host organizations actively recruit donors who will advise on the use of their funds and prepare and administer programs aimed specifically at them.

Adapted from Guide to Donor Involvement: Basic Considerations and Best Practice, Washington, DC: Council on Foundation, 1996.

“We attempt to educate the donor about philanthropic choices,” says Peggy Ross, executive director of the new (formed in late 1999) Fund for Charitable Giving, which is affiliated with the brokerage firm Charles Schwab Corporation.

"We concentrate on the philanthropic aspect,” says Ross, whose fund is not tied to any particular cause or mission. Among other services, Schwab offers a print and website (www.schwabcharitable.org) publication called the “Seven Principles of Charitable Giving.” It also links web visitors to Guidestar.com, which can search all of the approximately 650,000 nonprofit organizations electronically to help donors find potential grantees around the country.

But why, specifically, are donor-advised funds so popular with families? This Practices monograph addresses that question by drawing on the views and experiences both of host organizations of donor-advised funds and, more importantly, families who have established such funds. When donors and their families are asked why they chose donor-advised funds as a philanthropic vehicle, they mention one or more of these additional motives:

•       Desire to express their philanthropic impulse;
•       Find the convenience and service attractive;
•       Benefit from tax advantages;
•       Like involvement in grantmaking — at levels right for them;
•       Bridge geographic separation;
•       Can train the next generation in philanthropy;
•       Can choose anonymity — or at least privacy; and
•       Make use of a broad range of options.

PROS AND CONS OF AN ADVISED FUND

Pros:
•   Quick and easy to set up — can be established in the waning minutes at the end of a tax year, if necessary;
•   Donor can determine the amount of time he or she will commit to grantmaking through the fund;
•   Donor can often obtain expert advice on potential grantees and grantmaking activities from the host organization for his or her fund;
•   Donor can honor a family member, friend, or other individual — including himself or herself — by naming a fund and giving grants in that name or give anonymously;
•   Donors can establish a fund with fewer assets than are required to fund a private foundation;
•   Size of the gift can be very small or very large and the gift can be made in one lump sum, in periodic payments to build up endowment, or in periodic payments to replenish the fund for annual giving;
•   Host organization has a proven track record, and associating with it may add stature and credibility to an advised fund;
•   Donor can establish multiple funds to encourage younger family members to become involved in philanthropy.

Cons:
•   Donor gives up control of his or her money — although the donor can recommend grantees, the host organization makes all final decisions on the timing of grants and specific grantees;
•   Donor has limited involvement in grantmaking, management, and governance roles;
•   Duration of donor’s philanthropy (perpetuity) is usually limited; and
•   To ensure compliance with the Internal Revenue Code, grants must fall within the fund host organization’s charitable mission for grantmaking.

© 2003 National Center for Family Philanthropy. All Rights Reserved.

Return to Publications Page